What Does the MWE/Legal Tech Fund Deal Mean?

In an unusual move, international law firm McDermott Will & Emery (MWE) has invested $10m in The Legal Tech Fund (LTF), a VC group focused on startups. But what does it mean and is there anything really substantive happening here? Artificial Lawyer has a look.

First, this is the same LTF VC group that a couple of weeks ago received funding from DocuSign and which has investments in companies such as no-code automation startup Josef, as well as: LeasePilot (lease drafting), Qualytics (compliance), and Quanlex (litigation finance platform).

But, back to the larger question: why would a law firm put money into a tech investment fund?

As we saw yesterday, more and more law firms are investing in legal tech companies, e.g. the partners of Slaughter and May have just announced the creation of a Ventures arm to put cash into startups that have been part of its Collaborate incubator. Meanwhile other law firms have already invested in legal tech businesses, such as: Clifford Chance, Allen & Overy, Latham & Watkins, CMS, Mishcon de Reya, Wilson Sonsini, Cooley, and Rajah & Tann, among others.

Investing in a company that has been through an incubator, or that you really want to see take its place in the market, e.g. Reynen Court or Lupl, makes sense.

In some cases the firm may have already spent time helping a startup to develop its product, and may also be using it on client work. Adding some capital helps the law firm to both influence the startup’s development, stay very close to it as it grows, and of course one day it may provide a financial return.

But….the last bit, the financial return, will be in many cases the least important part.

Equity partners in law firms that already have revenues over $1 billion (as MWE does) are not short of cash. Those partners make enough to invest by themselves in their own time in a wide range of areas – and many no doubt do, from buying property to art works and more.

In short, when a bunch of very wealthy people, whose wealth just keeps on rising at the moment, sink a relatively small amount of capital into legal tech what are they really getting? Why are they doing this?

The clue is in part held within this comment from MWE Chairman Ira Coleman, who said: ‘We are always working to peer over the horizon for our client – this time through a very crowded legal technology landscape.’

He went on to add: ‘We want to fund the best ideas and leverage the exceptional experience of the team behind The LegalTech Fund to shape the legal technology market moving forward. Our phenomenal growth over the last few years has put us in the position to make this happen, and we are doubling down on that success as we look to the future.’

So, two points: the firm is loaded – i.e. the pandemic has helped partners generate so much cash each year they are looking for things to do with it. And given that most firms run a full distribution model, if they don’t invest it now it will just get gobbled up as a small additional sliver of money in the equity partners’ income.

Legal tech is also really on their minds now – and perhaps all the stories about big valuations, IPOs and the ever-beating drum of ‘innovation, innovation, innovation’ has made them feel ‘they need to do something’? I.e. that the partners are not sure exactly what to do here, but $10m is a small price to pay for making a splash in legal tech in a highly notable and newsworthy way.

Then the other point – Coleman noted that this will allow the firm to ‘peer over the horizon for our client’, i.e. by being close to LTF, which as well as investing, keeps a close eye on trends in the legal tech market – as you’d expect – the law firm gets a lot of valuable insight into what is happening.

That insight can then be used by the firm to shape its own buying and innovation decisions, but it can also be leveraged to help with those awkward client conversations when the client asks: ‘So, er….legal tech…..? What is your firm doing?’

MWE now has a nice and clear answer: ‘We’ve just invested in a fund for legal tech startups.’

They can also appear to new recruits to be ‘with it’ when it comes to innovation, and Coleman alludes to this. He noted: ‘We will continue to position McDermott as the premiere career accelerant in the legal industry.’ I.e. they are focused – as everyone is right now – on keeping young talent. Having some kind of stake in tech may help improve the optics here.

Now, the flipside.

Will investing in a fund like this really change things for MWE? Not massively. But, it may help engage those lawyers at the firm who are interested in innovation a bit more. That said, this has its limits. Splashing cash doesn’t equate to meaningful change in legal services delivery. And there is a real risk that this becomes more of an ‘innovation by press release’ type of initiative.

It may produce something tangible, but here are a few other things they could have spent $10m on:

  • Several years’ worth of PoC costs to trial and potentially implement a host of new tech solutions.
  • Hire a top tier innovation team to add to what the firm has already, to drive real change internally.
  • Fund their own incubator for legal tech for several years so they can directly engage more easily with new companies and ideas.

Overall, it’s an unusual move that is likely to deliver primarily:

  • Good headlines and market buzz.
  • Leveraging LTF’s research to help inform MWE’s views on legal tech.
  • Provide something to tell the clients.
  • Perhaps give them something to tell new recruits.

But, will it really be substantive in its impact? Will it really change how the law firm does its work for its clients? It could do. It could help accelerate change. But, it could also become a ‘tick box’ marketing project that doesn’t lead to real innovation. Time will tell. Let’s hope it’s on the more positive side of things.