Five New #Legaltech Unicorns. One Unicorn Nearly Doubles in Value. Three Companies Go Public.
It might be unfair to say that legal technology arrived in 2021. After all, law firms and law departments, the primary target buyers of legal tech, have been preparing for the impact of AI and automation.
In 2018, Amlaw 100 firms like Reed Smith and later Wilson Sonsini began creating dedicated tech-focused subsidiaries. See Post 213 (Zach Abramowitz’s overview of law firm-led legal tech. In late 2019, the chairman of an AmLaw 50 firm told us, “We know there is new stuff, we know that our clients know about the new stuff. The question is how we become proactive so that our clients don’t bypass us on the way to the new stuff.”
Discussing Baker McKenzie and Reinvent’s partnership with AI company SparkBeyond, Ben Allgrove, the firm’s Research & Development Partner said recently, “Five years ago our industry was flooded with hype about AI disruption. Our oft-stated view at the time was that this disruption would not happen overnight, but that it was coming. We have spent the last five years preparing for the technology to mature.” Staff, “Baker McKenzie Boosts It’s AI Transformation,” CIO Applications, May 31, 2021.
And mature it has.
Maturation means a more efficient market
As shown in the above lead graphic on #legaltech unicorns, while legal tech didn’t arrive in 2021, there is no denying that 2021 has been a historic year for the nascent industry. Compared with prior years, what unfolded in just the first half of 2021 alone shows clear signs of a maturing legal technology ecosystem.
Now, is the growth in legal tech part of broader economic trends like rising inflation, a pandemic, and jaw-dropping tech valuation multiples? Absolutely. See All-In Podcast, “Episode 26, The State of Venture Capital,” Mar 20, 2021 (arguing that startup valuations and the access to funding is the result of a smarter, more efficient market). But the fact that legal tech is now behaving just like any other vertical is significant in its own right.
Technology adoption is moving downstream from core business and revenue generation to back-office functions. Inside the industry, the legal tech entrepreneurs of the last ten and twenty years are now seasoned serial entrepreneurs pursuing second and third ventures. See Victoria Hudgins, “Litera Acquires Kira Systems as Kira Spins Off Contract Startup Targeting Corporate Market,” Law.com, Aug 10, 2021 (discussing Wasiberg’s role as the CEO of newly formed Zuva); Post 231 (noting serial entrepreneur trend in the early auto industry and citing Liam Brown and Eric Elfman has two of the leading examples of serial entrepreneurs in the maturation of one-to-many legal).
Outside of legal, companies like Salesforce, Docusign, Google and their alumni—the same parties that developed cutting-edge technology around communication, sales, marketing, and procurement—are now turning their gaze to less chartered territory like legal. Better talent, better tactics, and better tech are driving greater adoption with the end-user and vice versa.
What we are seeing is not a bubble. Rather, it is a more efficient market.
Five New #Legaltech Unicorns. Several IPOs.
Here is some of the startling chronology of legal tech in 2021:
- In January, Silicon Valley-based Ironclad announced a capital raise valuing the company at nearly $1Billion and then later announced that Salesforce Ventures had joined the round, making Salesforce an investor in at least three different CLM companies (two post Conga/Apttus merger). Victoria Hudgins, “CLM Provider Ironclad Raises $100M—Putting Total Funding Over $180M in 4 Years,” Law.com, Jan 14, 2021; see also Kate Clark & Ross Maticon, “Mary Meeker’s VC Firm Bond Invests in Ironclad at Nearly $1 Billion Valuation,” The Information, Dec 20, 2020.
- In March, the rich got richer as CLM provider iCertis, already a unicorn as early as 2019, announced their Series F round that, per Crunchbase, values iCertis at a whopping $2.7Billion (premoney). See iCertis News Release, Mar 10, 2021. The following week the Wall Street Journal reported that Relativity received an investment from Silverlake reportedly valuing the eDiscovery company at $3.6Billion. Mirriam Gottfried, “Silver Lake to Invest in Legal-and-Compliance Software Firm Relativity,” Mar 19, 2021.
- In April, cloud-based practice management provider Clio, which is dominant among smaller law firms, raised a new round of financing at $1.6Billion from T. Rowe Price, among others. Mary Ann Azevedo, “Canada’s newest unicorn: Clio raises $110M at a $1.6B valuation for legal tech,” Tech Crunch, Apr 27, 2021. In addition, private equity powerhouse Warburg Pincus acquired a majority stake in NetDocuments in a deal rumored to value the Utah based document management system (DMS) at $1.4Billion. Caroline Hill, “Warburg Pincus acquires NetDocuments from Clearlake,” LegalIT Insider, Apr 25, 2021.
- In June, Israel-based transcription software Verbit.ai joined the unicorn club with its latest nine-figure raise. See Staff, “Israeli AI Transcription Startup Verbit Raises $157M At Over $1B Valuation,” NoCamels, June 9, 2021. According to the fundraising deck published by Business Insider the overwhelming majority of Verbit’s business is legal transcriptions. See Callum Burroughs, “We got an exclusive look at the pitch deck Israeli AI transcription startup Verbit used to raise $60 million,” Business Insider, Nov 22, 2020 (noting that company specializes in legal transcriptions currently but will use this funding to expand to other verticals). Legal tech made its way to public markets as well with each of Intapp, LegalZoom and CS Disco executing successful IPOs while embracing the label of software for the legal industry. See, e.g., Frank Ready, “Is the World—or the Industry—Ready for More Legal Tech IPOs?,” Law.com, June 8, 2021; Sara Merken, “As DISCO shares jump, CEO says ‘software is coming’ to legal sector,” Reuters, July 21, 2021.
To put all of this in context, anyone of these NINE companies going public or reaching a unicorn valuation would have easily been the most significant #legaltech story in each of the last five years. And yet, except for Disco’s IPO, which took place in July, all of this happened before the end of Q2.
According to data from Raymond James, there has been more money invested in legal tech in the first half of 2021 than there was in all of 2020. Richard Tromans, “Legal Tech Funding Hits $1.4BN, While M&A Soars (Updated),” Artificial Lawyer, Aug 2, 2021.
So, what are the takeaways?
Here are six.
1. Legal startups are growing faster than ever
It took NetDocuments 20 years to reach the $1B “Unicorn” threshold, whereas it took Verbit only four. Consider that contract AI pioneer Seal Software was launched in 2010 and sold to Docusign for $188M, see Frederic Lardinois, “DocuSign acquires Seal Software for $188M to enhance its AI chops,” TechCrunch, Feb 27, 2020, a valuation likely exceeded already by both LinkSquares and Evisort, founded in 2015 and 2016 respectively.
LinkSquares CEO Vishal Sunak did not mince words when announcing his company’s recent growth round, arguing that the artificial intelligence of ten years ago is already outdated:
If the established players in legal software were interested in being customer-focused and innovation-obsessed, they’d have built LinkSquares five years ago. But, just as shipwrights who grew up building tall ships could only bolt boilers onto their old designs, it takes a fresh perspective to realize the power of what engines—and AI—can really do. We built LinkSquares because the other guys can’t, including other “AI startups” in our space.
Vishal Sunak, “
2. Legal is buying what legaltech is selling
Over the past year, we have spoken with more and more lawyers, both in-house and at law firms, who now fear that all the “new stuff” is actually going to begin impacting them, although they’re not exactly sure how. More firms are hiring chief innovation officers, leaning in on technology initiatives, and starting their own subsidiaries. See Dan Packel, “Big Law Firms Look to Unify Work Being Done in Pockets By Creating Innovation Roles,” AmLaw, July 6, 2021.
It is more of the same inside legal departments:
- Gartner is predicting legal department tech budgets will increase threefold by 2025. See Press Release, Feb 10, 2021.
- 62% of CLOs expect digital investments to continue despite cost containment measures per Deloitte. See “Resilient leadership: Chief legal officers and COVID-19,” Deloitte, Dec 2020 (providing results of survey of CLOs). “https://www2.deloitte.com/content/dam/Deloitte/us/Documents/about-deloitte/us-resilient-leadership-pov.pdf
- 37.7% of GCs say that “legal operations” is their most important strategic initiative. See ACC “2021 CLO Report,” at 30.
These studies track with our experience and those of many of our colleagues.
3. Blue Chip investors are betting on legal
Today, top tier VC firms like Andreesen Horowitz, Sequoia Capital, and Tiger Global are making big bets on legal. Venture capital firms have often shied away from investing in legal (Y Combinator being a major outlier, albeit in the PeopleLaw space, see “The 11 Legal Tech Startups Currently Backed by Y Combinator,” Law.com, Dec 2, 2016) because of how long it takes for disruptive legal companies to scale. Some of the most high-profile legal startups of the past two decades like LegalZoom, Axiom, and NetDocuments actually prove this case. But as our lead graphic demonstrates, the time to scale is constantly getting shorter.
Part of the reason legal technology lagged behind is that the best entrepreneurs and investors didn’t think legal provided great investment opportunities. Top-tier investors and founding teams chose to build tech for sales, marketing, manufacturing and other core business functions. AI for autonomous driving before AI for procurement contracts. Without the smartest money investing, it is harder to recruit the best teams. Without the best teams, you don’t get the best products built and shipped.
PiedPiper’s legendary, albeit fictional CEO, Action Jack Barker explains:
Richard Hendricks: Don’t you think because they are such amazing salespeople that it would be OK for them to sell the harder stuff?
Jack Barker: No, it does not work that way. The way you keep the best salespeople is you need to give them something easy to sell. Otherwise they just go somewhere else.
HBO Silicon Valley, “Two in the Box,” Season 3 Episode 2.
4. A new wave of strategic acquirers are looking at #legaltech startups
For years, the only real strategic acquirers in the legal industry were a handful of legacy companies like Thomson Reuters and LexisNexis.
Over the past few years, more players have emerged like Mitratech, Onit, Litera, Fastcase, and others. Of the new legal unicorns, Ironclad and Relativity have already made acquisitions since announcing their capital infusions and each of the new legal unicorns has said that M&A will be a bigger part of their strategy. But more significantly, companies like Salesforce and Docusign are already investing in this space. Google and Microsoft have already gone after eDiscovery because they are trying to stay competitive with each other for email and corporate communication. See Craig Ball, “Is Pinpoint the Future of eDiscovery?,” Ball in Your Court, July 8, 2021. It seems fair to expect them to evaluate and acquire contract tech in order to make their business suite more competitive.
Having more strategic players (and more sophisticated strategic acquirers) at the table will mean exit valuations will become more competitive. So it is not surprising then that, per the data from Raymond James, there have been a record 87 M&A deals through Q2 of 2021. Furthermore (and this will be addressed in greater detail in next Sunday’s post), the tech giants have already been dragged into contract tech via the open sourcing of machine learning models. See Richard Tromans, “Why Google Cloud AI is a Game Changer for Ironclad,” Artificial Lawyer, June 10, 2021.
All of this data will show up on the pitch decks of legal startups and will continue to fuel further investment.
5. Legaltech is a pie and everyone wants a slice
Put all of this together and the result is an innovation merry-go-round that doesn’t stop: legal tech companies are growing faster than ever, they have better access to capital (both in terms of customers and investors) and more exit opportunities.
This is creating a domino effect so that now more talented engineers and more experienced attorneys are building advanced business technology designed for legal work. Smarter capital and better teams lead to better products and more willing buyers.
Like the image above, it is hard to know which came first, the increased appetite from buyers or the investment in better teams and products. Did the pie get better first or did more hungry customers drive a tastier product? But what we do know is that, at the moment, all sides of the ecosystem are feeding off each other.
Founders are leaving years of experience at law firms or in-house and partnering with engineers from top tech companies. Consider:
- The team from Draftwise made up of engineers James Ding and Emre Ozen from Palantir (Ozen also worked at Google) teamed with Ozan Yalti a senior attorney from Clifford Chance.
- TermScout CTO Evan Harris was Manager of Machine Learning Engineering at Colorado-based unicorn company Ibotta.
- 10be5 was started by two senior associates at Cleary Gottlieb (Cleary is an investor)
- LegalMation was started by ex-Quinn Emanuel litigators.
Top-flight attorneys and pedigreed engineers are giving up on lucrative opportunities to build legal software because they see what the rest of the ecosystem sees: upside.
6. Platforms will support point solutions, which is the basis for many struggling legal tech startups
Many legal departments want to know why their law firms aren’t using all the new AI tools, but many of the new AI tools are point solutions with a very narrow application. They fall under what venture capitalists often refer to as a tool or a feature, but not a company. The legal technology ecosystem is littered with the tombstones of point solutions.
As an example, a few years ago, a company called jEugene designed a tool that made bulletproofing long legal documents like stock purchase agreements much easier. But, ultimately, jEugene closed down because it couldn’t sustain itself as an independent company. Even though it was useful, it was a feature, not a sustainable business. If taking advantage of new tools requires lawyers to open up multiple window tabs, those tools will struggle to gain adoption. Sometimes lawyers aren’t using the newest AI, not because they are stubborn tech laggards, but because the user experience or the underlying technology is not good enough.
The M&A that will come from platforms buying point solutions could very well lead to greater adoption of point solutions. People will use more tools if they are packaged inside the tools they already use. For in-house attorneys at Fortune 500 departments, it is usually Office365 or the G-Suite and, for lawyers in a firm with more than five lawyers, a document management system and a practice management system. NetDocuments, Clio and Relativity are examples of tools that attorneys already use and thus act as a platform-home for point solutions.
Upon announcing the acquisition of Kira Systems, Avaneesh Marhawa explained that Litera’s acquisition of Kira Systems will “allow us to include advanced machine learning workflows into our Transaction Management platform.” See Press Release, Aug 12, 2021. Notably, both Relativity and Ironclad have already acquired point solutions this year: Relativity bought TextIQ, Ironclad bought Pactsafe. Platformization is still in the early stages, but it too will get smarter (and more crowded) over time, create a more friendly user experience and drive wider adoption.
Conclusion: time to abandon cynicism
Plenty of organizations on all sides of the ecosystem have been burned by #legaltech. According to Gartner, more than 50% of General Counsels say legal transformation projects fail to meet expectations. Whether it is long drawn out implementations of products that are under-delivered or startup investments that failed to generate returns, these experiences breed cynicism and hold back adoption. But, the legal industry would do well to consider new evidence. Because, if the first half of 2021 is any indication, we are seeing the steep maturity of the market in real time.