Sometimes we make bold statements just to challenge our own assumptions. Dare ourselves to look closer and see if our reality is just a lie. While charting 912+ legal startups I wrote: “I did not spot a unicorn…yet“. How would I know what a legal startup unicorn looks like? What is a unicorn anyway and could these ever roam in a legal startup landscape?
What is a Unicorn?
A unicorn is a venture-backed private company worth more than a billion dollars…on paper. For argument’s sake, let’s pick the top unicorn valuation ($47+ Billion) and benchmark this amount against the market value of the #1 rank company in the world ($270+ Billion)*. A unicorn would be about 17 % the value of the industry pinnacle. With this number we can now measure a unicorn in any industry. So when a startup valuation ventures into the 15-17% bracket of the industry leader in revenue or market value, it becomes a Unicorn.
An additional observation: the name Startup implies that it’s a young company. Meaning we’ll need to set a time constraint so we’ll state that they shouldn’t be older than 5 years.
*Note: Apple has the biggest market cap however its numbers are just too crazy to use as a benchmark.
What is a Legal Unicorn?
Looking at the list of the biggest players in the legal service market, the #1 Law Firm has a reported $2.5 Billion in revenue. So according to my scientific ratio a legal startup with a
$45.9 Million $459 Million valuation would be a Legal Unicorn. You can also do this exercise on neighboring industries such as legal information providers. However, this would raise the bar to $214.2 million $2.142 Billion but I shall not dwell on this track. For this exercise, we’ll stick with looking at companies trying to displace the Practice of Law e.g. Law Firms not the Business of Law e.g. Legal Information Providers.
Do Legal Unicorns Exist?
When I said: I did not spot any unicorns, my reasoning was clouded by ego devoid of data…and this happens often ?. I believed I would know it when I see it, even when camouflaged and hidden in the 912+ legal startups on Angel.co or anywhere else. Now that I devised this yardstick, I can more accurately assess if my intuition was correct. So between 40-50 million dollars valuation a legal startup would reach Unicorn status. Do we currently have legal startups with valuations in this range?
To answer this question, I needed to descent into this absurd world of venture capital, fundraising, Pre-money or Post-Money Convertible Notes etc. In short, there seems to be no limit on valuations, yet there is a sanity on the willingness to fund. And the logic reveals itself in so-called rounds. Herein lies the key to my argument: funding usually starts with seeding after which follows a series A, B rounds and so forth. I stated that there are few rules on limits but it appears that each round of funding has a virtual ceiling e.g. 100k-$1million usually is considered Seeding. And between $1 million- $5+ million is considered to be Series A. Now stay with me: when you are entering in Series funding than investors expect at least a 10x return on investment. Example: a successful $2 million series A round will put a company at a minimum $20 million valuation.
However, companies aren’t bound by this limit and they can set their valuations much higher e.g. Buffer raised $3.5 million at a valuation of $60 million post-money. By this reasoning, if a legal startup receives $2+ million or more in VC money, it’s roaming Legal Unicorn meadow. And if they are able to get between $500k – $1+ million then we can call them Legal Centaurs.
Yes, eventually we will have Legal Unicorns [icon name=”trophy” class=”” unprefixed_class=””]. One example: Shake raised a total of $4 million before it got acquired. This would put its valuation between $40 – $70 million, according to our Buffer Theorem.
There is one more thing: above I briefly mentioned age but did not elaborate on how it equates to the value of startups. Looking back at my previous post, I was searching for a correlation between the creation of legal startups vs economic events. I may have been looking at it all wrong…bold statement ?.
[updated: July 8, 2015. Thanks to Ron Friedman for pointing the error of my ways ?]