The answer appears to be yes. A deep dive into Hotshot.
For many of us, success is partially a function of being at the right place at the right time. Yet, this type of luck often has even larger second-order effects, such as the ability to see new and emerging business opportunities. Indeed, this is how I see the careers of Ian Nelson and Chris Wedgeworth, who were part of the sales team that helped Practical Law Company (PLC) enter and dominate the U.S. market.
In 2013, Thomson Reuters acquired PLC for a staggering $450 million. See “Thomson Reuters buys Practical Law Company,” Telegraph, Jan. 23, 2013 (reporting the size of the deal between £200 and £300 million, all of it achieved without venture or PE funding). A few years later, the Thomson Reuters executive who wrote the check told me that PLC proved to be a phenomenally successful acquisition (“worth every penny”), as it was a new category product that generates substantial recurring revenues from the vast majority of large law firms and legal departments in the U.S. and U.K.
According to Geoffrey Moore, talent divides into two groups, pioneers who have the vision and drive to establish a new type of product or market segment, and settlers, who have the mindset and discipline to turn the pioneers’ success into a strong, durable operating business. See Moore, Crossing the Chasm 149-51 (3rd ed. 2002). With their next business, Hotshot, Nelson and Wedgeworth revealed themselves to be pioneers who, if the conditions are right, might stick around to settle a company they personally founded.
This post is about Hotshot, an e-learning platform designed to fill business and legal knowledge gaps for lawyers (mostly junior associates) working on complex matters for sophisticated corporate clients. Hotshot was founded in 2014 by Nelson and Wedgeworth, just a few short months after finishing their required tours of duty at PLC. As discussed below, Hotshot has some distinctive features that set it apart from other legaltech startups:
- So far, it has gotten by with an initial seed round from smart angel investors, mostly from their PLC network (see roster of investors).
- The founders retain control and are building an operating company that they could run for many years to come. PLC was built the exact same way. See Post 032 (summarizing PLC story, which was 23 years from founding to sale).
- The niche they are filling, though quite small by venture capital standards, is likely to result in a business with strong margins, near 100% market share, and extremely high barriers to entry.
For all these reasons, Hotshot is a model worth studying. In addition, it provides us with an excellent opportunity to apply the Diffusion of Innovation Worksheet from Post 098 and to ask whether Hotshot is showing up legal education.
What problem does Hotshot solve?
Law firm associates enter practice with significant knowledge gaps. Historically, these gaps have been filled by partners spending time with associates and explaining how all the pieces of a transaction or a litigation matter fit together, usually in the context of paid client work.
For several reasons, however, partner-led training and mentorship has become a less reliable and more expensive mechanism for transferring knowledge. Specifically:
- The legal world is getting more complex
- Partners are under more pressure to bill time and develop business
- Everyone’s billing rates keep going up
- Clients are less willing to pay for on-the-job training
These converging pressures might play out as follows. Partner is busy working on several client matters. To keep things moving, Partner dispatches newly hired Associate to a far flung city to conduct due diligence on a “reverse triangular merger.” Associate receives only the most cursory instructions — review these stacks of contracts and flag anything that “looks weird.”
20 years ago, as a newly hired associate at a major New York City law firm, this exact fact pattern happened to Ian Nelson. And he was terrified. What’s a reverse triangular merger? What’s due diligence? What types of contracts might warrant the attention of the partner? Can he come clean and acknowledge that, despite his law review credentials, he failed to learn any of this in law school? This was terrifying in 1999 and has only gotten worse with the passage of time. See Post 032 (Ian Nelson telling this story to students in my How Innovation Diffuses in the Legal Industry class).
How does Hotshot fill knowledge gaps?
Hotshot is a just-in-time e-learning platform that is currently segmented into 130 “courses” covering six topic areas and 24 subtopics. Each Hotshot course is a video of relatively short duration (~2 to 20 minutes) combined with quizzes, summary outlines, and exercises to apply and practice the newly acquired knowledge.
The table below provides a summary of the current Hotshot library. The number of courses in each subtopic is shown in parentheses:
Subtopics (# of courses)
|1. Accounting & Finance||Financial Statements (7), Essential Concepts (4), Process and Oversight (4), Application to Legal Practice (7)|
|2. Civil Litigation Basics||Civil Litigation Practice (3), Ethics in Litigation (2), Pleadings and Motions (5), Discovery (10)|
|3. Excel & Data Analysis||Excel Basics (13), Excel Functions (8), Data Analysis (3)|
|4. M&A Basics||M&A Practice & Process (4), Deal Structures (4), Deal Documents & Provisions (7), Due Diligence (3), Closings (5)|
|5. Securities Offerings||Securities Laws (2), Practice and Process (6), Types of Securities and Offerings (5), Deal Documents (5)|
|6. Venturing Financing||Business Context (7), Deal Documents (7), Common Associate Assignments (3), Venture Math (5)|
Below is a screenshot of the user interface of “Principal Acquisition Agreements,” which is the first course in the M&A Basics / Deal Documents & Provisions subtopic.
The video for “Principal Acquisition Agreements” is 13 minutes. This is a relatively long video for Hotshot, albeit it is the first course in the Deal Documents & Provisions subtopic, which has seven total courses. So perhaps the longer duration is justified. According to Nelson and Wedgeworth, Hotshot follows a simple axiom: “Make the videos as short as possible, but long enough to do the subject matter justice.”
As shown in the screenshot above, each Hotshot video, which are remarkably short to begin with, are further subdivided into even smaller bite-sized pieces. In the case of “Principal Acquisition Agreements,” the first five sections are visible. The remaining seven sections include: “6. Representations and Warranties (3:00), 7. Covenants and Additional Agreements (0:56), 8. Closing and Closing Conditions (1:13), 9. Indemnifications (1:40), 10. Termination (0:49), 11. Miscellaneous (0:22), 12. Disclosure Schedules and Exhibits (1:39).” This is a remarkable amount of material to cover in 13 minutes, which means that these videos are painstakingly scripted for clarity and economy of words.
Under the Materials section (bottom right of screen) are links to other features of a Hotshot course:
- Short multiple choice quiz (to aid and reinforce learning)
- Downloadable outline that tracks the video content
- Exercise that provides an opportunity to apply and practice the material just covered.
According to Nelson and Wedgeworth, law firm clients are increasingly using the exercises for flipped classroom training sessions run by the firm’s own partners. See, e.g., Katie Walter, “Making Due Diligence Training More Engaging,” HotshotPD (case study of flipped classroom model at Kramer Levin); Ian Nelson, “How McCarter & English Flipped the Classroom with Clients,” HotshotPD (same); Caitlin McCarthy, “Creating a Firm-Wide Business Acumen Program at Wilson Sonsini Goodrich & Rosati,” HotshotPD (same).
Finally, the presenter in the “Principal Acquisition Agreement” video comes across as a skilled and experienced partner or senior associate. However, like all Hotshot presenters, she’s a professional actor.
During Hotshot’s early meetings with prospective clients, Nelson and Wedgeworth received conflicting advice. “Half of the law firms said, ‘Well it’s got to be a lawyer on camera or no one will take it seriously,’” recalled Nelson, “while the other half said ‘Please God, don’t put a lawyer on camera.'” After some actual testing, however, the results were clear. “Overwhelmingly people preferred the actors.”
Producing Hotshot courses
Through trial and error, Nelson and Wedgeworth landed on the philosophy of letting experts do what they’re good at. “We hire expert lawyers to write the scripts and hire expert presenters to present.” That said, in all other aspects of the business, Hotshot has enormous in-house expertise.
For example, after getting a script from a subject matter expert (a large, upfront cost for the company), Nelson and/or Hotshot’s Head of Content, Emily Gottheimer, typically go through an extensive editing process that transforms a document that was meant to be read (the style of legal subject matter experts) into something meant to be said out loud in a pleasing, conversational manner (what Hotshot needs). According to Nelson, these are two “wildly different” formats. Thus, through many years of practice, the Hotshot team has become a skillful translator between the expert and the novice.
In addition to script transformation, Hotshot also has become very good at “storyboarding” their videos so that the presenter’s words are supplemented with useful graphics and animations that aid and expedite learning. This process usually starts with Wedgeworth and members of his production team printing out a script prepared by Nelson and Gottheimer. Then, in the wide right-side margin, they starting drawing little pictures of the best way to convey what the presenter is saying. Over the course of several years, this process has produced the Hotshot Design System, which is 60-page PDF document of all the layouts of screens and graphics the company has used over time.
Thus, the storyboarded script (text + pictures) includes numerical references to the Design System, which Wedgeworth and his team give to professional designers. Below is an example of a storyboard frame from the 5-minute “Greenshoe Options (Overallotments)” video, which is part of the Securities Offerings / Practice and Process subtopic:
Here is a screenshot of the finished product:
Obviously, an immense amount of thought, effort, and expertise goes into the production of Hotshot courses. However, as any lawyer knows, if you do something complicated over and over again, you learn various tricks to save time while also improving quality. That’s certainly true here.
For example, when it comes time to shoot video, Hotshot now holds a casting call where 60 or so actors show up to read scripts and do camera tests. What is Hotshot’s production team looking for? “We want to know, ‘Do they sound natural? Do they sound conversational?,'” says Nelson. “If they come across as salesy, we don’t use them.” And then there are pure efficiencies — “how good are they at reading a teleprompter?” Wedgeworth chimes in, “we also want to have a diverse set of presenters. That’s a factor that comes into it too.”
What are the results of all this planning and vetting? It the early days, one course (again, 2 to 20 minutes of actual footage) might take a full day of studio time. Today, Hotshot can shoot up to ten courses in a single day.
This dramatic increase in skill, know-how, process, and efficiency coincides with Hotshot’s current production schedule. Between now and the end 2019, Hotshot plans to grow its library of courses from 130 to 170, with much of the content designed to educate lawyers on industry sectors (e.g., technology, energy, financial services, healthcare etc.). Like virtually all Hotshot content, the industry sector initiative is the direct result of asking existing clients what they want.
Below is a video of Hotshot business acumen content, which is a good example of the style, content, and quality of a Hotshot instructional videos.
Hotshot’s pricing could not be more transparent. Basically, click on the pricing tab on the firm’s website, enter the number of lawyers in your firm, and choose your subscription level (ala carte among the six topic areas).
For a 1000-lawyer law firm, the first topic is $14,000 with the price dropping to $9,000 per topic if the firm subscribes to all six ($45,000). For a 500-lawyer firm, the all-in price is $27,000. For a 100-lawyer firm, the price is $9,000. On a per lawyer basis, this provides larger firms with a slight pricing discount ($45/lwyr for 1000-lawyer firm, $90/lwyr for 100-lawyer firm, $500 for solo practitioners or a 1-person legal department).
Individual law students can sign-up for $15/month, or $180 per year (a bargain if you want to be a standout summer associate or a candidate who excels in a job interview). However, a 600-student law school can get an all-in package for just $9,000 per year ($15/yr per student).
Hotshot’s business model
The Hotshot business model is very similar to the one used during the early days of PLC. I would summarize it in four steps:
Step 1. Get law firm partners and administrators to see that there’s a tranche of know-how and intellectual property that is fairly generic across virtually all reputable firms.
Step 2. Convince law firms that it’s in their self-interest to outsource the maintenance and upkeep of these materials to an expert third-party provider (Hotshot or PLC), which will free up time, money, and whitespace to focus on sources of true competitive advantage.
Step 3. Focus on quality and user experience, which is the road to 100% renewals.
Step 4. Expand library of offerings based on customer need, which in turn expands the base of recurring revenue while dramatically reducing the per-unit cost of selling and servicing clients.
Although this model sounds attractive, it also has several formidable challenges. First, you need to identify a tranche of know-how and IP that is truly generic and thus sensible to outsource. These opportunities are hard to find. Second, you need to build out content of sufficient breadth and depth to impress a very demanding and discriminating client base. This is extraordinarily expensive, time consuming, and expert intensive (hopefully you’ve hired true experts). Third, your sales team needs to be highly credible and connected to prospective clients, which is yet another layer of complexity and expense.
The education industry
To be clear, Hotshot is in the education business, which is a massive industry sector dominated by large public and nonprofit organizations. It’s also a sector known for high costs, uneven quality, and a reluctance to innovate. Not surprisingly, over the last 20-30 years, many sophisticated investors have targeted the education sector as a future source of profits. Most of these ventures, however, have ended badly. See Jonathan A. Knee, Class Clowns: How the Smartest Investors Lost Billions in Education (2017).
According to Jonathan Knee, a lawyer-turned-investment-banker who is now a professor at Columbia Business School, these dismal outcomes were traceable to multiple factors: business judgment clouded by good intentions, a preoccupation with doing business with elite institutions, overreliance on educators (and lawyers, consultants, and bankers) rather than experienced business operators with a strong track record of execution.
However, in reading the book, one point of failure caught my eye: investors’ failure to understand the education industry’s byzantine structure. According to Knee, the mistake wasn’t to enter an industry with a complex structure. In fact, that’s a plus. Rather, the mistake was a failure to master how the many pieces fit together and interacted with one another. Knee writes:
Difficulty … does not suggest impossibility, though it does reinforce the importance of closely aligning strategies with the nuance of industry structure. … At the end of the day, although a convoluted industry structure may be challenging, it is far more likely to yield attractive business opportunities than are straightforward ones. …
No amount of brilliance or good intentions can overcome an unwillingness to accept the predominant role of understanding industry structure … . The best evidence of this deep strategic infirmity is the tendency to blame the market itself rather than the inability to effectively serve it. (p. 208-09).
Hotshot is an education company selling into the legal industry, which is a double dose of convoluted. Yet, Hotshot founders and key investors (see Hotshot investors) obtained much of their industry knowledge by working inside the PLC juggernaut. Hence, they had the ability to spot the Hotshot opportunity, the nerve and patience to make a large upfront investment, and the skills and connections to go out and sell. From far away, this may look like luck striking twice. But these are extremely intelligent people who paid close attention to their surroundings. Most people don’t.
What’s the result? Hotshot currently has one third of the AmLaw 100 as customers, which suggests that it has made its way into the early majority and likely “crossed the chasm” as an operating business. See Post 007 (discussing adopter types); Post 025 (discussing Geoffrey Moore’s Crossing the Chasm). Hotshot also enjoys a 95% renewal rate and a client base telling them what to build next.
During a call with Nelson and Wedgeworth, they declined to discuss revenue numbers. But Wedgeworth did say that “the business model really holds together.” The key is to expand the recurring revenue base (which, again, is renewing at 95%) to the point where operating revenue fully supports the content growth. “We’ve had enough experience with a few years of renewals and growing sales,” said Wedgeworth, “to know that it’s going to happen.” Long-term, the model is on track to expand to several hundred courses. As that occurs, Hotshot’s depth of content and ala carte pricing will make them more attractive to legal departments. Likewise, some law schools are nibbling at the edges.
Here is some back-of-the-envelope math that approximates the potential upside. Let’s assume that Hotshot is priced at $100 per lawyer/student (a mix of law school pricing, large and small firm ala carte usage, and an expanding library of content that increases the subscription base). Let’s also assume a potential user market of 400,000 US lawyers and law students (200,000 lawyers in law firms serving corporate clients, 100,000 working in legal department, 100,000 law students).
These calculations result in an addressable market of ~$40 million per year for a business with very high operating margins (PLC’s were reported to be 50%). Further, the business is solving a problem that never goes away (contextual training for junior lawyers). It also enjoys enormous barriers to entry due to economies of scale built out over a period of years.
These economics work well even if Hotshot captures and grows only 10% of the potential market — the group of lawyers who see the value of high-quality contextual training. This is not the type of business that would attract venture capital funding. However, it would be an incredible owner-operated business. Cf Knee, Class Clowns at 216-20 (citing niche specialization in education market as key to enduring profitability).
Scoring Hotshot’s likely rate of diffusion
In Post 098, I presented a Diffusion of Innovation Worksheet that can be used to score the likelihood that an innovation will be adopted by its target audience. The worksheet, which is divided into five sections, is based on Everett Rogers’ rate of adoption model. See Post 008 (explaining model). Below, I apply the worksheet criteria to the Hotshot e-learning platform. The goal is to more precisely understand its odds of success.
I. Perceived Attributes of Innovation (+12)
As noted in Post 098, most of the variance in an innovation’s rate of adoption (between 49 to 87 percent) can be explained by the five innovation attributes listed in Section I of the worksheet. Thus, if I’m making an investment decision, this is probably the most important part of the analysis. Likewise, if I’m the actual innovator, I need to work hard to maximize these five scores, as sales and marketing can’t compensate for a product that fails to delight end users.
Once again, we score Section I using a simple 7-point scale that runs from -3 (strongly hinders adoption) to +3 (strongly favors adoption). Below is a summary of Hotshot’s scores on the five innovation attributes:
Overall, +12 is a very high score for Section I. However, it should be pointed out that +3 for Relative Advantage comes at a very high price, as the product has been 100% designed, developed, and produced before the Hotshot makes a sales call. Yet, according to Ian Nelson, the #1 factor favoring Hotshot adoption is trialability (+3); specifically, the ability of partners to sit in front of a computer and review the quality of the content. Nelson experienced the same dynamic with PLC. See Post 032 (Nelson discussing how he sold at PLC).
II. Type of Innovation Decision (-6)
Hotshot doesn’t catch any breaks here. According to Nelson and Wedgeworth, this is a Collective adoption decision made by a law firm’s director of professional development in dialogue with the firm’s education or training committee. So it’s a -6 (see scale to the right).
Fortunately for Hotshot, these decision makers have a strong personal stake in the outcome. For partners, it’s saving an immense amount of time answering questions and running training sessions. Likewise, PD directors are spared blowback from associates bored by busy partners giving long, tiresome PowerPoint lectures. (Both of these factors go to Relative Advantage in Section I.)
Regarding this topic, I talked with Henry Brown, Director of Attorney Training at Morrison & Foerster in San Francisco. According to Brown, the current generation of associates strongly prefers to learn at the comfort of their desk where they are free to navigate the content and follow their interests. Also, they aren’t too keen on acknowledging what they don’t know in front of partners and their peers. Conversely, they love the interactive flipped sessions led by partners.
The data suggest that Hotshot is filling a niche for younger lawyers. Among the 10,000 registered users on the Hotshot system, usage tends to spike during the summer (when summer associates join firm) and the fall (when new associates are onboarded).
III. Communication Channels (+3)
Communication Channels carry information to potential adopters. All else equal, more and better channels increase the rate of adoption. This is a definite challenge for Hotshot, as Nelson recently acknowledged that Hotshot’s biggest impediment to adoption is lack of prospective user awareness. See Monica Bay, “ATL alt.legal Innovation Awards Winner: 5 Questions with Ian Nelson,” Above the Law, Feb. 16, 2017.
To get the word out, the entire Hotshot teams invests a lot of time at law firm professional development conferences (e.g., NALP in April, PDC in July, PDI in Dec.). If all goes well with the PD professionals, the Hotshot team will get a series of sales calls where they’re in the same room with partners on the training or education committee. Without these meetings, and an opportunity for partners to taste-test the product, nothing is going to happen.
Although Hotshot is probably doing all it can to maximize Communication Channels, law firm partners are a hard group to reach. Thus, the score here is a moderate +3.
IV. Nature of the Social System (-3)
This score is hard to move, as law is a fairly traditional and isolated industry (due to Rule 5.4 prohibition on lawyers coventuring with other professionals). See Post 098. However, many of Hotshot’s first customers were West Coast tech firms (Fenwick, Cooley, Wilson Sonsini, the Palo Alto office of Goodwin Procter), which primed the pump for Hotshot’s eventual success with several Wall Street firms. Thus, instead of the usual -6, this factor might be -3.
V. Efforts of Change Agents (+7)
In the legal industry, the most effective change agents are consultative salespeople. See Post 034 (discussing how this approach is used at Thomson Reuters).
This is an area where Hotshot truly shines, as their entire business model is built around what Nelson calls “customer success.” As a practical manner, this means that Nelson and Hotshot’s Head of Customer Success, Caitie McCarthy (another PLC alum), are spending a lot of time providing ongoing advice, guidance, and support to PD professionals and law firms partners, such as one-on-one work designing curriculum, providing examples of effective blended learning methods, and helping adapt Hotshot exercises to fit a firm’s specific practice areas. Over time, however, the firms generally become more self sufficient.
Hotshot is very good at consultative sales and thus hits all seven Change Agent factors. See Worksheet. This results in a +7 score.
Hotshot’s total innovation adoption score
In the legal industry, +13 is likely to be a high score, particularly compared to other legal startups trying to sell into law firms. Cf. Post 008 (quoting a venture capitalist who refuses to invest in any business that depends upon sales to law firms).
Is Hotshot showing up law schools?
A few weeks ago, I showed Hotshot to a law professor who runs an entrepreneurship law clinic. His reaction was stark: “They’re building a business out of our failure to educate.” I certainly understand where my colleague is coming from. We have our students for three years. We charge them a lot of money. Yet, Hotshot’s content and teaching methods are much more sophisticated and time efficient than most law school classes.
Well, how do we fix this?
Going back to one of Jonathan Knee’s key observations in Class Clowns, the shortcomings of legal education (market inefficiencies?) get fixed by understanding the industry’s byzantine structure and working backward toward solutions that serve the various stakeholders. In this case, the hardest part is threading the widely divergent agendas of different stakeholder groups (students, faculty, employers, regulators and lenders (currently, the US gov’t)). Yet, as Knee writes, “Difficulty … does not suggest impossibility” (p. 208).
The economics of Hotshot work because their excellent intellectual property can be amortized over a very large customer base — i.e., selling to everyone. That is not the law school model, where brand is maintained through exclusivity. Thus, even Harvard (with 1,600+ law students) would struggle to produce a similar product at a per-unit cost that made sense. And this sets aside the difficulty of getting law professors to integrate the content and methods into the classroom, as status and salary are driven primarily by research rather than teaching excellence.
Many practicing lawyers criticize the knowledge and skills gaps that result from current model of US legal education. Yet, large law firms — Hotshot’s best customers — support and preserve the status quo by recruiting most heavily from the most elite law schools. What transpires in term of actual learning over the course of three years is largely irrelevant. In effect, large law firms appear to value the sorting function of law schools, which arrays the market based on entering academic credentials. Some law firms are wising up to the arbitrage opportunity. See, e.g., Malcolm Gladwell, “The Tortoise and the Hare,” Revisionist History, Season 4, Episode 2 (discussing Evan Parker’s Moneyball analysis for law firms). But today, this is the industry’s structure.
Hotshot founders Nelson and Wedgeworth have no need to fight it. Further, as legal education catches up, Hotshot is happy to help.
(H/T to Lauren Henderson (UBC ’20 Anthropology), who transcribed some very lengthy interview sessions.)