New data from Legal Complex has shown that the burn rate for legal tech companies dropped in 2024, the first time it has done so since 2018. It also follows the previous year’s record level for longer burn rates.
So, what does it mean? First, what is a burn rate? This is the number of days it takes for a company to use up its cash before a new investment round. Legal Complex measured the time between rounds for a range of legal tech companies and came up with a mean average.
As you can see from the table below, from 2018 to 2023 the burn rate increased steadily year-on-year. I.e. companies are taking longer to get through their cash. Interestingly, Legal Complex found that legal tech had a slightly longer burn rate than fintech, which was 255 days in 2024.
As to the bigger picture, it’s a game of several factors. If companies are getting a lot of money in their A, B and C rounds, then they may not need to go back to the market so rapidly. I.e. the lengthening in burn rates from 2018 to 2023 was perhaps caused by more money coming into the legal tech sector.
However, from another point of view, if a legal tech company is growing very quickly, then burn rates will shorten – and that’s not a bad signal. In fact, short burn rates could mean that there is more growth in the market and companies are spending that cash, turning it into growth, and then needing a ‘top-up’ more quickly.
One caveat to that is the question: does a company burning money quickly always mean more growth? Well, generally investors won’t keep funding a company more and more quickly if it’s not showing growth.
So, overall, what does the data tell us?
The steady rise in burn rates from 2018 onwards may be the result of increasingly larger rounds. And certainly this site has noticed that since 2016 the amount of cash startups now get each round certainly seems higher than back then. As noted, that in itself suggests more money overall coming into the legal tech world – and that is also reflected in other data we have seen.
The shortening of the total burn rate, i.e. the period between new rounds, seen in 2024, may have multiple causes. One potential cause is simply that there has been more growth, or at least one can say legal tech companies are spending as if they are in a higher growth era. So, more spending of cash, faster burn through of cash that was invested, hence shorter time between rounds.
An alternative analysis could be that costs for legal tech companies have risen, e.g. staff costs, and / or perhaps the need for more investment to develop genAI tools, and that is the reason the burn rate is shortening. I.e. it’s not because of more rapid growth of the companies, it’s because more cash needs to be spent now for legal tech companies to stay in the market.
As is often the case with these types of data, we will need a couple of years to pass to really get a clear picture of what’s actually happened.
Plus, as explored last week, 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.
So, whatever we can conclude from this, it’s fair to say the legal tech sector seems to be entering a new phase of growth, with new conditions. We’ll have to wait to see where this goes.