Today, two startup legal tech companies bagged $19.2m in new funding between them: time management system Ping got $13.2m in a Series A round (and was once a member of the Mishcon de Reya MDR LAB – which also invested in them back in 2017), while Germany-based Bryter, which is a legal automation platform, got $6m in what it described as a late Seed round.
Congratulations to both companies. And in the last year or so we have seen tens of millions of dollars flooding into legal tech in investments, some in small slices, others in massive chunks. All in all it can’t but help make you wonder: are we heading for a crash? Will the bubble burst?
Here’s a few thoughts:
First, are there any signs of a collapse in confidence?
Just a few short weeks ago, DealWIP, (which by coincidence was another member of the MDR LAB), and with what looked like a solid idea for improving deal flow, decided to call it a day. It’s understood they could not get sufficient new cash to keep going, and so the founders went off to new day jobs, leaving the company on ice.
And there’s the issue. Just because investors get behind you doesn’t mean the product will fly off the shelves. Then investors get cold feet about new rounds. And then….pop. It’s over.
But, is DealWIP an isolated example? So far there have not been many examples like DealWIP. Moreover it was not massively funded. It didn’t burn through tens of millions of dollars.
Early stage investors assume a lot of the money they put into startups will never come back. They are like talent spotters at a record label. Some bets will work out, many won’t. But they expect that. It’s part of the business model.
A company with $100m in investment that went pop would be an issue, one at an early stage and with relatively small sums involved is noteworthy, but to the big investor community they’d probably be surprised if that was not the case.
Not Unicorns, Not Listed
Another issue is that although some of the big legal tech companies are publicly listed, such as Thomson Reuters, legal tech is only one small part of their business.
The new range of start-up, pure-play legal tech companies are not listed on any stock exchange. In part this is because of size. Listing a startup with low annual revenues, would be very, very unusual (these days…).
Also, legal tech, despite the relatively large potential market size if you are a startup, remains a very small market compared to, for example, consumer software that everyone with a computer might want to download. Listing such companies will be a challenge. And it’s a challenge we are far from for most legal tech companies.
Also, if you are not listed then you also don’t face the fickle nature of the markets with your share price going up and down based on a news story. If you are not listed then you just keep plugging away, building revenue, improving the product, building the team, building the brand and so on. You just keep going. I.e. it’s harder to crash if you stay away from public markets.
Market Demand vs Category Wars
The dot.com crash 20 years ago was caused by startups getting listed for huge valuations when there was in some cases not even a viable product. In other cases the product was viable but the demand – back at a time when ‘do you have the internet?’ was a question people still asked each other even in London – was sometimes very weak.
Legal tech is in demand, both the new and old varieties.
Probably the bigger problem is not short term demand as such, which appears to be steadily growing, starting with larger firms and inhouse legal teams, and working outward and through the market, but a looming category war.
I.e. let’s say that all the leading 1,000 or so law firms around the world decide they want a new legal tech product. There could be five or more possible varieties of product in that category.
If you add up all the large, commercial law firms in the world, which may want to buy in new tech that goes beyond the usual DMS-type backbone applications, then how many are there? It’s a small number in terms of what most companies would be looking at.
And, a market size of about a thousand firms is a very tight market for mature companies. For startups in a niche such as law, that’s fine. But, once companies expect to have hundreds of clients each – not just a few dozen – then market size is really an issue.
And, the more cutting edge your tech, the more it needs a law firm to really want to embrace innovation, and then the more limited the total market size. And as we have seen in the UK, the top 100 firms dominate innovation here, but there are 10,000 law firms in England & Wales, most of which are tiny. How many past the top 100 are going to buy all this lovely new tech? At least in the next few years?
Also, it’s an issue for investors. If you can grow a lot at an early stage that’s great. But then you get to, for example, 200 clients, and then things could stop growing. What then? The investors have put $50m into you. But you can now only grow very slowly, and primarily by eating other companies’ market share.
Maybe the idea then is to sell you to a consolidator. And that could work. But some won’t get sold. Then the crunch will come. Or, you take out the opposition. But again, those on the losing end of the category war also face a crunch.
But we are far from this point. And that’s not even including all the inhouse teams around the planet to pitch to – which clearly outnumber the total number of leading commercial law firms.
Investment into legal tech may be expanding like a bubble, but it is nowhere near close to its limits.
Most companies are not listed, nor of the newbies with fresh funding are these businesses anywhere near close to a market saturation point on a global basis.
There is everything to play for.
Will some startups drop out of the race? For sure. But, for Artificial Lawyer, the real crunch will come when certain categories start to reach a natural level of market saturation and then the fight for market share will become brutal and then……and likely only then, will we see a mini-legal tech crash, when some investors who have bet large on one horse find out it’s not a winner, that it’s hemmed in, can’t grow, and that it has lost out to other brands in the market.
At present though, legal tech’s newer companies are still exploring what feels like an open market where they have not yet touched its limits.
So, a bubbling flow of investment – yes. But, a bubble that is about to burst and create a legal tech crash? No.
As an investor with first-hand experience digging under the hood with multiple legal tech vendors I find myself asking the same question but for a different reason.
The success and valuation of some vendors appears to be built on a stack of logos collected which look great together on a slide in an investment pitch book, but dig into the individual parts that make up the whole and you find abysmal user adoption, client renewal and implementation success rates hidden behind smoke and mirrors.
That stack of logo’s then starts to look a little bit like another bubble maker – a 2008 CDO.