Environment, Social, and Governance (ESG) seems like nitro for investors but capitalizing on this trend starts with lawyers and startups.
TLDR: ESG is aligning wealth creation with nature and decency. Lawyers are excellent guides navigating this process and accelerating the growth of RiskTech. But the jury is still out.
Deliveroo, the food delivery startup, recently offered new stock to the public, but there wasn’t much ‘appetite’. At the moment of writing, shares in Deliveroo traded at 30% below their proposed value. The analyst blamed the failed initial public offering (IPO) mainly on their advisers, the Banks. While the pandemic has benefitted everyone in logistics, the public remembered how Deliveroo treated their workers. Now Goldman Sachs is reportedly forced to buy $103 million in Deliveroo stock to boost the IPO price. An action described in this podcast: as buying all of your own kid’s scout cookies.
The reason we bring up workers’ rights is that this is now playing out on a much grander scale at Amazon: one of the biggest employers in the USA. We’re curious if attempts to block employees unionizing will impact Amazon’s stock price. While managing human capital makes financial sense, it’s still bad for business if you’re ignoring the S in ESG. Both companies aren’t breaking any laws, but they’re drifting close to the edge of human decency. Looking strictly at the numbers, you can’t blame accountants for not identifying these risks. Yet, your general counsel would be doing cartwheels to get your attention.
What is ESG? As human beings, we should take care of our environment, be socially conscious and fair in order to create sustainable prosperity. ESG aims to create a level playing field for all by emphasizing rules on emissions, security, diversity, and inclusion. It is an investment thesis to identify long-term wealth opportunities by going beyond the numbers to find companies that practice ESG. If you feel fluffy and flustered by this, talk to your local legal professional. They can best explain the vast array of rules surrounding ESG. Or you can swing by EcoVadis, one of the biggest in Civic Tech, and OneTrust, the biggest in Legal Tech, to see what they offer.
This brings us to the nitro. On March 16 we released the Top 11 Legal Tech companies of all time. By March 23, the list was outdated when OneTrust acquired a couple of Legal Tech companies. In the first quarter of 2021, we experienced a surge in venture funding we haven’t seen since 2014. We debuted an exclusive chart in issue 340 of Legal IT Insider by Caroline Hill. The chart featured venture funding of private companies operating in Legal & Regulatory. How we define the Regulatory space is key to understanding the impact of ESG.
We mentioned the surprises, like PatSnap ($300M) and Fadada ($138M) who listed respectively 4th and 9th overall in round sizes for Q1. PatSnap patent research we classify as ‘Legal’ because it’s a job traditionally done by lawyers. Fadada is an e-Signature provider and listed in Regulatory which is a collection of Governance, Risk & Compliance (GRC) tools. GRC are mechanisms, like e-Signatures, created by lawyers to be used by companies to manage risk. These mechanisms help to avoid the risk of litigation or fines by the government. Fines like the record $2.75 billion for anti-trust violations leveled at Alibaba by China.
That is why GRC is twice the size of Legal based on our numbers. In Q1, GRC raised $4.01 billion while Legal managed half with $2.11 billion. Both broke the previous record for a single quarter. Legal’s previous record was set back in Q1 2019 with $1.29 Billion. As for GRC, the surge wasn’t just pushed by the urge to manage risk. Risk management actually was the smallest of the big three. Governance and Compliance took the bulk of fresh funding with notables in Fraud Detection and Tax. However, most rankings only look at the size of the rounds or the amount raised. And that’s where many get it wrong.
Do you really want to know the future? Then ignore dollars but look at deals. Big funding rounds usually signal the end of a cycle rather than the beginning of a trend. We’ve seen this pattern play out in venture funding of legal marketplaces, practice management, and contract tech. Case in point: in the first quarter of 2021, Tax shot to the number three spot with 12 deals. This is more deals than Contract Tech could muster in the same quarter. This discovery was so powerful that it inspired the unique setup of the Spark™ dashboard.
Counting the number of deals within various niches of Legal and Regulatory reveals where the action is. Deal numbers not only show areas warming up but also the ones cooling off. We indicated Legal Tech slowing down because legal doesn’t need that much tech to explain the risk. However, by explaining risk, it has propelled the use of Risk Tech. Especially the risks to people and our planet.
With ESG, we’ve decided to invest in long-term prosperity as opposed to profiting from the apocalypse. This has driven companies to install more security on their platforms and checks in their balance sheets. They are looking at accounting and supply chains to measure their impact on nature and communities. Companies can even check if their banks are green or fix their toxic culture with virtual reality. At least, that is the thesis so let us all follow the ticker symbol AMZN closely.