Our Job As Entrepreneurs? Figure Out Zero Tax Just Like Jeffhttps://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2022/01/Tax-0.png?fit=2560%2C910&ssl=12560910Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
Entrepreneurs need to tackle three things to be successful: lure customers to a great product with a competitive price at zero tax.
Zero
A country provides us with safe living conditions, crucial infrastructure, and services to do business. A government allows us to operate in peace. For this privilege, we pay taxes. By adding jobs aka taxpayers to the economy, entrepreneurs get a break and leverage to negotiate better rates.
When I set out on this journey, I took the time to take a course on taxes. Following my first credo:
love the things you hate because they allow you to do what you love.
The other reason to learn more about taxes is that I heard Jeff Bezos – one of the world’s richest – did not pay taxes. Operating a borderless e-commerce platform at a loss automatically helps you evade local taxes. Nevertheless, this drove 137 countries to agree on a once-in-a-century global tax treaty to close just this single loophole faster than you can say: climate change.
Two things I learn during the tax course which really surprised me: all entrepreneurs made tax mistakes because they copy each other. Second, those mistakes usually originate from accountants doing the same copying from other accountants. Perhaps you wonder why mistakes perpetuate? Not getting caught doesn’t mean it’s legal, it’s just a lack of enforcement. Huh, why? Enforcement is a political nuclear bomb too explosive for me to handle.
Hero
Mistakes can be as simple as a correct invoice, or as complex as knowing the various rules and rates in each country. Especially the lather is a game of cat and mouse where the cat is any country and the mouse is any digital product. Ever wondered why many crypto companies reside in George Town. Or corporations in the USA all seemingly come from Delaware. Care for some Double Irish with a Dutch sandwich? Yes please, I’d love one with my Panama Papers.
An honest tax lawyer will say it’s complicated because every country wants its own taxes and has no authority over others. The only way to simplify rates is if all countries agree to them. Now grab the popcorn because this movie is about to have an unpredictable ending. Meanwhile, if you have a great digital product, your job is to sell to customers everywhere at the most competitive price. That price should include a fair tax rate, which can be zero. Why? Because we can use all the help to compete in a borderless market.
A good tax lawyer understands this and will help you figure that out. A smart government will support this because…just like Jeff, we could each deliver almost a million taxpayers within a year.
Any economist knows that this is the only way to stave off inflation and our ticket out of this recession.
2021: What’s the Score & Are We getting More?https://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2021/12/Spark-Max-Investors-21-.png?fit=1575%2C1009&ssl=115751009Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
We made this statement at our only appearance at a conference this year. While it’s important to note new events, it helps to color them in context. Later below, there’s an example of why it helps. Now, here are the numbers we tracked, the struggles to get them, and finally, what’s next.
For the first time, not only do we have the totals but also the trends:
$41.17 Billion in Venture Funding was up 175%;
$26.36 Billion in Mergers & Acquisitions was down -6.9%;
3045 Investors was up 76%.
Ok, so what companies do the numbers above represent? They represent mostly technology companies, that support the law. Legal Tech is what lawyers use, Risk Tech (GRC) helps companies avoid legal issues, and Civic Tech does this for citizens. Each industry has unique economics: CivicTech is largely led by government and politics. RiskTech is driven by finance and economics. LegalTech straddles both worlds. If you like to draw inspiration from examples, check our sister site Legalpioneer.org.
The funding data is still pouring in, so next year we’ll have actual totals and trends. We did an exclusive on M&A for our friends at Legal IT Professional. Here we’ll take a look at investors. Why? This year we registered a seismic shift in the investors landscape. For years, Y Combinator dominated the landscape in the spaces we track. This year they lost the crown to Tiger Global. Moreover, the analysis on Softbank was to rectify an erroneous report, doing the rounds, about their first legal tech investment. Softbank is busy ramping up in key areas and locations, but many just weren’t paying attention to Asia.
Yet, the key metric we are tracking is how much money startups get and therefore, how much they need to compete. The median investment companies received is $3.5 million, up almost 17% this year. This metric takes both growth and seed-stage investments in total. However, the numbers differ wildly depending on location, stage, and investor. Last week, we wowed a Swedish copyright tech startup exploring growth with our new Investor dashboard.
Did we wow everyone? I wish. The most popular post on LinkedIn was my mom receiving a medal from the President of Suriname. Business-wise, launching Spark with our Jus Mundi testimonial, and signing our first Dutch customer with 900+ employees were highlights. Legalcomplex received a bit of love from the locals, and it means the world to me. Nevertheless, we stay focused on getting the data to power your dreams. Here’s what we did thus far:
Bootstrap: When and Why It’s Better Than Fundraising?https://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2021/11/SparkTarget.png?fit=1500%2C875&ssl=11500875Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
Do you need to raise, or can you bootstrap? You may not have a choice in the future, so get ready to buckle up.
Burning Pain
First the economics: the USA has announced that it will slowly but surely stop pumping fake money into the economy. This will likely reduce those amazing funding rounds and acquisitions announcements that were fuelled by Treasury. As everyone needs to raise prices to survive without ‘free’ funds, inflation takes hold. Result: we have to strap in. That’s it! End of analysis…just kidding, there’s more to back this up.
The graph above calculates when most of the companies, we have captured, will burn out of cash. When Ross Intelligence imploded, they gave us conformation on our algorithm. Moreover, since a greater number of companies raise funds on public markets, we get to feed the algorithm vetted financials. Note that there is a way to go public with less scrutiny. In case you missed it: Fiscalnote went public via a Special Acquisition Company aka SPAC merger valued at $1.3 Billion. With these dates and numbers, we are able to calculate the collapse of companies and rank the near-death by date. This way, we know when to reach out for support.
More on reading tea-leaves: remember our friend leaving (NL) the legal tech division of a big-name Dutch law firm in 2019. Well before COVID-19 struck in 2020, a also well-capitalized Dutch Legal Tech Studio quietly folded. Off the record, a well-funded non-profit told us they would no longer support legal tech companies. We watch™ these departures unfold around the globe and see the collateral damage to those who relied on them. To understand why this is happening, check The Right Valuation. Besides the time required for startups to mature, another reason is the time it takes for customers to trust them. In short, support is slowly pulling back, but there is a silver-lining in the lowlands, so keep reading.
Bootstrap Mindset
Trust is a good reason to fundraise and not bootstrap. Yet, fundraising doesn’t say much about the long-term sustainability of any company. Actually, a fundraising event signals a lack of funds to compete. Remember, we had this difficult conversation before. Visualize fundraising as a snowball of debt rolling towards an inevitable outcome: payout. Here’s the cycle: founders invest sweat equity to build a company. During this journey, they accumulate debt. Debt will be paid off when the company gets acquired in whole or in part by another company or investors. All the while, founders can technically only live from profits or interest on assets like real estate.
It can get even weirder: according to 2019 court records, Elon Musk was financially illiquid, which means, he’s broke. He doesn’t have a salary or income and reportedly lives in a very modest prefab SpaceX property. Yet on paper, he’s the richest man alive. But only if he sells all of his shares. He’ll cash out, but the point is that plaintiff Musk was still bootstrapping when he really..really didn’t have to.
Are you saying to not raise funds? It depends on your unit economics. Your economics will be determined by your competitors, and your model. Contrary to what investors have you believe, your market size doesn’t matter if you don’t know your competitors. Let’s get back to Tesla, whose market cap hit $1 trillion. The car market has many competitors, and yet Tesla market cap is worth more than all of them combined.
Why? The current stock value tells us that none of the existing car-makers can compete with Tesla in the electric car (EV) market. According to those same public stock markets, EV carmaker Rivian is the only exception. If Rivian performs like Tesla, it could reach a $69 trillion market cap. Point: in a seemly crowded market, you can still be a monopoly. When you think you have a monopoly, you may actually have more challengers. You only notice these subtle differences using a CAT™ approach and an ROI algorithm.
Perseverance Pays
To inspire, let us sample some bootstrap outcomes: Mailchimp, never took in venture funding and sold for $12 Billion. Both founders got $5 Billion each. Here’s a head-to-head: Arianna Huffington (HuffPost) vs Mike Arrington (Techcrunch). Huffpost sold for $315 million and Arianna walked away with about $18-$21 million. TechCrunch sold for just $30 million, but Mike pocketed $24 million. Let’s clarify, we aren’t saying that venture funding leaves you poor. Uber and WeWork founders walked away as billionaires, building a unique but unprofitable business. Both companies repeatedly broke venture funding records. How is this possible? Between 14:50 – 15:48 minute (video) in Adam Neumann’s first interview, we get an honest answer.
Back to legal: do you know how many players there are in the legal document space? Do you know how much capital they have? If you are in that space, you need to raise…a lot. If you are doing something completely different and perhaps unique, it’s better to rely on yourself and bootstrap. Back to lowlands: I met Lieke Beelen shortly after she won the ‘The Hague’ innovators price in 2015. Six years later, she won again (NL) and more importantly, she outlasted all those well-funded initiatives above.
Bootstrapping is an essential skill to master in light of oncoming traffic. It is honorable and humbling, and one should take great pride in being capital efficient, socially responsible and scrappy. While both paths are hard, and the payoffs can be pretty, the path of perseverance is a bit more predictable.
NFT: Squid Game for the Copyright Industryhttps://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2021/10/Spark⁺Venture-IP-2021-banner2.png?fit=2880%2C1800&ssl=128801800Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
This year technology trading copyright raised $2.43 billion, which is 1670.8% more than last year. Caused by Non-Fungible Tokens (NFT)?
Before we dive into this analysis, here are the three points we’ll be making:
Blockchain-based protections are superior to any legal framework;
Selling art and entertainment are major economic drivers;
Just like South Korea, if you invest early in both, the pay-off is huge.
Catalyst: Copyright
We identified four catalysts for the growth of the legal industry:
We first discovered how epic blockchain was back in 2015 while hunting legal tech on ProductHunt. We embraced the Initial Coin Offerings (ICO) craze in 2018 that generated beautifully creative solutions for legal. That is where we first calculated how much we, as a society, are willing to invest to protect our identity and art. We sprinkled numbers on copyright tech starting as far back as 2017. Now we are at $2.43 billion in just this year, which dwarfs all our previous numbers. So what are the dynamics and why now?
What is NFT?
Here’s our best metaphor: imagine that you could walk into the Louvre, snap a Polaroid of the Mona Lisa, and sell your Polaroid for roughly the same value as the Mona Lisa. That’s possible because your Mona Lisa Polaroid is a unique physical representation of the Mona Lisa. Your Polaroid is a Non-fungible Token (NFT). An NFT is a unique hash of any object in the digital or physical world. So an NFT is a Polaroid photo and Blockchain is a Polaroid camera.
Now, why did I use this metaphor? Because it shows the miracle and the madness of this concept. Manufacturing a unique physical object like a Polaroid has natural constraints. NFT’s don’t have any physical constraints. It is a weird notion that a representation is worth as much as the original. In theory, everyone can create an NFT platform and become Kodak. Fun fact: Polaroid won a $925 million patent infringement settlement, the second largest in history, against Kodak. Like a modern gold rush, NFT is a footrace to become the Polaroid as-in the number one marketplace in any space.
Why now?
We posted on LinkedIn about Royal, an NFT music-royalty platform by artist 3Lau. They raised a whopping $20 million in seed funding. They aren’t the first blockchain or NFT platform to make a play in music. In theory, any online manifestation could get its own NFT trading platform. Images of bored apes or NBA clips as new interactive trading cards. This feels like the ICO craze all over again but with a twist. First, this time we’re playing with real money and second, there is a serious economy behind it. The economy is called copyright and was invented three centuries ago by lawyers. An invention designed to protect the capital, not the culture powering art. Now culture wants its power back.
I didn’t watch Squid Game because the entire internet spoiled the plot before I got a chance to see it. I did watch history-making best picture academy winner, Parasite. Remember that Gangnam Style broke the billion views barrier on YouTube. I fell in love with K-pop when I heard Se7en collab with Lil Kim on ‘Girls’ (YouTube) all the way back in 2009.
I did some digging on why the ‘Korean Wave‘ is so popular. In 2019, the Korean government earmarked $5.5 billion to support the nation’s culture industry. Fun fact: watershed moment came when was pointed out that total revenues generated by Hollywood’s Jurassic Park had surpassed the sale of 1.5 million Hyundai automobiles; a source of Korean pride. Now BTS alone adds $5 billion to Korea’s economy every year according to NPR. It wouldn’t surprise me if Blackpink did roughly the same.
In short: there are a few no-brainers in the legal universe with clear returns. Legalcomplex did a deep-dive with Law360, using the Spark max dashboards to calculate the ROI of any legal ventures. The analysis is behind a paywall, but one finding we can comfortably spoil: Intellectual Property came out on top.
Debt and the Difficult conversation we should have in Legalhttps://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2021/08/growth-is-real.png?fit=1039%2C502&ssl=11039502Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
Just like the rest of the economy, legal tech is now loaded with debt. Let’s have a calm conversation about it.
We analyze the numbers and match them with conversations we have with our friends. First the numbers: we registered an increase in funding and acquisitions during 2021. On the surface, this looks encouraging for everyone in the legal industry. We ran a poll on LinkedIn and 91% voted that growth is real. The public views private capital injections as proof of a healthy industry.
Honestly, so do we. We collect, and clean data to calculate the numbers that measure growth. During this process, we discover many financing variations. And some of these discoveries have us concerned. One is the type of funding, and the financial engineering underlying them. For instance, there’s an uptick in debt financing [paywall] of legal tech startups, as mentioned in Law360. Also, note the increase of private equity financing of acquisitions by Legal IT Insider. Other signs are down rounds, bridge rounds, or current investors passing on later rounds. It is especially worrying when this happens in crowded areas.
Fuel ?
What concerns us is that all this money isn’t chasing demand for legal products or services. You make money by selling, you fake money by funding. Because funding is debt. Don’t panic. Almost every government has plunged into debt during the pandemic, and it has not spelled the end of the world. Banks printing money is a temporary measure to stave of worse. That ‘money’ is being channeled into companies as loans. However, perhaps we should spur demand for products rather than serve as a crutch to companies. Something akin to the US infrastructure plan. Let’s call it a ‘Liberty Bill’.
The companies, we track, offer support to lawyers. Most support the law by helping companies and citizens play by the rules. They all impact the demand for legal services in various ways. One boost the pandemic gave the legal industry is the increased focus on financial security (FinSec) and ESG. Companies and citizens alike were making sure that investments were secure, money’s in the bank, or in a bit of Bitcoin. Seriously, everyone wanted their contracts signed, invoices cleared and their affairs in order. Generally, these transactions go through lawyers. But since the pandemic forced remote work, they all went through legal technology. That’s one narrative that has fueled funding this year.
Burn ☄️
Remember the conversation we had? Most companies aren’t run by the CEOs alone, CFO’s and especially accountants play a huge part. They run the numbers on your company as well as many others. This provides them with a pretty broad perspective on profitability. Their influence grows when debt accumulates. At some point, the accountant will pull you aside to talk about the numbers. Usually, the moment arrives around three to four months before the company is about to burn out of existence.
I admire entrepreneurs because they combine commercial savvy with financial smarts to make profits. Occasionally, it takes a technological tweak to ensure the cost to produce is lower than the price you pay. Yet, this isn’t necessary if demand for your product keeps growing. This last point is key: demand drives down costs. Automation drives down cost, but automating in legal is really expensive. Getting attention in legal is really expensive. That’s why many companies in legal need funding to stay afloat on their way to sustainable revenue.
Like a supernova, we see the surges of growth throughout the legal galaxy. That’s why we can also pinpoint the black holes in that same galaxy we mention in the video below. We support entrepreneurs in legal because they take a risk on an industry that doesn’t take kindly to disruption. They bet on a surge and, with a bit of luck, the gamble pays off. With a bit of data analytics, the payoff is huge.
Remember, there is no such thing as free money. The world is in a “buy now and pay later” phase, and so is legal. At some point, we should expect to get a Margin Call just like the 2011 movie. If you haven’t seen it, I recommend The Big Short: same story, fewer suits, more spreadsheets, and humor. A bit like us.
How Big is the Addressable Market for the Legal Industry?https://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2021/06/Spark⁺CAT-LegalGRC.png?fit=3750%2C2188&ssl=137502188Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
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:
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 that 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 BillionAccess 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 summarize: it looks like sunshine in the long term. But we’ll have to deal with inflation in the short term.
What Is The Right Valuation Of Any Legal Tech Startup?https://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2021/05/AI-CAT-2021.png?fit=1800%2C1050&ssl=118001050Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
We recently received several cries on how hard it is to raise venture capital for a startup in law, why? Valuation
Valuation
One of our most-read analyses is about the acquisition value of legal tech startups. Only recently we discovered why that is: it helps founders convince investors. Recent exits of SignRequest and Clocktimizer have largely confirmed the thesis: the value of a startup depends on the type of customer. Does your product work for consumers (B2C) or businesses (B2B)? As for the type of businesses: is it small or big? If so, are you selling to corporates or law firms?
Based on the recent exit values, our numbers show that the exit value declines when we travel along this spectrum. Small businesses represent a higher value and usually faster exits. The opposite is true for providers selling strictly to legal professionals. We speculate that the underlying reason is pure supply and demand. Perhaps in some popular areas, there is less demand and an oversupply of solutions offered to the legal service sector. So a startup valuation is largely determined by the customer and not necessarily the product itself.
Frequency
Why is your target customer such a factor? Well, you can get a large cheque from a few customers or get a small one from many. Both strategies have their challenges but the law sector has an ace: getting paid is almost guaranteed by the legal events. Case in point: without a signed contract it’s difficult to claim. If you do have a claim, you usually have to run it by a judge or arbitrator. If you have to appear in court, you’ll need representation. We explored the Legal Roadmap and identified Contracts and Claims as two of over 10 areas with high-frequency legal events. And BTW, don’t forget to pay your taxes.
However, there’s one decisive variable we only explored in the roadmap: frequency. When a startup latches on to a high-frequency event, the more likely its valuation will increase. Let’s address the elephant: signing a contract happens more often than reviewing or drafting one. Therefore, e-Sign companies sit on top of the food chain. The addition of DocuSign to the NASDAQ-100 means it is one of the 100 fastest-growing ‘tech‘ companies in the world. That’s just for signing sales contracts and before they decided to go after high-value \ high-frequency contracts like mortgages, and estates. Nope, we won’t discuss Ethereum, smart contracts, and zero-proof. We’re saving that for a special Facebook-Tesla edition.
Network Effects
Since we did bring up the blockchain, we may as well talk about the actual force behind frequency: network effects. The network effect is the mesh of human interactions that multiplies the use of technology. Google and Facebook are the biggest examples of tapping into a network of commerce. Even though most legal events are enforced by law and don’t require networks, they can leverage networks like finance. Financial security is the network that propelled DocuSign into unicorn stratosphere.
Now buried within the network of financial transactions reside numerous legal events. The pandemic accelerated mergers and acquisitions which reportedly boosted many law firm earnings. We’re also waiting on a barrage of bankruptcies that need legal handholding. In our latest Legal IT Insider chart, we debut an overview of areas using advanced tech. The biggest area to capture capital was fraud detection and a notable round in geo-analytics. One reason we keep nudging Geo is that it directly underpins some high-frequency legal claims. Case in point: real estate disputes are arguably the single largest source of legal conflicts in the world. This is a vibrant area we recently explored in our access to justice breakdown.
Legal Events
Now that we’re talking about Geo, here is where it gets tricky: when is a solution part of a legal event? Moreover, since we’re determining valuations: do we want it to be a legal event? A legal event can be the result of regulation like fraud detection or be a monopoly such as court proceedings. Both RiskTech and LegalTech markets look attractive since they are difficult to enter. However, due to their closed nature, legal events aren’t easily fueled by outside forces. A state we described in The Fall of Legal Tech and our most popular “Will lawyers be replaced by GPT-3?” And unfortunately, this is where the crying starts.
And perhaps we can offer a tissue. Not all legal events originate from the same universe of rules. Some even spontaneously appear based on cultural shifts due to societal events. Covid made us value CivicTech and privacy, even more, when we largely rejected contact tracing apps. #MeToo was a catalyst for HR apps to consider using virtual reality as a solution to help us behave. And the biggest growth engine is the ESG movement we discussed in our previous analysis. None of these insights come from anecdotes or experience, they are directly derived from metrics in the Spark dashboard. We are not the experts, our data is.
Funding
Enough prognosis, let’s be practical. Here is a StartUp Fundraising Checklist we stumbled upon with a great set of tasks to undertake to get funded. When you run through the list, you’ll notice that there is some tedious research you need:
What’s my market size? We use the CAT™ model for an instant and exact calculation ;
Who are my competitors? Check out our Challengers analysis;
What’s my valuation? Start reading from the top;
Setting up an investor CRM? Our Investor dashboard with FOMO filter is just 5 clicks
But yes, we agree. All of the above is too long, didn’t read (TLDR). So we are announcing the launch of a one-click platform to provide all four answers instantly on a single page.
ESG: Growth Engine for Legal & Regulatory or Human Prosperity?https://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2021/03/spark_live-velocity.png?fit=1800%2C1050&ssl=118001050Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
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.
ESG
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.
Surge
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.
Signal
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.
Gaslight: Three Conditions Essential Technology In Our Society Needshttps://i0.wp.com/www.legalcomplex.com/wp-content/uploads/2017/02/lc-fires-red-bg-width-900.jpg?fit=2048%2C952&ssl=12048952Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
We’ll give three reasons why the legal profession doesn’t buy tech. Stop the gaslighting because all three are legit.
TLDR: providing the legal industry with secure easy to use systems is essential for any democracy. Compromised lawyers and overloaded judges can’t pursue justice.
Gaslight
While cruising the clubhouses, we noticed a tendency to sow fear, uncertainty and doubt (FUD) among lawyers. The basic message: there is so much brilliant legal tech so lawyers should adopt or die. In ‘World of Robots‘ we provided numbers and examples of the speed at which they adopted technologies like the pager, Blackberry, and iPad. The first digital case law search engine was created and used in the early seventies. Correct, lawyers went ‘online’ to retrieve case law before the internet was even invented.
The last decade of legal tech didn’t live up to the hype, but we’re at the dawn of a new one. This decade we start with smart technologies like GPT-3 and a pandemic accelerating tech adoption. However, major legal obstacles remain and the industry is perhaps in the worst shape it’s ever been. Here’s why.
Security
Legal professionals traditionally practiced security by obscurity, an approach rejected as far back as 1851. Then the Panama papers exposed law firms as the weakest link and quickest route to sensitive information. Now the Solarwinds hack reminded us that digital systems can be jeopardized at many junctures. A perfect illustration is the recent hack of 7th ranked global law firm Jones Day. It’s simple: a law firm with many tech vendors just increases their risk profile and exposure to attacks. If you’re shocked at a $2 Billion law firm being a soft target, imagine how our government-hosted courts and judges feel.
If financial and health records get exposed, we can hit the perpetrators with a lawsuit. But how do we prosecute when judges and lawyers are also compromised? When both digital and legal defenses go down, we don’t have a fair society. If many do not trust their legal system, they’ll march on the Capitol. A secure legal industry is the safety net for our society. Its participants must be able to use systems securely to reach a fair judgment.
Continuity
Security doesn’t only mean impenetrable but also means continuity. It’s one of the reasons some professionals still prefer paper. The law states that judges are nominated for life and lawyers enjoy confidentiality no matter what. In practice, no system can offer confidentiality for life.
The reality is that new technologies offer an ephemeral solution. Systems are flexible and update frequently to stay secure and competitive. They save data encrypted in proprietary formats in many places at once. These formats are only supported until the next release, the company runs out of money, gets acquired, or the developer disappears.
Here’s where the legal industry struggles to live up to its ethical duty while considering innovating. At some point, lawyers moved from stone to paper and from paper to email. Nothing lasts forever and change is inevitable. However, when legal commits, they are required by law to make it last.
Data
Whenever the next big investment announcement rolls around just be sure to check if there were any law firms mentioned as investors? Another hint: when a tech vendor lands a large contract with a Tax or Justice department or a Law institution. Besides the essentials like email security or eDiscovery, legal seems most intrigued by technologies that already have the data they need. Legal doesn’t invest in populating your software with their data or training your algorithm. Spoiler: legal actually doesn’t have that much data. On the contrary: they seek more data to make better decisions.
How did we uncover the pattern of security, continuity, and data investments? We used Spark+ to analyze investments by Corporates and Law Firms to break them down by type of company. Two samples, typical of what we’ve seen, are Palantir and Spark Beyond: both have fascinating deals with law firms.
As the last line of defense, legal does have some special considerations when it comes to choosing tech. There is data to prove legal professionals are quick to adopt when it’s right for them.
Investor Dashboard to Grow Your Capital, and Competehttps://www.legalcomplex.com/wp-content/themes/crocal/images/empty/thumbnail.jpg150150Raymond BlydRaymond Blydhttps://secure.gravatar.com/avatar/b2107c5e41052042419dccfe176bcf5a?s=96&d=mm&r=g
You need capital to build a better product or broadcast to a wider audience. In order to capture customers and compete, start here.
Pitch: The Investor Dashboard (aka Grow) provides everyone unique leverage to connect to your ideal investor. Btw, clever ones use the dashboard to check the competition or capture leads.
Compete
During Spark demos, we were often asked: do you also have the investors? Yes, we did, and it was the second product on our roadmap. Yet, what surprised us how much interest participants had to see the companies which have already raised capital. Where Spark delves deep into the numbers underlying the markets, we decided to create a light-weight version to focus on the names of the players with capital.
The initial design was to show the names of investors and, for context, to include the number and names of companies. This feature was an instant hit with the service providers of marketing, IT, and staffing. This list offered them a unique source of qualified leads: companies with targets and a budget. Subsequently, these companies will aggressively attack the market so need to be watched closely.
Especially in the contract space, those who raised early are spending on traffic and attention. Astute observers may argue that all this activity contributes to a bubbly atmosphere. Whatever the case, entrepreneurs should seize the moment to literally ‘capitalize’. In the Investor Dashboard, you can specifically exclude investors that have already invested in Contract Tech. This allows you leverage to approach only the investors that have the fear of missing out. So we dubbed this the FOMO filter.
Conscience
In our first Investor analysis in April 2019, we found that the average number of investors for a typical legal tech startup is between 5 – 6 investors. That number in the mega-infographic also made us realize that we have more investors chasing good startups than good companies seeking cash. When the pandemic first hit, we collaborated with Legaltechstartupfocus.com, Charlie Uniman to create a global list of the top 106 investors.
Despite all these efforts, it’s extremely hard for young ventures to find funding outside of friends and family. Especially, if entrepreneurs aren’t well-connected or have a social disadvantage. Luckily, science explored and sadly explained why in these two articles. “How Venture Capitalists Make Decisions” by Harvard Business Review and “Entrepreneurs don’t have a special gene for risk—they come from families with money” by Quartz.
Legalcomplex is currently supporting several companies pro bono to level the playing field. We also have actively reached out to investors to collaborate. The Investor Dashboard is a platform to rebalance the process of funding innovation without using data on ethnicity and gender. If history should teach us one lesson, is that equality starts at the data entry.
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