There has been a 532% drop in legal tech funding in January 2020. Perhaps it’s time to entertain a 4-step plan to pivot to a market with measurable growth.
TLDR: The previous decade has proven that no amount of money, technology or talent can disrupt the legal industry…from the inside.
Admittedly, January 2019 was unique with a haul of $613 million. January this year had a total of $97 million with $75 Million going to Personio — an HR platform that also generates contracts. Another outsider breaching the contract space as a challenger. While we noticed most stats trending downwards, funding was our last metric of hope.
If we took an honest look at where venture capital for the past decade was allocated, we may come to a harsh conclusion. Most of the money evaporated in broken dreams of products with no fit or it’s being used to prop up legacy systems. Yet the funding metric may not be the only alarm we kept hitting snooze on.
Some may remember CB Insights and Crunchbase extensive coverage of legal tech back in 2017. Except for some reports on individual companies, we haven’t seen the same level of interest since. On Twitter, hashtag #LegalTech peaked on December 11, 2017. According to Google Trends worldwide, Legal Technology peaked even earlier. One positive: it seems we are steadily climbing back towards the tip of January 2011.
We consolidated this data in the Decade Dashboard and visualize the growth and subsequent decline in over 800 locations. A bit more optimism: we are still net positive in terms of new ventures versus the fallen. Meaning we register more new companies than we can detect that went out of business. It is not the most accurate way of measuring growth. It’s more like adding sugar to your coffee to get an extra boost.
Let’s forget about the long sales cycles and the culture of risk aversion for a moment. Here’s why the legal industry is impervious. There are two historical drivers of change in legal:
- A change in the law or;
- A technology that enhances the charging capabilities of professionals.
The quickest way the legal industry can be disrupted is when we change the law. Here are two obvious candidates: in most parts of the world, access to case law and codes is supposed to be free. However, through a weird marriage of copyright and publishers, they are mostly pay-per-view. Worse in France, you risk a five-year jail sentence if you analyze cases at scale. In short: no country on earth allows easy access to all cases or codes to analyze them at scale for inconsistencies.
Another outdated constraint is the illusion of impartiality. That’s why lawyers can’t recommend technology [dutch] in The Netherlands. This restriction also discourages non-lawyers from owning a law firm and obstructs the marketplace model of charging for leads. These limitations harm the distribution of justice. It creates an artificial economy partial to the few with enough money to get a fair day in court.
The combined fact that we can’t analyze all court data and that lawyers are insulated from normal economic dynamics creates a virtual monopoly on legal knowledge. A rebellious lawyer may even argue that it’s an unconstitutional one. Who wants to step forward to liberate and democratize law?
The other detonator for disruption is a technology that enables lawyers to charge more for less. The pager, email and the blackberry were eagerly adopted by lawyers. These technologies increased communication which directly translated to more billable hours. Whenever a technology was able to fuel the bill-by-the-hour model, it became an instant success. Unfortunately, not everyone got the memo.
Marketplaces and Technology Assisted Review (TAR) weren’t warmly embraced but had to fight their way through a decade of court battles. Why? Because they flipped the dynamic and forced professionals to charge less for more. Any technology embodying this principle shouldn’t expect a red carpet in Legal. That’s why we monitor the profiles in our dataset that promote efficiency. Just to see if they can stay afloat.
It would be a sad waste to have all of these wonderful ideas die in oblivion. Especially when there are other sectors in desperate need of driving down costs. Particularly unpredictable legal costs in a volatile economy. So here’s a 4 step plan to help any company at least experiment with the idea of a pivot:
- Generalize your tech
- Identify attractive markets
- Research fit versus growth
- Relax your mindset
Let’s start at the bottom. In an industry where precision is sacred and quality is holy. None of these attributes are easily measurable in the context of the law. At some point, we’ll have to trust the numbers. More capital is being spent to avoid legal work. Most of it vanishes in non-legal tech sectors. Fintech, WealthTech, RiskTech, and SmartTech are the biggest beneficiaries. Although business requirements may differ wildly in each of these sectors, at its core software is data and math. Once we view it through this prism, we can see the possibilities.
Now that we’ve adjusted our lens, let’s take a close look at legal tech. We’ve discussed the many flavors of contract tech in two posts. From storing raw contract data in databases all way up to using contract text analysis for financial and security purposes. We also ran through over 400 research platforms that fetch answers on the law. Each of them supports the ‘better decision’ making process in various ways. The largest legal tech company is essentially a clone of SalesForce CRM. Maybe they’ll replace SF altogether? Relax, it won’t happen but it’s technically possible.
Now let’s stay in this dream state for a moment. Software is here to support our decision-making in life and so is every law ever created. No matter in which niche you have planted a flag, zoom out to see the big picture. Practically any software that supports critical decisions is legal tech. What critical question is your legal tech providing an answer for? Better yet, who is asking the question? Is it a lawyer or a client? If it’s a client, are they in trouble? Finally, do they often end up in trouble?
We just went through all 4 steps in this exercise. Open mind, generalize tech, made an inventory of possible markets and explore the growth opportunities. Let’s try it on something more concrete like a contract clause recommendation engine. If you ever used spell check while writing texts, you’ll recognize this concept. Now imagine your spell check also suggested you don’t write “funding secured” in a tweet. Elon Musk was lucky enough to afford representation otherwise, those two words would have landed him in jail.
Our continued concentration on defining legal tech makes us lose sight of what matters. The impact of law goes beyond lawyers and is bigger than the business model of law firms. Holding tech and talent hostage in legal tech is an attack on justice everywhere. We should explore the many ways legal tech can make a difference and it only takes 4 steps.