Musings of a Legal Tech Founder
By Alex Nordholm, co-founder of due diligence collaboration platform, dealWIP
(The following musings are from a collection of Tweets on the subject of legal tech adoption by law firms and how investors view legal tech startups. Enjoy.)
1/ So, I’m gonna try this threading thing. Working Title: musings of a #legaltech founder after 12 months (aka how I’m feeling about lawyers, legaltech adoption and legaltech financings right now). Probably no new insights for observers, but perhaps a new gloss. Disagree freely.
2/ The view that lawyers are Luddites is total and complete nonsense. What I get in sales meetings with lawyers and innovation folks: ‘We are thirsting for sane and thoughtful solutions to our problems.’ Clients want it, firms want it & all acknowledge that future is efficient.
3/ Importantly, too: contrary to popular belief, lawyers aren’t mutated Homo Sapiens satisfied with a life experienced under fluorescent lights, glued to monitors. They hate wasting time; they hate missing holidays w/ kids; they want to go home, like everyone else (weird!).
4/ But there are realities that can’t be denied. First, and most importantly, is that lawyers have professional obligations to clients – that’s taken really seriously. It means doing work carefully, reading twice, and dotting i’s and crossing t’s. Also leads to:
5/ some other issues, like: 1) they pay close attention to security standards, which are generally quite high in the industry which causes; 2) existing IT/software systems to be in place for security/infrastructure and workflow purposes. 1 & 2 are straight startup repellant
6/ Building software applications that meet security requirements and integrate with (or, at least, don’t undermine) existing systems is a serious undertaking. It means that having a great product is not enough; being thoughtful about implementation, onboarding/training is key
7/ What does it take to create a great product that solves important problems and also be sophisticated in security, implementation, onboarding and training? Well, it takes a significant amount of resources and time (i.e. money/runway!). This is common across enterprise apps.
8/ What isn’t common across enterprise apps is that most VCs hate the market. Of course there are exceptions and/or examples of VC investment in legaltech, but the pool of potential VCs is significantly slimmed down by the perception that legal is a bad market.
9/ For VCs, there are generally 2 (at least) non-negotiable filters: 1) they must love the founders; and 2) they can’t hate the market. Legal (selling to firms, specifically) violates that second filter for many VCs, it seems. So that puts legaltech companies in a bind.
10/ This isn’t a thread in which I’ll fully confront professional investors for failing to buy-into my self-serving (perhaps, delusional) view that legaltech (specifically, targeting firms/ALSPs) is one of the best markets for investment today. But, if you ascribe to the (true)
11/ view that the only way to make outsized returns is to be both contrarian and ‘right’, I’d be interested in knowing where other contrarian bets in multi-billion dollar, generally winner-take-all markets even exist. I get that telling LPs that you invested in scooters
12/ while premier VCs were also investing in scooters, and you just backed the wrong horse, is defensible. But flocking to the same markets and deals strikes me as the definition of competing away profits in the investment biz. Industry-wide data verifies this, I believe.
13/ Anyways, back to legaltech, the above status quo demonstrates a 2-pronged, self-reinforcing cycle that, when broken, will bring better, more commercially viable tech to legal providers (and ending legaltech’s (particularly, the kind that sells to firms) sad malaise)
14/ The first prong of this cycle is the slow sales cycle caused by 1) the perception by lawyers that most legaltech products are low quality and/or not sufficient for the end user (‘Skepticism’), and 2) the disaggregated decision-making process at firms (‘Slow Decisions’)
15/ Skepticism is informed, certainly, by real challenges in change management. Getting folks to change well-worn behaviors using tech is really hard, and it takes a disciplined program to make change happen. That’s true with any solution. These observations aren’t new.
16/ It is also undoubtedly true that some legaltech products are indeed bad, warranting Skepticism. But it seems to me that in the legaltech context lawyers tend to be particularly Skeptical of whether a product might work for THEM – maybe for others, but not for them.
17/ My evidence on this point is admittedly anecdotal, but it seems to be a very real trend – and I’ve seen the criticism levied by others. In my experience, other professionals (we also talk to bankers, advisors, etc.) seem more open to new solutions and ways of working.
18/ Slow Decisions are a feature of law firm structure – in the DNA of the partnership model, essentially – but are exacerbated by the fact that most firms have not taken steps to centralise decision-making or empower innovation departments to impose change management programs
19/ The second prong of the self-reinforcing cycle is the perception by investors that law firms constitute a bad market, dampening financing. This is caused by the slow sales cycles brought on by Skepticism and Slow Decisions. As a result of the perception legal = “bad” market
20/ investors disqualify legaltech companies that sell into law firms. That makes it hard as a legaltech company to find requisite investment. I’m sure you can see that those two prongs are reinforcing… low investment -> low quality -> Skepticism -> slow adoption -> bad market
21/ Without significant investment, legaltech companies cannot build products that from the outset satisfy law firms (i.e., that solve important problems, are provably secure and integrate with firms’ existing IT/infrastructure and applications) – causing slow/no sales
22/ Without faster uptake by law firms, legaltech companies cannot convince VCs that selling to law firms is a “good” market, suitable for VC investment by generating excess returns in 5-7 years (exceptions exist, of course, but they often don’t sell to firms/have other markets)
22/ The ways to break the cycle are obvious – attack/circumvent either of the prongs – either the slow sales cycle prong or the investment prong. Both are being incrementally eroded, but there are no doubt things that can be done to expedite their destruction. Law firms can take
23/ steps to shorten sales cycles. That includes, primarily, change management programs internally that undermine Skepticism and/or centralized decision-making processes. Further, transparent/industry standard security and integration requirements would be great (Reynencourt?)
24/ Or, investors could step up: VCs could get interested; law firms could invest at greater scale. With funding, quality startups can knock out barriers (security, integration) and better work with firms on change mgmt. Once this happens evolution will be faster than many think
Important note: these are my industry-wide observations over the entirety of my experience so far; not at all suggestive that my company is feeling these problems acutely or any more than others…to the contrary, I make these observations b/c I’m invested in this for the long-run.
What do you think? Please feel free to comment below to agree, disagree, or add to Alex’s points.