Investment in Legal Technology
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Slides from Investment in Legal Technology on September 30, 2015.
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Investment in Legal Technology
- 1. Investment in Legal Technology September 30, 2015 @evolvelawnow #EvolveLawLive @rightbrainlaw @avvo@generalcatalyst @juanleungli @maryjuetten @traklight @beclarke @HaeJules Wifi: SU_Guest Username: events1516 Password: suffolklaw
- 2. Darwin Talk
- 3. It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. -Charles Darwin
- 4. Why isn’t there more investment in Legal Tech? AKA Lawyers Hate Legal Tech
- 5. FinTech vs Legal TechHow are these sectors different?
- 6. FinTech Market Size $90 $90 $90 $90 $90 $90 $189 $189 $189 $189 $189 $100 $100 $100 $100 $379 $697 $697 $697 $300 $300 $872 $2,248 $0 $500 $1,000 $1,500 $2,000 $2,500 Wealth Management Personal Finance Other Services All Services Insurance Payments Lending All Source: Charles Moldow, General Partner @ Foundation Capital via Federal Reserve, SBA, Goldman Sachs, Bloomberg, FRBNY, McKinsey, SwissRE FinTech Services Only $379 Billion; All FinTech = $2.2 Trillion
- 7. Investment in FinTech $75 $28 $36 $72 $20 $69 $84 $116 $46 $54 $83 $61 $120 $116 $61 $96 $232 $228 $100 $145 $223 $658 $177 $193 $137 $174 $251 $297 $259 $429 $99 $348 $329 $112 $270 $124 $378 $225 $478 $700 $342 $750 $1,054 $718 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Source: Ernst & Young Venture Source, Financial Services ~ $3B & Financial Instruments ~ $8B ($11B Total) Since 2010
- 8. Legal Tech Market Size $274 $274 $274 $274 $274 $274 $274 $274 $274 $7.2 $7.2 $7.2 $7.2 $7.2 $7.2 $7.2 $1 $1 $1 $1 $1 $1 $5.0 $45 $45 $45 $45 $45 $45 $45 $45 $45 $7.2 $7 $6 $5.2 $395 $0 $50 $100 $150 $200 $250 $300 $350 $400 Practicing Attorneys Temp Staffing LPO In-House SMB Consumer Research eDiscovery GRC All Source: Joshua kubicki, Legal Transformation Institute, 2014 Ibis World Law firms in the US report, Nearly $400 Billion in the US Alone
- 9. Investment in Legal Tech $49 $20 $6 $2 $20 $10 $183 $4 $32 $2 $10 $15 $75 $85 $22 $20 $73 $86 $5 $0 $10 $2 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Source: Crunchbase $731 Million since 2010, only $17 Million in the last 4 quarters
- 10. Comparative Investment Level *Excluding Lending, Insurance and Payments Fintech Services has > 4x more investment since 2010, FinTech Services* Legal Tech $3 Billion In funding since 2010 $1.1 Billion in funding for prior 4 quarters $731 Million in funding since 2010 $17 Million in funding for prior 4 quarters
- 11. 11 Why is this happening?
- 12. Lawyers Hate Legal Tech.
- 13. Lawyers are Skeptics Lawyers Average Source: Herding Cats: The Lawyer Personality Revealed, Dr. Larry RIchard You say NO for a Living and Risk Aversion Serves You Well with Clients 90th Percentile 50h Percentile
- 14. Penguins HITTING RAPID GROWTH WITH HELP OF SEED ROUND 14Lawyers Adopting Technology: The Penguin Model Slow Leaders, Fast Followers
- 15. Lawyers are Tanking VC DealsDuring due diligence, lawyers are asked for their opinion by investors • Investors have (valid) concerns about lawyers adopting new technology • Lawyers are saying they would not use the tech products, so investors are not as enthusiastic about the deal • This is a common theme among MANY of the 50+ companies in our Evolve Law community • Personal Experience: 5 serious investors, 1 where their firm was already using my product • This is like asking a taxi driver in 2009 if they would use Uber
- 16. What can you do about it?
- 17. If You’re a LawyerBe an Early Adopter • Try new legal technologies • Embrace collaboration with innovators • Tell people when you’re using a tech product you love • If an investor asks for you opinion, make sure you are the end user. E.g., If you’re a Venture / Tech attorney and the product is focused on litigation, ask your colleague who is in litigation.
- 18. If You’re an InvestorFind the Right Lawyers to Ask • When doing due diligence, don’t just ask your Venture Attorney, ask the actual end user. Not all lawyers are created equal. • Find the early adopter lawyers who have a history of using new products – might not be at large firms • Give entrepreneurs a chance to react to the feedback from your lawyers or connect with them directly
- 19. I am not apt to follow blindly the lead of other men. -Charles Darwin
- 20. If You’re an EntrepreneurBe Proactive and Get In Front of the Issue • Be aware that this will happen and tell investors to expect negative feedback from lawyers • Have client references or lawyers who believe in you • When an investor is doing diligence, ask for the opportunity to engage with the lawyer directly • If possible, ask to set up a sales call with the lawyer with the investor listening in – at the very least you may get a new client! (this is better than VC $) • Don’t give up!
- 21. Men do not differ much in intellect, only in zeal and hard work. -Charles Darwin
Notes de l'éditeur
- For each event at Evolve Law, we end the content with something called a Darwin Talk. Darwin was pretty radical in his day, but it’s this type of thinking that leads to scientific and social progress. We’ll end each Evolve Law event with a 5 minute talk to get the intellectual juices flowing.
- As my favorite quote from Darwin states, it’s not the strongest or the most intelligent of a species who survive, it’s the one most responsive to change. So we’re trying to shake things up and help bring about change by giving you some thought-provoking content at the end of our events. You can agree with what I’m about to say for the next five minutes or violently disagree, but at the very least it will make for good discussion in the networking after.
- So our very first Darwin talk ever is called “Why isn’t there more investment in Legal Tech”, or what I affectionately subtitle “lawyers hate legal tech”
- Investment in legal tech is an issue. Legal tech is at the very beginning stages of it’s life, so I wanted to benchmark it to a slightly more established industry. I think the closest comp is FinTech, represented by our Monopoly man here, and our friend Saul Goodman from Breaking Bad is representing the legal tech space. Both of these industries are basically highly skilled professional services, and both rely on people doing their jobs efficiently and with high quality.
- So lets take a look at the FinTech market. The total FinTech market size is around $2.2 billion, according to Charles Maddow at Foundation Capital, a top VC in this space that invested in companies like Lending Club. However, a big chunk of this is what I would call “financial instruments” like insurance, payments and lending. The portion of FinTech that is directly comparable to legal tech is the services component, with wealth management, personal finance and “other services” like crowdfunding and research. That portion is $379 billion.
- VC investment in fintech has been booming. Investors have forked over $11 billion total and $3 billion the ‘financial services” component of fintech in the past 5 ½ years.
- The legal tech market is about the same size as the FinTech services market. It hasn’t been analyzed nearly as much and deserves a more thorough analysis, but based on data from Josh Kubicki at the Legal Transformation Institute, the market size comes in a just under $400 billion.
- Investment in legal tech has been relatively puny. It’s driven by a couple of big investments in companies like Avvo and Clio, and a handful of very early stage seed investments. I kept this chart on the same scale as the FinTech chart so you could compare. This is sad, right?
- Investment in FinTech services is 4 times higher than investment in legal tech, but the most interesting thing is that investment in FinTech is dramatically increasing, with $1.1 billion in just the past 4 quarters, while investment in Legal Tech is erratic and actually slowing down, with only $17 million invested in the past 4 quarters.
- So why is this happening?
- I think it’s because lawyers hate legal tech.
- Lawyers are natural skeptics, raking in the 90th percentile on skepticism compared to the rest of the population. This is probably good for working with clients, but it’s not great for adoption of new technologies and processes.
- In fact, I like to joke that lawyers adopting new technology are like Penguins, they wait for the first penguin to jump in the water and not get eaten by a shark, then all of the other penguins jump in the water like a waterfall of penguins. But it’s really hard to get the first penguin to jump. So how does this relate to investment?
- VCs always call lawyers when they are doing diligence on legal tech companies, as they should, and lawyers always tank the deals. There are a few exceptions, but this is the constant feedback I hear from so many legal tech founders, many of them here today, and it’s something that we need to talk about. Investors get excited about the legal tech market because of the obvious opportunity, but when they do their diligence, they rightly conclude that lawyers are difficult to sell technology to because they are not early adopters, and then the lawyers they know say that they wouldn’t use the technology. This has personally happened to me when I’ve been fundraising for Hire an Esquire. No less than 5 times we’ve been in diligence with VC funds who were enthusiastic about our product and market opportunity, and we had a partner who was advocating for us. Then someone on the investment committee or partnership would call their brother or their friend who was a lawyer and the lawyer would say “why would we use technology when we’re doing just fine the way we do things now.” In at least one instance, their law firm was already a client of Hire an Esquire, that partner just didn’t know it. This is insane, and especially for me and Hire an Esquire as an on demand company, this is like someone asking a taxi driver in 2009 if they would use Uber. Of course they would say no, but that doesn’t mean that the investor shouldn’t invest.
- So what can you do about it?
- If you’re a lawyer, you can buck the trend and be an early adopter. I know it might be against your natural, skeptical instinct, but if you can make an effort to try new legal technologies and tell other lawyers about any tech products that you love, this will go a long way. Also, and most importantly, if an investor asks you for your opinion, make sure that you are the right person to answer the question. If you are not the end user, introduce the VC to a better end user. For example, if you’re a venture attorney and the product is around litigation or recruiting, introduce the VC to your Litigation Partner or head of recruiting for more accurate feedback.
- If you’re an investor, make sure you’re asking the right lawyers for feedback. Your VC lawyer is going to tell you it’s a terrible idea, trust me. And they’ll be wrong most of the time. Try to find the lawyer who would actually use the product, and try to find lawyers who have a track record of being early adopters. Also, give entrepreneurs the opportunity to interact directly with the lawyers to see how good they are at sales, and see if they can overcome that innate skepticism.
- And as Darwin would say, don’t blindly follow the lead of other men. Make your own decisions and take what the lawyers say with a grain of salt.
- If you’re an entrepreneur, expect that lawyers will tank your deal. Tell investors at the beginning that this will happen, and have a list of client or personal lawyer references who believe in what you are doing. When an investor is doing diligence, ask them for the opportunity to sell to the lawyers they know. This will give you the chance to take control of the conversation and show off your sales skills, and even if the investor doesn’t invest, you may get a client out of it, which is much better than VC investment anyway. And finally, don’t give up. The legal industry is a bit harder than other industries to be an entrepreneur, so just keep working at it and make it happen.
- As Darwin says, men do not differ much in intellect, only in zeal and hard work. So be zealous and work hard, and it will pay off for you AND for the legal tech industry. Thank you.