LegalTech

The Fall of Legal Tech And How To Pivot Out

The Fall of Legal Tech And How To Pivot Out 150 150 Raymond Blijd
Read time: 4 min.

There has been a 532% drop in legal tech funding in January 2020. Perhaps it’s time to entertain a 4-step plan to pivot to a market with measurable growth.

TLDR: The previous decade has proven that no amount of money, technology or talent can disrupt the legal industry…from the inside.

The Fall

Admittedly, January 2019 was unique with a haul of $613 million. January this year had a total of $97 million with $75 Million going to Personio — an HR platform that also generates contracts. Another outsider breaching the contract space as a challenger. While we noticed most stats trending downwards, funding was our last metric of hope.

If we took an honest look at where venture capital for the past decade was allocated, we may come to a harsh conclusion. Most of the money evaporated in broken dreams of products with no fit or it’s being used to prop up legacy systems. Yet the funding metric may not be the only alarm we kept hitting snooze on.

Some may remember CB Insights and Crunchbase extensive coverage of legal tech back in 2017. Except for some reports on individual companies, we haven’t seen the same level of interest since. On Twitter, hashtag #LegalTech peaked on December 11, 2017. According to Google Trends worldwide, Legal Technology peaked even earlier. One positive: it seems we are steadily climbing back towards the tip of January 2011.

We consolidated this data in the Decade Dashboard and visualize the growth and subsequent decline in over 800 locations. A bit more optimism: we are still net positive in terms of new ventures versus the fallen. Meaning we register more new companies than we can detect that went out of business. It is not the most accurate way of measuring growth. It’s more like adding sugar to your coffee to get an extra boost.

The Dynamic

Let’s forget about the long sales cycles and the culture of risk aversion for a moment. Here’s why the legal industry is impervious. There are two historical drivers of change in legal:

  • A change in the law or;
  • A technology that enhances the charging capabilities of professionals.

The Law

The quickest way the legal industry can be disrupted is when we change the law. Here are two obvious candidates: in most parts of the world, access to case law and codes is supposed to be free. However, through a weird marriage of copyright and publishers, they are mostly pay-per-view. Worse in France, you risk a five-year jail sentence if you analyze cases at scale. In short: no country on earth allows easy access to all cases or codes to analyze them at scale for inconsistencies.

Another outdated constraint is the illusion of impartiality. That’s why lawyers can’t recommend technology [dutch] in The Netherlands. This restriction also discourages non-lawyers from owning a law firm and obstructs the marketplace model of charging for leads. These limitations harm the distribution of justice. It creates an artificial economy partial to the few with enough money to get a fair day in court.

The combined fact that we can’t analyze all court data and that lawyers are insulated from normal economic dynamics creates a virtual monopoly on legal knowledge. A rebellious lawyer may even argue that it’s an unconstitutional one. Who wants to step forward to liberate and democratize law?

The Bottomline

The other detonator for disruption is a technology that enables lawyers to charge more for less. The pager, email and the blackberry were eagerly adopted by lawyers. These technologies increased communication which directly translated to more billable hours. Whenever a technology was able to fuel the bill-by-the-hour model, it became an instant success. Unfortunately, not everyone got the memo.

Marketplaces and Technology Assisted Review (TAR) weren’t warmly embraced but had to fight their way through a decade of court battles. Why? Because they flipped the dynamic and forced professionals to charge less for more. Any technology embodying this principle shouldn’t expect a red carpet in Legal. That’s why we monitor the profiles in our dataset that promote efficiency. Just to see if they can stay afloat.

The Pivot

It would be a sad waste to have all of these wonderful ideas die in oblivion. Especially when there are other sectors in desperate need of driving down costs. Particularly unpredictable legal costs in a volatile economy. So here’s a 4 step plan to help any company at least experiment with the idea of a pivot:

Let’s start at the bottom. In an industry where precision is sacred and quality is holy. None of these attributes are easily measurable in the context of the law. At some point, we’ll have to trust the numbers. More capital is being spent to avoid legal work. Most of it vanishes in non-legal tech sectors. Fintech, WealthTech, RiskTech, and SmartTech are the biggest beneficiaries. Although business requirements may differ wildly in each of these sectors, at its core software is data and math. Once we view it through this prism, we can see the possibilities.

The Mindset

Now that we’ve adjusted our lens, let’s take a close look at legal tech. We’ve discussed the many flavors of contract tech in two posts. From storing raw contract data in databases all way up to using contract text analysis for financial and security purposes. We also ran through over 400 research platforms that fetch answers on the law. Each of them supports the ‘better decision’ making process in various ways. The largest legal tech company is essentially a clone of SalesForce CRM. Maybe they’ll replace SF altogether? Relax, it won’t happen but it’s technically possible.

Now let’s stay in this dream state for a moment. Software is here to support our decision-making in life and so is every law ever created. No matter in which niche you have planted a flag, zoom out to see the big picture. Practically any software that supports critical decisions is legal tech. What critical question is your legal tech providing an answer for? Better yet, who is asking the question? Is it a lawyer or a client? If it’s a client, are they in trouble? Finally, do they often end up in trouble?

We just went through all 4 steps in this exercise. Open mind, generalize tech, made an inventory of possible markets and explore the growth opportunities. Let’s try it on something more concrete like a contract clause recommendation engine. If you ever used spell check while writing texts, you’ll recognize this concept. Now imagine your spell check also suggested you don’t write “funding secured” in a tweet. Elon Musk was lucky enough to afford representation otherwise, those two words would have landed him in jail.

The Price

Our continued concentration on defining legal tech makes us lose sight of what matters. The impact of law goes beyond lawyers and is bigger than the business model of law firms. Holding tech and talent hostage in legal tech is an attack on justice everywhere. We should explore the many ways legal tech can make a difference and it only takes 4 steps.

Recession Survival Guide for Legal Tech Companies

Recession Survival Guide for Legal Tech Companies 962 514 Raymond Blijd
Read time: 3 min.

These uncertain times make an economic recession a growing probability. If a downturn is imminent, here are three practical steps to ensure survival.

I witness the highs of the late nineties and 2000. Then the Dot-com bubble burst and the Great Recession hit. Working at companies at the receiving end of both events gave me a close-up experience. I got a couple of pragmatic lessons being inside a startup and an established company during these storms. Here’s my balanced view within this spectrum.

Economists usually monitor consumer optimism for signals of a slump. There is another clear sign which is the mood of entrepreneurs. Their mission turns from growth at all costs towards surviving at any cost. They are the first to see orders slip, deals delay and their pipeline dry up.

To stave off insolvency, businesses start looking at where to cut costs. Low hanging fruit in cost-cutting are ‘nice-to-have’ subscription services. Especially “innovation” services that promise to deliver savings in the future suffer first. Here’s where the legal industry is specifically vulnerable since contracts are just that: a promise of future safety. Litigation will also take a hit as more businesses will try and steer clear of unpredictable costs in dark times.

The Intellectual Property market, especially patents and trademarks, will be considered luxury expenses for most companies. Across the board, cost-cutting will eventually influence every layer of legal work. Business owners will look at their core operations and customers to evaluate every dollar they spend. With this backdrop, let’s explore 3 measures Legal Tech companies can undertake.

Become a Benefit not an Expense

Being a cost-efficient company is a no-brainer but being perceived as one by your customers is more important. If your customer is doing everything it can to stay afloat, they may want to see the same. Remember when American automaker CEOs flew in on private jets to beg the US government for a bail-out? Once you see it, it’s hard to forget.

Even when you offer a high-value subscription product, the service will get customers fleeing in a recession if the price is too high. Lowering the price or offering discounts will see you enter a race to the bottom with your competitors. One way I saw some survive is switching to a freemium model whereby churning customers may opt to stay with a lighter version. There are two upsides: you maintain your customer in another capacity, and they become cost-conscious about your product.

**Update March 23, 2020: Freemium vs Extended Free Trials:

For those who opted for an “extended free trial” instead of a “freemium” version. The difference lies in the balance between the cost of acquiring a customer (CAC) and sustainability. Even if you converted 5% or 10% to a paid subscription, you may have lost 90% of users forever. Remember, ‘free users’ may be the best source of objective feedback for improving your product.

Make Friends not Foes

The freemium model was also a suggestion by Mary Meekers as we reported earlier. According to her data, the cost of acquiring a customer is already at an impossible threshold. This is especially true when trying to acquire a new legal service customer.

If a freemium model is not an option, then a strong relationship with your best customers is essential. First, figure out which customers are able to pull your company out of an economic apocalypse. Those customers should get exceptional customer care to the point they consider you a friend. When the costs cutting decisions are being made, there is always an emotional connection to the vendors that provide more value than is being paid for. Having been part of both ends of this conversation, I have witnessed this first hand.

Discover your Diversity

Remember, some of the most successful companies were started during a recession like Microsoft and FedEx. Some even thrived during a recession such as Amazon and AirBnB. Which brings us to the final and most pivotal point. The survival of a legal service provider like a law firm depends on two factors: one is the health of their customers and the other is the demand for their legal expertise.

For Legal Technology companies these factors work out slightly different. Usually, law firms heavily rely on specific expertise to service a certain set of customers. If altogether new expertise is required, they will struggle to fulfill that need. Example: if Thomas Cook was your biggest customer, and you aren’t into Bankruptcy Law, you’ll probably join them.

Therefore, smart legal technology should resist becoming too niche and stay flexible to fulfill new needs. Amazon is the most powerful example of this approach. They quickly scaled from selling books to selling virtually everything with the same platform.

To find out which outcomes to consider all you need is some data and your intuition. There are data-driven tools available to help scope sectors, segments, types of customers and evaluate similar products in other sectors.

For example, Legal Design studios normally focus on law firms and designing contracts. A rudimentary CAT scan suggests, that serving corporations in designing compliance is a 5x larger market. Legalpioneer discovered one design company operating in RiskTech which raised $10 million in venture capital.

To summarize this survival guide:

  • Be cost conscience;
  • Care for your customer;
  • Diversify your portfolio.

The legal industry now has the luxury of having their own data analytics providers. So if your intuition tells you to brace for impact, there is data to deploy your airbag.

A Message To Legal Tech: 4 Signs Winter Is Coming

A Message To Legal Tech: 4 Signs Winter Is Coming 1200 800 Raymond Blijd

Read time: 2 min.
After a couple of record breaking months during the Hottest Summer in Legal Tech,  I believe winter is upon us and here’s why.

#1 Lots of Legal, Little Tech

While Legal Startup numbers look spectacular, the reality is that the quality of startups is more of the same. Some geographies are doing better than others (see #4). However, the majority of registering startups are marketplaces, solo’s or niche practices that use simple & little tech. As the chart below illustrates, this year started very encouragingly. In January and February, Tech was winning. Yet in the heat of summer, the lead started to melt away. Clever company names will not disguise the fact, it is not tech you’re selling, it is just legal. This September we passed 40 again but don’t rejoice: since legal tech life should begin at 40.

[chart id=”3644″]

#2 Lacking Creativity

There is only so much spin and juice one can put on “Uber for legal” before you start smelling the rot. So I like to give a nod to Paper, who aims to automate the legal workflow associated with creating your business. By putting the legal flow in a UI instead of documents and making lawyers an “In-App” purchase. They also launched their site with an SSL Certificate or more commonly known as HTTPS. I’m not a security expert but I do feel more confident when sites have https. This makes Paper very rare on Angellist and I’m hoping to see more of them.

#3 Startup Winter

Angellist is preparing for winter because of a decelerating startup scene. They are not alone as Y Combinator, the world largest incubator, is also changing strategies. Both CB Insights (image below) and Mattermark are warning of a slowdown.  So I’m a bit bemused by the fact Legal is jumping on the accelerator. It takes, at best, 4 years for a business to find traction and 5 to flourish or exit. Moreover, if your startup is selling to the legal professionals market beware. Law firms have notoriously long sales cycles and this will only become more fickle as market pressures mount on them.

winter-cbinsightsSo when the Pro’s pause, Legal steps on the gas. And that approach may work but I do see the benefits of breaking so bear with me..

***Mr. Robot Spoiler Alert***

While my head is still reeling from Mr. Robot season 2 finale, I captured an important message dubbed “Python Approach“. One of the characters explains that a python’s primary attacking tactic is to wait for its prey to come. Patiently tracking it over long periods of time and snapping it up when the time is right. As Dom states, Pythons can go up to a year without food.

******

In short, startups should not expect Capital to be heading their way, so it’s time to bootstrap and focus on the other C: Customers. Choose them well.

#4 A Bright Spot

There are bright spots, as seen in this video: Where do Legal Startups come from? In October, I’ll publish more stats so here’s a preview: it seems the rest of the world is picking up the slack and I see quality legal startups emerging from Asia and Africa. Diversity & necessity may be better drivers for quality startups than venture capital or accelerators.

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