The total addressable market for the global legal industry is $3 Trillion, according to page 8 of the Intapp SEC S-1 filing. Does it add up?
Statista puts the size of the legal services market worldwide by 2025 at $908.26 Billion. Both estimates target mainly consultancy-based services. What is the total addressable market (TAM) for legal technology? Here is a list of reported TAM or serviceable addressable market (SAM) in S-1 type filings from various legal technology providers:
- Docusign – 2021: $50+ Billion TAM;
- Legalzoom S-1 : $48.7 Billion SAM (p115);
- Disco S-1: $42 Billion TAM (p2);
- Intapp S-1: $23.9 Billion TAM | $9.6 Billion SAM (p8);
- Docusign S-1 (2018): $25 Billion TAM (p5);
- NUIX Prospectus (pdf): $12.8 Billion TAM in 2024 (p19).
Law Society reported the mix of GRC and Law Tech markets in the UK to be $22 Billion (p8). Also note the image below: DocuSign’s estimate of the contract space is $17 Billion.
Why addressable market size matters
The size of a market determines how much money you can earn when investing in a player in that market. Let’s say you have one dollar, and you want to turn it into ten dollars. One realistic option is to give it to a public or private company. Disclosure: I did invest in a Legal Tech company and did enjoy a similar return. So, if many customers buy the product, then the number of customers multiplied by product price determines your returns.
Example: if you had one dollar on May 10 in 2011, and you wanted ten dollars within 15 months or 130 dollars within ten years. Your most likely avenue was to give your dollar to Apple to get a 10x return within two years and roughly 130x return within 10 years. Or buy Bitcoin, but I’ll get into trouble for saying that. A good explanation I overheard between the 02:20 and 05:00 minute mark in this podcast by Motley Fool.
However, the question remains: will customers keep buying?
How to measure growth
To estimate any future growth, we need a history of numbers. Specifically, numbers indicating a sustained demand for products. One popular method is compound annual growth rate (CAGR). It provides a percentage for year-over-year growth. Most use CAGR to keep track and project future growth. According to the S-1 filing by CS Disco, their revenue grew 43% CAGR. This means their income almost doubled every two years. In keeping with our example: they would give us about five dollars in ten years.
DocuSign reported revenues translated to a CAGR of 26%. They had exactly the same growth rate when they initially filed to go public. By comparison, Apple’s CAGR in the past three years was 0.83%. Yet, Apple’s CAGR did jump to 90% and climbed to almost 82%. Respectively, the year after the iPhone launched and once it was revealed they had more cash than the US Government. The chart below also displays a curious jump in 2021. Perhaps this increase was a panic …ahum… pandemic driven reaction.
Measure more meaningful
Here’s our take: we already commented on market size estimates in the CAT™ analysis. Before the launch of the iPhone, there was no measurable market for it. This prospect also doomed the early electric cars before Tesla. Market size analysis can never account for changing behaviors or technology breakthroughs.
Likewise, CAGR is handy if we consider the various underlying factors. Crafty accounting, job cuts or price inflation achieve higher revenues as well. So do company acquisitions and mergers. The CAGR method works best on stock price incremental swings. When implied to data points with big differences, it provides weird outcomes.
For the legal sector, we generate graphs to quantify the growth and stability of legal technology using industry-specific data. In Stability & Endurance, we talked through two metrics using numbers from legal tech companies. Despite wild swings in every area, we were able to show how Legal is more stable compared to sectors like FinTech. One reason is that legal relies on laws to sustain demand.
A more realistic market size estimation is one which is able to anticipate new or changing markets. As of July 17, 2021, we registered $89.84 Billion of venture capital allocated to Legal & GRC technologies (CAT™). This is the one-dollar investors hope to get back in tenfold. So an expected return is at least $890 Billion within ten years. Once we established this, we carve out areas, themes, and countries. Like the $5.22 Billion Access to Justice theme we were able to extract.
We are coming out of a pandemic and entering a new world. A world where ESG equates to growth. A movement that stood at the brink of fading after the US ‘ghosted’ the Paris Climate Accords. ESG supports Environment, Social, and Governance awareness in every industry. So far, the $890 Billion only represents Governance and a bit of Social.
To summrize: it looks like sunshine in the long term. But we’ll have to deal with inflation in the short term.