Lawyer Culture: The Boundary To VC Funding For Legal Startups?

Powered by automation and artificial intelligence, the dissolution of major industries is a well-worn arc. The legal sector and its practitioners are not excluded from the narrative.

Follow Crunchbase News on Twitter & Facebook

But the morass that is the domestic legal system will, for the foreseeable future, require human hands to navigate. And while tech can’t (yet) replace a lawyer as a representative in court, that doesn’t mean the legal industry has been left untouched.

In fact, a number of startups have crowded around lawyers in an effort to bring their offices from pen-and-paper to the cloud.

Software For Lawyers

As we noted in prior reporting, investment in the legal tech sector, as a whole, has been more-or-less disappointing. But if we dig a little deeper into the niche, does that change for legal software startups who aim to support lawyers in their jobs, rather than replace them?

According to Crunchbase data, there is no clear cut answer. Using our dataset from prior reporting into the legal tech space, we identified 47 venture-backed U.S. startups in the legal tech category that primarily aim to complement a lawyer’s work. Startups that aimed to replace lawyers, served primarily as job boards, or were community-based networks for lawyers were not included.1

From this cohort of legal tech startups, Crunchbase identified 85 known funding rounds raised since 2010, as charted below:

In total, this cohort of legal startups have raised a touch under $394 million, or approximately a quarter of the $1.5 billion funding market for legal tech.

Due to the relatively small amount of reported deals we have to work from, it would be irresponsible of us to draw hard conclusions in the subsector of the space. We are, admittedly, in the weeds. However, that doesn’t mean we can’t glean something of interest.

Moving past the relatively tame years from 2010 to 2014, legal tech for lawyers saw huge uptick in funding amounts in 2015—followed by a precipitous drop. Behind the chart, though, is an answer to this uptick that makes 2015 far less impressive. The year was primarily driven by a massive $125 million round into e-discovery platform Relativity. Without that one round, 2015 sits at a total of $61.3 million in known funding—which is just enough for the year to at least keep its status as the most active year in terms of dollars.

Moving forward, known dollar amounts have been on a decline. And while 2017 has life in it yet, it’s doubtful the year will finish with a bang as the holidays near. But that doesn’t mean there isn’t potential for legal software startups aiming to work with lawyers.

Looking at our fundings rounds, the vast majority of deals are being made into this legal tech cohort are confined to seed and early-stage deals.

For the space, it’s reason for optimism. A glut of early-stage startups are necessary for late-stage deals to occur. Only one known late-stage deal made the cut, belonging to CS Disco and its $18.5 million Series C.

However, many seed-stage startups fail regardless of industry. There are also a host of issues specific to the legal sector, such as ethics rules, that may limit growth. And it’s quite possible that legal software startups simply don’t need later-stage funding to fuel growth, according to Kevin O’Keefe of Above The Law.

Only time will tell if there’s a glut of funding waiting to be deployed into the space, but in the meantime, there are investors and startups who have found success in the legal tech sector.

One Efficient Lawyer At A Time

Raising a total of $14 million from the likes of OpenView and Storm Ventures, San Francisco-based Logikcull, an ediscovery and automation startup, has grown it customer base by 550 percent in the past year.

“[Law firms] are actively seeking legal tech solutions that are going to make them more efficient. They’re going to allow them to offer better services to clients to take on bigger cases,” Robert Hilson, Logikcull’s senior marketing director, told Crunchbase News.

And while there are, at least for Logikcull, a number of lawyers who want these services, there is still a “whole other side of the market, of course, that is naturally skeptical of innovation.” However, the trend towards going digital is a rolling stone that even lawyers won’t avoid.

“Attorneys that are forward thinking know that having immediate access to information and being able to find this stuff and being able to dive into the data is going to give you insight that you are not otherwise going to get,” Hilson further explained to Crunchbase News. “That gives [lawyers] a competitive edge.”

Still, despite forward-looking attorneys, there are unique difficulties to operating in the legal tech sector.

Krishna Srinivasan, a partner at Texas-based LiveOak Venture Partners, believes that it is possible entrepreneurs are not working on “more mission critical problems” lawyers regularly face.

The investor in CS Disco, a Texas-based ediscovery platform that has raised over $30 million across three rounds, noted that part of the problem could be the lens through which lawyers, engineers, and entrepreneurs view workflow bottlenecks in the legal industry.

“Lawyers and engineers are two different beasts,” Srinivasan explained to Crunchbase News. Due to these differences, it’s likely difficult to “truly better [a lawyer’s job] from a product strategy and design perspective.”

According to Crunchbase data, 17 percent of startups that made it into our cohort have a founder or co-founder who are known to be lawyers—possibly pointing to in-domain expertise being a competitive advantage.

And although the hurdles to jump in building a sustainable business in this category may be high, Srinivasan remains optimistic.

“You can build incredible companies in the legal industry if you conceive of products and go to market correctly,” he explained.

Until then, lawyers do have options to modernize their legal workflow practices. At this point, there’s no excuse to stay on Windows XP. However, the money that’s gone into legal tech for lawyers isn’t near matching other industries that have come to embrace tech in a more orderly fashion.

Illustration: Li-Anne Dias