The legal industry is ridden with complexity and nuance. Ethics rules govern how lawyers can interact with clients, and rules can vary by town, county, and state. And the tools that keep the wheels of the legal system turning are persistently stuck in the 90s. Think fax machines, Windows XP, and a world without Slack groups.
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All of this presents an opportunity for tech startups to modernize the legal industry. With the advent of tech innovation in other industries, calls for lawyers to embrace technology are growing. Meanwhile, other tech startups are actively working to replace lawyers with artificial intelligence.
However, to rework the legal industry, which is steeped in tradition and regulation, large sums of money are likely required. In an effort to address these challenges, legal tech startups have received $1.5 billion in funding across 610 deals since 2010.
Here’s how that breaks down for the industry over time.
Legal Tech Investment Booms And Busts
While over a billion has been placed in legal tech startups, the pace of that investment in terms of deal and dollar volume has stalled.
Included in this stalling are startups that look to help lawyers automate and improve workflows through new software and services, and startups that look to do away with lawyers using artificial intelligence and other software innovations. Crunchbase puts both markets of legal tech startups under one category. For the purposes of this article, we will be examining both sides of the coin, with later reporting on the progress being made in each individual market.
As the chart below demonstrates, investment in legal tech startups hit a hard peak in 2015.
2015 brought in over $426 million to legal tech startups across 129 deals. This was over double the former high reached in 2012 in terms of deal amounts and dollar volume. And two startups, Relativity and Avvo, were largely responsible for the boom.
Chicago-based Relativity raised a staggering $125 million, or over a quarter of the 2015’s venture haul, in one round. The startup helps companies and major law firms streamline e-discovery. Once discovery is completed, Relativity will analyze, organize, and visualize key facts found within the documents gathered. The company claims to have “over 13,000 corporations, law firms, and government agencies” as customers.
But while e-discovery is a complex problem, lawyers need to find clients for that process to begin. Aiming to be in a lawyer’s corner is Avvo, a review platform that matches lawyers with potential clients. The “online legal marketplace,” according to Crunchbase, raised a $71.5 million Series E in 2015, accounting for the majority of the $132 million the company has raised in total.
However, the good times and large deals did not persist after 2015. In the next year, deal volume dropped by nearly 18 percent, and dollar volume dropped by a more precipitous 42 percent. And barring a major deal being completed in the last two months of 2017, the legal tech category will likely fall short of 2016 in terms of funding and deal totals.
However, positive signs in the legal tech market can be found if you’re a seed-stage startup.
Seed Stage Investment Stays Surprisingly Strong
To get to large deals that fuel years like 2015, a consistent stream of seed and early-stage startups is often necessary. And the legal tech category has seen plenty of seed-stage over the past 7 years, implying potential for late-stage deals.
From 2011 to 2014, over 50 percent of the funding rounds made in legal startups were in the seed stage. And while the percentage of seed-stage deals dropped from 2015 to 2016, 2017 YTD has seen a rebound with nearly 45 percent of known funding rounds being made in the seed stage. This is bucking the overall trend seen in 2017, especially in the US, where seed-stage investment has experienced declines in favor of late-stage deals.
Seed-stage startups attracting funding in 2017 include Juro, which helps companies manage their contracts using AI. CourtBuddy also received a $1 million seed-stage funding round in 2017. The startup, which won the American Bar Association’s Legal Access Award for 2017, matches clients to affordable lawyers.
But while seed-stage investments show promise, it’s no guarantee that legal tech startups will rebound in terms of deal and dollar volume as a whole. It’s possible that regulatory hurdles, of which large startups like Avvo have run into, could prove too difficult to overcome. VCs likely aren’t fans of funding lawyers to combat, well, more lawyers.
Additionally, modernizing software services for lawyers isn’t a slam dunk. Many lawyers are slow to adopt technology—why fix what’s not broken—and tech entrepreneurs who weren’t once lawyers may find it difficult to break into a somewhat insular community. Moving fast and breaking things is not a welcome attitude when selling to lawyers due to various ethical constraints.
That said, AI is already beginning to do the work of lawyers. And there is hunger for legal services to come at a lower cost with a touch of modern technology. Whether that means replacing lawyers with technology, or simply making the work lawyers do more efficient, is a battle with no clear winner as of yet.
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