Recent months have seen well-publicized developments in the legal industry as Axiom abandoned its IPO plans, and Atrium shut down. Meanwhile, investment continues to pour into LegalTech, and companies such as Linksquares, EverLaw and Eigen score large investment rounds to continue product development and expansion.
What gives? Are there commonalities between these two groups?
The answer is, yes. Companies in the first group built their offerings mostly around talent (i.e., lawyers), whereas those in the second are much more heavily based on technology (i.e., automation and AI).
In general, any LegalTech startup’s closing is bad news. Our industry is still in its early stages, and we need success stories to demonstrate our value in the marketplace and show potential customers that there’s a better way to do things.
At LawGeex, we’ve been doing this for six years. We understand how hard it is to build a successful business in this market, and we have a lot of respect for any venture trying to bring innovation to the legal industry.
It’s worth asking a few key questions to predict the next wave of LegalTech winners:
What is the startup’s DNA? Startups that are “a better horse and carriage” (i.e., talent-based) are not as impactful as those that offer innovative technology-based solutions. Core offerings that are based on true innovation lead to fundamental improvements in efficiency, economics, and quality.
In the startup world, the term “DNA” is used to assess the strength of teams and their experience developing core intellectual property. Because the legal market already has a developed talent pool of lawyers as well as established large players experienced in capitalizing on this talent (i.e., law firms), a startup with a talent-based DNA will find it hard to sustain a competitive edge over time – even if it has a strong foundation and is backed by some of the leading brands in the VC industry.
Can companies quantify their expected results? Startups need to demonstrate quantifiable benefits to potential customers. It also helps when the legal tech benefits other groups within customers’ companies, not just their legal teams, even if it’s just the perception of extended benefits. This makes the investment easier to justify, and legal teams can potentially get the other departments to chip in budget to fund the tech. For example, when the technology helps the legal team itself run more smoothly, other departments may not perceive the benefit to the company.
How well funded is the startup? Creating a whole new class of technology is a double-edged sword. Pioneers get to own the category, but customer acquisition is more difficult because legal teams and law firms won’t have line items in their existing budgets for the new category. Therefore, startups need to have adequate funding to both educate the market (i.e., create the category) and market their products to ensure that they have traction before expanding their go-to-market efforts too quickly.
How difficult is the change management to deploy the new solution? Horror stories abound as to LegalTech being deployed and then either not used or, worse, abandoned because of resistance from lawyers. Zero or minimal change management is key.
How crowded is the space? Expect to see consolidation in the contract management systems space given the number of entrants: currently 170 vendors, according to Gartner. The same goes for eDiscovery.
Investors are bullish on LegalTech, and with good reason, but answering these questions and evaluating a startup’s DNA is key to picking the winners.