Data from Legal Complex has found that 2024 was a record year for legal tech funding, which is good news. But, it also saw a big drop in the number of funding rounds and a huge increase in total debt finance, albeit for a smaller number of companies than in 2023.
As can be seen in the table below, the total amount of money going into legal tech (based on a broad definition of ‘companies that utilize a legal process at the core of their business model’) was higher than in any year going back to 2015. In fact, the total value of funding dwarfs those heady days of 2015-2017 when legal tech startups exploded in number across the world.
Yet, while many will cheer this news, there are plenty of things that are not so great. First is the level of debt, (i.e. funders ‘lending’ money, rather than taking a simple cash for equity share deal). Debt is now the top segment for funding legal tech in terms of total value. In fact, it’s now at over $5 billion in 2024. And this is at a time of very high interest rates as well. That said, less companies took debt than in 2023, which suggests some larger companies are taking on a lot more than everyone else.
Also, the total number of deals is down a lot, to 356, compared to 575 at the peak of deal volume back in 2021. That is a dramatic reduction, according to this data.
The reason for this drop at the same time as more money is coming in, is that although some startups and scale-ups are getting a good flow of cash, much larger companies are soaking up a huge amount of the fresh capital. This is simply a sign of a maturing legal tech market, even as a whole range of new genAI-based companies have arrived since 2023 and are now on a growth surge. And as noted below, it also shows some reticence to invest in those companies that have been in the market for some time, but are neither fully scaled up, nor are they new startups with everything ahead of them.
What Does It Mean?
So, what does all of this mean? Well, it’s a very mixed picture. Certainly many legal tech startups are indeed getting the cash they want. Harvey for example bagged $100m last year. And without a doubt investors are excited about the potential for genAI to transform the legal market.
At the same time some larger companies bagged significant funding, sometimes ones that don’t always hit the newsstands, such as Dye & Durham. This shows that investors have a long-range appetite for the bigger legal tech companies that have managed to scale their way to a stable position.
One concern is the drop in the total number of deals, which is a paradox given that the arrival of genAI has triggered the launch of many new startups.
Why is this? One potential reason is that money is bifurcating between the very new startups that are just a couple of years old and promise rapid growth, and the very large scaled-up companies that are seen as a sure bet and have proven themselves already.
Meanwhile, it’s possible that some companies that have been around for some years since the first wave of the legal tech boom in 2016, but have not scaled considerably since then, are seeing less interest from investors – but that’s just AL’s theory as to why we have a record year for funding, but far fewer deals.
Can those ‘middle distance’ companies change the story? For sure. One key reason is that genAI tech is available to all. A first-generation legal AI company from 2016 can provide genAI capabilities as well. The challenge, as ever, is the story they tell to the market and how they are perceived by potential investors. But, everyone gets a second chance.
Some investors may still be thinking ‘Well, if you didn’t grow massively before, you won’t now’. But, that could be flawed logic. Many companies now have much greater opportunities for growth precisely because genAI is changing expectations across the legal market. An early mover from 2016 may in fact now finally be seeing the right conditions for massive growth – if only investors would get behind them and support their scaling.
In short, investors should be looking at the whole spectrum of legal tech companies for investment opportunities, as all such companies have an opportunity for greater growth as the legal tech market expands in general on a global basis. And it’s fair to say, much of this change is being driven by genAI.
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Commenting on the results, Legal Complex founder, Raymond Blyd, said: ‘Debt can be viewed in two ways. First, Private Equity and banks still view mature legal tech companies as viable investments.
‘Second, mature companies need way more capital to compete in the current legal tech market. Perhaps this is because of the incursion by bigger companies like Microsoft, OpenAI, Adobe, and Box. As well as the aggressive competition by AI-native well-capitalized startups.’
He also added: ‘Having followed the space for over 10 years, I have become a bit coloured by each year’s results. My initial reaction to the 2024 numbers was that not every new investment was aimed at AI.
‘The M&A space will be very interesting to watch in 2025. Especially, the companies that were able to raise between 2020 – 2022 and weren’t able to raise in 2023 – 2024. I also noticed that AI companies raised more often.’
Blyd has also produced a video exploring this and more, it is here.