Do Customers Care About Legal Tech Funding?

Do law firms and inhouse teams care that your legal tech company has received new funding? We see investment stories every week now, but does funding really matter to the people who use your software? Artificial Lawyer asked the market, this is what people said.

Introduction

First, some context. There are hundreds of legal tech companies and many of them are at any particular time in the process of raising new funds. This could be a small startup looking for seed capital, or a giant with a decade under its belt looking for $100m to expand globally. These fundings, once the cash has been given, are always marketed as major events.

Meanwhile in your daily life you use the products and services of dozens of companies without ever thinking twice about how they are funded. When you stop to buy a coffee from your local shop do you pause for a moment and say to yourself: ‘Hmmm…I wonder how their balance sheet is at the moment?’ Probably not. You want a coffee, they sell coffee, you buy a coffee, end of story.

So, why do we get so caught up with all the news about legal tech companies getting funding?

Part of it could be that after 2015 and the surge of startups that followed, it was novel to see so much money going into so many new companies. Then when AI-driven doc analysis companies started bagging sums in the $50m-plus range it also became something of a validation of that kind of technology – which if you remember those days, some market commentators said back in the 2015-2017 era that they would never take off.

But today, legal tech funding news is ubiquitous. It’s become commonplace. In which case, does it matter to the most important people in the room: the buyers at law firms and within inhouse teams?

It’s All About The Startups

The first point is that when it comes to startups, then the company’s funding status can be part of the assessment of that product

Nikki Shaver, Paul Hastings’ Managing Director of Innovation and Knowledge, put it this way: ‘During the procurement process in a law firm, one of the typical aspects of vendor review involves an appraisal of operational soundness, including, for example, the years of operation of a company. When this review is undertaken and a vendor company is young enough to be considered a start-up, being able to show significant investment can allay fears around financial soundness. Other than that, however, information about legal tech funding is generally of no more than anecdotal interest to law firms.’

While Karyn Harty, Partner, McCann Fitzgerald, said: ‘The more important consideration when we’re procuring legal tech is how long lived is it likely to be. If it has the backing of a tried and tested company then we will be more confident about trialling it within the business.’

And Tara Waters, Head of Digital at Ashurst Advance, noted: ‘While security and functionality definitely take precedence in any assessment of a new vendor, funding is a relevant consideration.

‘In particular, for earlier-stage vendors, we will naturally be concerned with whether it will be in business in 12 months’ time, as well as its ability to meet minimum liability, indemnity and insurance obligations. Funding will be a key factor from that perspective. Less relevant to us is the source of that funding, although the knowledge that reputable external investors are backing a vendor is certainly a helpful fact in the mix of considerations (although knowledge of an active and happy customer base is probably a better indicator of success!).’

And that’s a fascinating insight. When a small legal tech company sends out a press release celebrating its new funding they may not appreciate that the key response from the buyers may be: ‘Phew, that company we’ve just invested lots of our lawyers’ time on for a PoC is going to stay in business.’

Unless you are the person responsible for onboarding new tech then it’s hard to appreciate how important this is.

But imagine you spend a fair amount of money on a new startup, you run a lengthy PoC that takes up the team’s time, including plenty of lawyer time, you do the security checks, you get it all implemented….and then six months down the line it folds.

That is not something anyone who was responsible for bringing that company into the firm wants on their desk. After all, if you have a job title that says ‘innovation’ then the business is trusting you to hopefully make good choices. Onboarding companies that fizzle out doesn’t look great. Hence the interest in funding.

However, it’s not as simple as just getting any funding.

As Bryon Bratcher, MD, Gravity Stack, the tech group of Reed Smith, pointed out: ‘Not all VCs are created equal. If a company receives funding from a VC with a strong brand and track record, especially in legal or B2B SaaS, then it’s a stronger signal to us. Ultimately though, we care much more about a company’s vision and whether or not it aligns with our strategic initiatives.’

I.e. if Andreessen Horowitz, SoftBank, or a homegrown investment fund out of Google or Microsoft, is backing you – perhaps with some very direct input from their side, then law firms are reassured.

This site would add that this also points to some of the challenges around crowdfunding. That method can work. For example, Clocktimizer, the very successful billing analysis company that was bought by Litera, was backed by crowdfunding. But, for some companies it could simply indicate a lack of interest from VC funds. And if VC funds are not interested then one has to ask why. There could be a good reason, or it could just be the VCs being short-sighted. But, all the same, it raises some questions.

The Inhouse View

Is it the same situation for inhouse lawyers?

One senior lawyer at a global bank told this site: ‘I’d say that it’s common sense to care up to a certain point about the financial resources. If having so many point providers and smaller companies already gives some firms / legal departments pause over not wanting to make a bad choice, being worried about support being poor or disappearing, being blamed later internally and politically (which will raise the hurdle for getting approval of further investments), then of course a certain amount of financial diligence is important.’

This inhouse lawyer clearly emphasised that making a bad bet on a new point solution can then impact the company’s support for future experiments.

Ben Shilito, an inhouse lawyer at Fujitsu and its head of digital services, said this: ‘The nature of a tech supplier’s funding is definitely relevant to us. Procuring and implementing new technology in a company like Fujitsu is very time consuming and, given the scale of our activities, moving off a platform is just as challenging.

‘Particularly with young and small companies the nature of its funding gives us insight into the long-term stability and viability of a company – both factors which increase our willingness to invest in their product.’

While, Maurus Schreyvogel, head of legal innovation, Novartis, added: ‘I do care about any commercial news from the legal technology companies I collaborate together with, as we are reimagining how we provide legal services together.

‘The collaboration with innovative legal technology companies has been very rewarding and difficult at the same time, as it feels like building a plane in the air. Therefore, news about additional funding is important; short term as it impacts the ability to deliver against their roadmap and midterm as it changes the ownership structure, which might impact my relationship with the technology companies.’

So, overall, the inhouse teams experience the same worries and the same hopes as the law firms, and funding news provides reassurance. And, as Schreyvogel points out, this is all about collaborating with the tech company and forming a long-term relationship. You therefore want to be certain the other party is going to stick around.

Larger Companies

Almost by omission it seems that when it comes to larger companies the law firms and inhouse teams are not so fussed. If you are a giant legal tech company, have 300 clients around the world, loads of excellent staff and have had serious investment for years, then it’s far less likely the news that your series E funding for $200m really matters.

Ironically, the more successful the tech company the less new funding may matter to the buyers. At a certain point we are not really talking about legal tech anymore, it’s just a matter for the general business press.

The same largely goes for IPOs. Going public can change the character of a business, as the push for growth can drive management moves and encourage M&A to keep expanding the business. But, equally, if you are doing an IPO you are not likely to vanish – at least not if you have a decade-long track record of growth already.

The one thing that may matter here is mergers. But, that is another subject. When company X becomes part of company Y it can change things a lot. Leaders can leave, service levels can change, and generally the company you knew can become something else. But, as said, this is not a funding question.

What Really Matters

Let’s get back to the key point. Generally, the buyers only care about funding news if the tech company is so new, so fresh to the world of law, that there is a potential risk it will fail.

As David Wang, Head of Innovation, Wilson Sonsini, explained: ‘I would say that it matters as far as conferring more legitimacy on a particular startup. One concern people often have is whether a startup is going to be around in a couple of years after you’ve built up dependencies around it in your stack/process. It is also a proxy for social validation since presumably you have a sufficient ARR to justify a certain valuation.

‘All this is helpful, but the reality is that most end-customers you are dealing with are not tracking this type of news closely.’

And April Brousseau, Clifford Chance’s Director of Research & Development, concluded: ‘When looking to partner with or purchase a legal tech platform or product, we look at a variety of factors including stability of infrastructure, the team and culture, roadmaps and vision as well as the rest of the market. External investment can be a sign that these factors are strong, but it isn’t determinative of our decision to engage.’

A Change in Approach

One final point is that with all this funding news is the increasing trend for law firms to invest in legal tech companies. On this point, one partner at a global firm, which has backed a legal tech company, said this: ‘One of the many interesting things about legal tech funding is how it makes law firms think about investment. Previously IT investment didn’t involve the lawyers. Now it can. 

‘But in that case what’s to stop law firms investing in clients and contacts that aren’t in legal tech? Can legal tech compete with the returns in other fast growth sectors that law firms also get to see? These are hard calls to get right, but the bold calls that win will be famous and take the rewards of survivorship bias as well as the financial return. There is a good chance that different firm cultures will now start to differentiate more than they did before.’

I.e. all this talk of funding has filtered through to the partners and is slowly shifting perceptions more broadly.

Conclusion

Does funding news matter? The answer is yes and no. Ironically, the larger and more secure you are the less it may matter to the buyers. For startups it does matter as it shows you will still be around in 12 months – and there is a professional impact on people who have brought you into a firm if a tech startup folds. So, for now, it looks like Artificial Lawyer will keep on reporting legal tech funding news because it matters to the buyers.