Startup Crowdfunds as VCs Pause Seed Cash

Case management startup, Legal Connection, has opted to kick off their Seed round on crowdfunding platform Crowdcube, rather than take a more traditional VC route, in part due to the tougher environment for early stage legal tech startups.

CEO, Guy Stern, told Artificial Lawyer: ‘We started preparing to raise our seed round in February, and in March the pandemic hit and many VC firms took the decision to stop new investments, opting to support their existing portfolio companies.

‘Crowdcube allows us to reach a completely new set of investors, many of whom will take small bets on companies that are building products that they want to see exist in the world.’

Although a growing number of established and clearly scaleable legal tech companies have received plenty of cash in recent months, as well as some of the better-established startups, the early stage/Seed level startups appear to be facing a tougher situation.

This is simply due to the fact that the earlier the investment stage the bigger the gamble. Once a tech startup has shown a solid revenue growth curve, won notable clients, and proven its software works and is liked, then the risk diminishes. But not everyone is that stage.

Legal Connection is a legal case management suite that allows ‘multi-party rich text group chats’. It got going last year when things were very different and it was selected as one of 13 startups with high growth potential by Antler VC, which invested £120,000 ($154,000) in pre-Seed cash.

Stern added: ‘The product is specifically designed to enable remote teams and those participating in the legal gig economy.’ And that looks on paper to be good timing in relation to the move to remote working.

Also, due to an integration with Shieldpay, parties involved in a matter can request client money, view account balances and sign off on transactions. 

According to the Crowdcube page for the company it’s attracted 44% of its base target so far of £120,000 ($154,000). Its upper target is £650,000 ($834,000).

So far 15 investors have contributed between them around £53,000 ($68,000) in this Crowdcube Seed round. I.e. approx. £3,500 per investor on average so far. After the current stage, that will last another 15 days where only people with the link to the campaign can invest, there is then 30 more days where the campaign is advertised to the entire Crowdcube community.

All well and good, but what are the pros and cons involved in such an approach?

Screenshot from the Crowdcube page.

Perhaps the first key point is that VCs bring with them a lot more than just cash. They are in most cases very experienced businesses that – if you get the right ones – know a lot about your sector and your type of product. That brings with it a wealth of advice and provides a pathway to future funding, as well as connections to other funds.

Going to the general market may also result in some legal tech experts acting as investors, but as seen above, they will be relatively minor ones. Also, if 15 investors have provided 44% of the base level funds, then to hit 100% could in theory mean having many more minor investors, who will own a small part of the company indefinitely.

From an individual small investor’s perspective the lack of management influence that goes with such a method may not be seen as a positive, but you can’t really expect a start-up to be steered by the views of dozens of people. And on the startup’s side it will miss out on all that input from experienced VCs.

Overall then, it’s not a perfect solution, but then, taking a big chunk of cash from one or two powerful VC funds has its own strings attached.

You could keep boot-strapping, i.e. self-funding, and a small number of startups do manage to achieve this and grow into successful businesses. But, that approach is a lot more realistic when the market is rapidly expanding and your tech solution is something really new that no-one has ever seen before – which allows you to bag clients in what is open territory. Trying to bootstrap when the market is not so vibrant and you are in a market space already occupied with other players….that is a tough proposition.

So, good luck to Stern and his fledgling company.

And, of course, readers should note, this is a news story about a legal tech company choosing to crowdfund rather than rely on VCs, it’s not a suggestion you should invest in this company. Making investments into any kind of business, not just startups, should always involve plenty of research and due diligence on your part, and naturally, investing in this way means any capital you might think about providing could get eaten up very quickly and you may get nothing in return. But, that’s the world of putting money into startups – it’s high risk.