funding

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 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 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 summarize: it looks like sunshine in the long term. But we’ll have to deal with inflation in the short term.

On the surface, breaking a billion in the first half of 2020 looks healthy for legal and tax. Yet, if we peel away May, it is a different picture.

TLDR: The legal market is currently operating in a financial distortion field. May stimulus is masking recession-resistant companies. However, tech-infused services fared better than traditional text & talk consulting services. New applications in Risk Tech offer new opportunities for Legal Tech.

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Credit

No, credit isn’t a new catalyst, rather a warning from the ‘Rebound’ analysis. One reason we surpassed a billion was Litigation Finance: Parabellum Capital donated a sizable chunk to the overall tally. Check our views on Litigation Funders as Legal Tech in this twitter spat. What’s remarkable is the fact that taken over a six-month period, companies usually eclipsed litigation funds in round sizes. It is perhaps a sign we’ve entered borrowed time.

Now as everyone is slowly running out of cash, most will have to turn to credit. We noted that about 14% of the top US Legal Tech companies took advantage of the Payroll Protection Program (PPP). We didn’t mention that, while doing the analysis, we encountered numerous traditional law firms and justice programs in the list of grants. Justice programs aren’t surprising because it’s rare to find those with a commercially viable business model. Most are born addicted to grants. As for business models: you may recall we encouraged everyone to listen to Kim Kardashian-West. Moreover, the US only released the recipients of over $150k loans, so we’re only seeing the surface.

In contrast, none of our top 25 Dutch legal tech companies were mentioned in the NOW loans report (Dutch stimulus program). Similar to the US, we did see several law firms and legal service providers in the NOW list of recipients. In any case, Legalcomplex is sticking to the mantra: numbers before names, that is why we won’t mention any names. However, these developments demonstrate the robustness of tech-fused services versus traditional talk & text consulting services. So ‘Starting in Legal Tech‘ may have become just a little more attractive.

Not only did we noticed a shift in where money was allocated but also when it was distributed. Most of this year’s action happened in May which brought in $644 Million. We initially registered SirionLabs in May, but they technically completed the round in April. In contrast, as far back as 2017, we notice that January and the summer months as the time the big rounds come around.

In short: there is a distortion in the market with so much stimulus flooding the economy. It’s hard to calculate how recession-resistant most businesses in the legal industry really are. Especially since we’re still dealing with Corona aftershocks and the second wave.

Conflict

Back to the numbers: $1.08 billion is lower than in previous years. Both 2019 and 2018 had outliers in the first half of the year like Legalzoom, Seal Software, and Onit. Clio happened in the second half of 2019 and doesn’t count in this summary.

This brings us to the conflict: our data reveals mega-rounds aren’t the beginning but rather the end of a trend. These numbers happen when the internal company metrics match up with external perception. These events initialize a final push for a monopoly in a certain space.

Moreover, the innovation capital coming into the legal market isn’t always invested in the players we all recognize. How can we spot the competition? This question led us to analyze ‘Who Are Your Challengers‘. To illustrate, check the Contract 2020 chart above with players in FinTech and SmartTech we excluded in the $1.08 Billion breakdown.

While most see mega numbers as an acknowledgment of a growing market, it’s actually an unreasonable assumption. Meaning, more money doesn’t equate to more market but rather results in less competition. We noticed a correlation between major rounds and subsequent drop in funding for new ventures in those niches. That’s why we sometimes end up in a conflict with legal industry experts. These conflicts stem from the source of knowledge: data versus past experiences or surveys. While these sources are complementary to data, they can be contradictory. Ultimately, when some get wowed by the bang, we’ve already seen data on the ignition.

Case in point: Safehub uses the Internet of Things (IoT) to warn companies to impending earthquakes. Businesses need this to proactively protect their operations and employees (RiskTech). At some point, they can use this model to warn citizens at home as well (CivicTech). And when they scale, they’ll become the benchmark for real estate value (FinTech) in whatever region suffering from tremors. Think tremors are only felt along fault lines? Read this cautionary tale on real estate in Groningen, The Netherlands from The New York Times (EcoTech). At that point, we’ll need a Seismic Witness (LegalTech) similar to Orbital Witness for legal conveyance. Safehub is taking the commercially more sustainable route to Legal. Both companies raised rounds this July, only one counted to the Legal & Tax wrap-up.

..and that is why we chase the Spark and not the bang.