funding

How Big is the Addressable Market for the Legal Industry?

How Big is the Addressable Market for the Legal Industry? 3750 2188 Raymond Blijd
Read time: 4 min.

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:

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.

DocuSign Total addressable market TAM

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.

Disco CAGR

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.

Apple revenue's 2006-2021

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.

Legal & Regulatory CAT™

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.

The Surface: $1.08 Billion in 2020 Legal and Tax Funding..so Far

The Surface: $1.08 Billion in 2020 Legal and Tax Funding..so Far 1546 814 Raymond Blijd
Read time: 3 min.

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.

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.

Legal & Tax wrap-up first half 2020
Overview first half 2020 in Legal & Tax

CAT scan: Calculating The Market for Any LegalTech Company

CAT scan: Calculating The Market for Any LegalTech Company 1920 1080 Raymond Blijd
Read time: 4 min.

How do you measure the market size for any venture? There is everyone’s way and there is a precise way.

How Zune?

According to Harvard Business Review, it’s notoriously difficult to measure markets especially new ones. The article describes how factors like customer passion are ignored in the calculation. For instance: Did you know that 11% of the population suffers insomnia whereas 26% wants to improve their sleep. So if you stumble upon a cure for insomnia, you better off marketing it as just “improving sleep”. Simply because it’s what more people are passionate about.

Another emotion our distorting market estimation is confirmation bias. The failure of the Microsoft Zune music player is a textbook example. Microsoft used the iPod as a confirmation for the projected growth of the portable music market. The reality was that Apple cannibalized its own iPod on purpose with the introduction of the iPhone.

The Zune was a minor mishap compared to Bill Gates biggest mistake: predicting Android and the opportunity of an open mobile platform. Google bought Android for a reported $50 million and went on to capture a $400 billion market. One stunning detail from that story was the fact that Google’s acquisition in 2005 was a defensive measure against Microsoft’s mobile operating system. The winner-take-all open mobile market came into existence only after the closed iPhone ecosystem launched in 2007.

So we should be aware that measuring a market based on existing products, is betting against change.

Fathom TAM

Let’s look at how we can calculate a product market size. Here are three approaches:

  1. Total Addressable Market (TAM);
  2. Jobs To Be Done (JTBD);
  3. Capital Allocated To (CAT).

Total Addressable Market (TAM) is calculated from the number of consumers for similar products or the revenue of those products. But here’s a dirty little secret: almost everyone copies or crowdsource a TAM number from somewhere else. Therefore, that number will be difficult to match to your product since there is no way to validate the underlying data. Worse, a TAM number may not consider evolving consumer behaviors like what happen in the Zune example.

That’s why there’s this other formula: Jobs To Be Done (JTBD). A theory derived from Clayton Christensen famous ‘job of a milkshake’, which he explains in this 4-minute video. By correctly identifying a ‘new’ need, you can deduce the number of potential customers. There is a more detailed look at this method here: Market Sizing with Jobs-to-be-Done.

The beauty of this approach is the ability to envision the change. The JTBD method for market sizing helps reveal new consumer behaviors and expose our biases towards the past. So in the case of Android, the job was to enable handset manufacturers to compete independently with the iPhone. However, JTBD would not have predicted that the size of this opportunity would be $400 Billion since the iPhone hadn’t yet changed the mobile landscape.

Numbers versus Nonsense

How do we get closer to a more precise estimate of an evolving market? By looking at venture capital. A capitalist invests their money in the opportunity to double, triple or even have a 10 times return. They are continuously looking for markets where that might happen. Once they invest in a market, we then get a total amount of capital for that market.

To test this theory, let’s stay in the legal industry and pick intellectual property law (IP law). Traditionally IP Law focus was on protecting data we generate for a commercial purpose. Data we generate and want to keep private doesn’t have such an established set of legal rules for protection. A few tech monopolies like Google and Facebook became extremely profitable because the law didn’t offer much protection on private data.

As the saying goes: we became the product.

IPTech is the use of technology in support of the enforcement of IP law and the monetization of data. We identified IPTech as one of the most lucrative segments in LegalTech. IPTech can also be deployed in defense of your brand, reputation, and privacy. We discuss ways ventures used Blockchain or Biometrics to offer these protections. In that sense, we identify IPtech as RiskTech. Now we discovered that IPTech as RiskTech is way, way bigger. How big? Over three times the size of its counterpart in LegalTech.

Legalpioneer tracked $5.84 billion of capital allocated to 473 IPTech companies. Then we noticed that $1.52 billion of venture capital was allocated in an area were just 50 RiskTech companies operate. The difference becomes apparent when we calculate and sort on the average value per area. One company that employs IPTech as RiskTech is valued at $30 million per company. One LegalTech company in the IPLaw space average value is about $10 million. To see this visualized, just follow the dotted line in the graph below.

IPTech as RiskTech

It’s insomnia versus a sweet snooze

CAT scan

The above example shows how a check on Capital Allocated To (CAT) a market segment or company has the potential to uncover the real needs of consumers. The nature of private companies enables them to pivot and mirror consumers movement in near real-time. A CAT scan sheds light on where investors are taking on new bets and exactly how much is on the table.

The best way to instantly reveal new behaviors is when running continuous CAT scans across areas. That’s why we set up the Ambition dashboard to check major movements in real-time. We also discovered an interesting byproduct of CAT scans called “green pastures”. By running more granular topics and categories, scans will also reveal the areas where little or no funding is registered. Better yet, CAT scan also reveal when these green pastures are suddenly flooded with funding like in the Contract space.

We performed about 18 custom CAT scans for boot camps, startups and corporations around the world and I would like to show my gratitude to all. The insights we shared were invaluable.

So are you wondering what unique ventures are attempting to crack new markets? Where are the ‘green pastures’ in the Contract Management space or is it saturated? And is Security the new black? If one of these questions intrigues you or you have a different question, reach out to us. We have 2 scan slots still open for August so pick a topic or a company and together we’ll explore the future.

Investor Landscape of the Legal Industry [Infographic]

Investor Landscape of the Legal Industry [Infographic] 1917 844 Raymond Blijd
Read time: 2 min.

Update April 22, 2019: 2018-2019 infographic

In 2018, we found 1941 individuals and organizations as an investor in companies impacting legal. Who is funding the legal industry? And Why now?

The Investor

If you kept an eye on the legal industry this year, you may have noticed something brewing. It started with an ICO craze we detailed in February and resulted in some outrageous announcements. Such as, Block.one raising $4 billion and then getting something extra from Peter Thiel, the billionaire founder of Legal Tech company Palantir. Fun fact: Peter is the most cited figure in articles on this blog.

But things really got weird in June and prompted this: First Half of 2018 Legal Tech Raised $1.2 Billion in Cash. Stories began to appear that revealed stars like Mark Cuban and Kobe Bryant also dabbling in Legal Tech. Steve Balmer, the former CEO of Microsoft, is a charitable CivicTech investor who poured $59 million more into the sector this year. Atrium LTS had 95 investors for a record-setting first round in 2017 and doubled down with two more rounds this year to close at $75.5 million. To put this into context, the average number of investors in the legal industry is almost 6 per company. And it wasn’t just Legal Tech companies, RiskTech also got some love like Assent Compliance getting $100 million.

To keep pace, there is a new chart up on Legal Startups Charts with amounts raised each month. However, after absorbing these shocking numbers, I had more questions about the wave of cash and coin injected into this niche.

Why Now

I suspect a combination of several factors that make this year different. First, I came across a good tip a while back:

One of the most reliable startup investing strategies is looking at where people spend a ton of money but hate the experience.

If we view the legal industry through this lens I would imagine money to be flooding the sector every year. Our estimate of total funding raised in 2017 was around $385 million. But here’s what happened: this year kicked off with 34 fundraising rounds in January with a total of $123 million. That is about a third of the entire previous year and we’re talking about a single month. In hindsight, January actually was the slowest month so it may have set off another famous investment credo called FOMO (Fear Of Missing Out).

In April we had another trigger with the successful IPO by DocuSign, the first pure Legal Tech exit to the stock market I have witnessed. They also acquired SpringCM for $202 million to move deeper into the corporate legal workflow. Then LegalZoom dropped a $500 million round in July as a sign of a strong consumer legal market. This could have been the catalyst for another monster month in September with a total of $796 million.

Questions?

It took four months and two new datasets to answer some of these questions. Like how many received seed capital (109) and which investors (e. g. Goldman Sachs) don’t mind betting on experimental ventures. And which sector got more early investment? To my surprise, it’s a dead heat between RiskTech and LegalTech (47 each) and we still have a couple of good weeks left in this year.

There also is a new ‘Data’ page which we’ll use to explain the general approach to our datasets. And if you were wondering why I abandoned our black & red scheme for this infographic, it’s because I was inspired by the real exit investors are looking for.

Do you have questions? Just reach out on @Legalcomplex or Linkedin

Enjoy!

First Half of 2018 Legal Tech Raised $1.2 Billion in Cash

First Half of 2018 Legal Tech Raised $1.2 Billion in Cash 1148 468 Raymond Blijd
Read time: 2 min.

[update: October 24, 2018

Added the line graph from the LegalTech Funding Landscape infographic to LegalTech Charts.

Two FinTech companies impacting legal are payment providers primarily focused on protecting customer privacy. Their core feature is to process payments anonymously in cryptocurrency or regular payments transactions.

The line chart below only displays funding in Legal Tech and Law. The LegalZoom round (August update below) inflated the law category and ballooned July. See the more bubbles in Law with the “Others” interactive chart. The below categories are present in the infographic line graph (pdf).

[chart id=”8082″]

[update: September 5, 2018

Kira systems just pushed us passed $3 Billion in funding for 2018..yup, it’s the new normal.

Download: LP-LT Funding 2018-v9.pdf

[update: August 9, 2018

LegalZoom raised $500 Million and DocuSign acquired SpringCM for a reported $202 million. While the SpringCM acquisition is not the same as raising venture capital, it does express a vote of confidence in a turbulent market. Therefore, July just bumped June as the richest month Legal Tech has ever seen.

But wait..there is more. This month also saw the announcement of Block.one receiving funding from Peter Thiel, after it raised $4 billion (!) with an initial coin offering back in February.

So we had to update the initial infographic to include the elephants.

[orginal post]

In the first half of 2018 Legal Tech raised $1.2 billion in cash. If that isn’t crazy enough, we are ignoring a possible $3.7 billion raised with initial coin offerings (ICO). We previously discussed those blockchain startups impacting legal but we didn’t talk about the elephant.

What’s more amazing is that we are only half-way 2018 but surpassed the amount raised in all of the past 3 years combined. Bear in mind, @Legalpioneer also registered 6 undisclosed rounds by private companies this year and we aren’t perfect so we could have missed others.

YearTotal rounds raised
2017$385 million
2016$280 million
2015$366 million
Total $1.03 billion

A little nuance: some of the larger rounds were debt financing which is a bit odd but not unusual. The other concern is that seed financing in 2018 is trending downwards compared to previous years. It seems Venture Capital (VC) is more attracted to mature Legal Tech.

Year# startups receiving seed or angel funding# startups receiving later stage funding
20181025
20172848
20163940
20152331
20142713

The Elephant

Also note: RiskTech startups grew not only in numbers mainly nudge by GDPR, their funding generally did as well.  Check out the huge rounds by privacy apps Signal and Orchid lab. Both dwarfed by the elephant called Telegram which raised a ridiculous ICO of $1.7 billion.

We still have 6 more months in 2018 but it seems we all value a fair society a little bit more these days.

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