We generated new metrics from our dataset to measure the trajectory of legal innovation. Metrics to benchmark endurance and stability.
Spoilers: Trend lines reveal Legal to be a fairly stable industry. Startups generally raise capital every 342 days (Endurance). You’ll need about $1.13 million to start and $8.3 million to grow. Amounts and endurance vary depending on your market, model, and location.
Stability
Our previous post revealed which areas would capitalize on a surge in traffic this year. Examples included the increased demand for e-signatures and claims, which subsequently allowed many to raise funds. After a slow start in January and the world being crushed by corona, we didn’t expect investment to be anywhere near previous year levels. Then we register a blowout in May. Now, why was there a sudden frenzy to invest in Legal? Part of the answer lies in similar behaviors on display in public markets.
What do Kodak, Hertz, Tesla, and Apple have in common? These are iconic brands that saw their stock reach record highs this year. In the case of Hertz and Kodak, the dream quickly descended into drama. While Hertz filed for bankruptcy, it’s stock jumped 1,000%. In the case of Kodak, its stock exploded to 2,757%. In both cases, the SEC had to step in and ask questions. Perhaps the nostalgia behind both brands drove Robinhood investors to view those stocks to be as stable as Apple or Tesla.
We do not provide any investment advice and can not judge the performance of any stock over time. Yet, as legal professionals, we do enjoy analyzing the psychology of trust and the engineering of stability. In volatile times, most latch on to things they trust. Economists call this behavior herding: a phenomenon where investors follow what they perceive other investors are doing, rather than their own analysis. Therefore, a surge is not necessarily a true sign of safety but rather a search for stability.
What is stable? During the production of several graphs, we discovered the legal industry to be fairly stable in comparison to similar sectors. The graphs in the video below display the total investments per month in private companies for each sector since 2018. After inserting a polynomial trend line on each chart, it revealed the stability of each sector. Keep your eye on the teal line and watch the curvature. Despite wild swings in funding totals, the trend line for legal still has less curve compared to the other markets.
Endurance
In may sound contrarian but it’s now easier to get money than to make money. Since 2017 we have had more investors and funds than good startups. On top of that, governments now are stepping in to save businesses indiscriminately. Yet, with all this stimulus distorting the economy, one cannot fool unit economics forever. The main reason Vine didn’t become TikTok is that it simply ran out of cash. Past wisdom dictated that it takes money to make money. Now, the COVID economy is going to teach us to make money with no money. Or worse, with interest rates this low for the foreseeable future, make money with fake money.
We can cook the accounting to stretch runways and split stocks to inflate the valuation of companies. But if the number of new COVID-19 cases and jobless claims remain high, many companies will not survive. Businesses will have to consider pivoting to a new product, model, industry, or hibernate. We explored pivoting towards areas with more traction in the CAT analysis or how to hibernate in our Survival Guide. Here we’ll calculate the financial endurance of startups based on the pre-COVID economy.
We ran a subset of 3036 profiles with a funding history through a few filters. First, we extracted the outliers which contained a healthy mix of large and small, popular, and obscure companies. These outliers had not registered fundraising in over 600 days. While they may hold the key to efficient capital deployment or a healthy business, we can’t guarantee these outliers haven’t received a loan or an undisclosed round.
To simplify the extraction, we created two buckets: seed funding and growth funding. The first is an initial investment or government grant. while the lather is a later stage round or debt financing like bank loans. The near-zero interest rates are making traditional financing options as competitive as venture capital. We excluded initial coin offering but can report they’re making a comeback this year. After the 2017-18 field of ICO dreams, this form of financing went dark in 2019. What you see, in the video below, is the filtered view of median burn rates and average round sizes for the various sectors, markets, and categories.
Bottom Line
The accelerated adoption of tech during lockdowns have pushed companies like Apple and Tesla to become beacons for stability on the public stock market. Yet, the record stock prices and the rush to IPO more companies to the public markets is a worrisome trend. Moreover, we signaled the increased appetite to acquire. That urge has translated into the rise of SPAC (Special Purpose Acquisition Companies). It seems privately funded ventures are dumped on public markets for retail investors to feast on aka “dumb money“. Smart money is unlikely to sit safely in the bank so will be reinvested in stable long term assets. The stability that those impacting the legal industry could offer in the areas with a slow burn.
Remember, the legal industry withstood a decade of “disruption” and continues to operate on a bill-knowledge-by-the-hour model conceived centuries ago.
Btw, we’ll keep bringing you positive but honest numbers. While the world feels like its burning, let’s focus the light it shines and capture warmth it brings.