By Raj Goyle
Five years ago, nobody believed legaltech was big enough to matter. Investors laughed at the idea. VC firms didn’t even list the vertical on their websites, despite it being a $500 billion global spend category ripe for disruption.
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Where previously a lark, investors now clamor to get into legaltech. They see a tidal wave of innovation coming, an industry on the verge of explosive growth, and lawyers in the crosshairs of techies and their market-democratizing SaaS products.
I know this because I run and co-founded a legaltech startup backed by private equity. We recently exited to another fast-moving legaltech (also backed by growth equity) that has made three other strategic acquisitions in the last 12 months alone.
Looking outward, there’s LegalZoom’s IPO share price spiking almost 40 percent on Day One of trading; DISCO’s similar IPO numbers (up 28 percent); Silver Lake investing in e-discovery software firm Relativity at Slack-esque multiples; and Ironclad securing $100 million from big investors eyeing SaaS-like returns.
The meteoric rise in legaltech investments in the last 18 months reminds me of another vertical that disrupted the incumbents and reeled in billions of private capital dollars—fintech.
By now, we all know the story of fintech and its coming of age during the 2008 financial crisis. Fintech unbundled services, distributed access, lowered fees and created digital-first experiences that easily disrupted the behemoth, risk-averse banks that people thought would never change. Individuals and businesses adopted fintech like wildfire, with investment reaching $130 billion in 2020.
Legaltech, which began 10 years ago, is similarly positioned at the beginning of an unbundling cycle and its own world-changing event—COVID-19. The pandemic has driven a shift to remote work, increased the need for digitization, and revealed the expense of delayed adoption in this insular industry.
The pandemic forced highly analog legal services to adopt technology at a rapid pace. New technologies and processes addressing the “business of law” are what saved legacy delivery models during COVID, supporting everything from collaboration, remote workforces and online courts, to autonomously managing routine but important legal tasks.
Change that was once considered colossal happened overnight. Law firms and corporations alike are now feeling the pressure to continue remote and hybrid work models, and maintain COVID-induced tech and processes that made everyone’s job easier. This wave of digital transformation will impact how, where and when law is practiced both today and in the long term.
Yet despite major advances, legaltech still faces obstacles that fintech didn’t. There’s a misconception that the legal industry is hyper-traditional, too risk averse, and that there’s less demand for technological innovation due to smaller market size.
Legaltech is bigger than anyone realizes. Uber investor Bill Gurley famously argued that supply creates demand, growing the pie and inviting new, unforeseen opportunities. He was the first to declare that Uber was worth more not because it was disrupting the existing total addressable market of taxi drivers, but because it opened brand-new opportunities that hadn’t been considered.
Legaltech is positioned at the beginning of a “supply creates demand’’ cycle for legal services driven by COVID, mounting pressure from the C-suite to manage legal spend, and the desire for more cost transparency that only technology can offer. In this new world, stagnant monolithic law firms will need to flex their multidisciplinary muscle and show their ability to adapt. They will be forced to innovate at the hands of disruption.
Investors looking for legaltech opportunities might take a wistful look at Confinity (rebranded as PayPal in 2000). A fintech company that unbundled digital payments for consumers, gained early adoption, went public and spent the next decade making a string of acquisitions, including VeriSign and Venmo. Now a $340 billion-plus company, PayPal is dominant in online payment processing and competes head-to-head with incumbents.
PayPal’s growth story is analogous to the adoption and consolidation emerging in legaltech. Investors are looking for businesses that have multiple levers for growth, and legaltech offers that in droves.
Once relegated to back-office support services, legaltech has a bright future ahead. As the digital transformation of the legal industry continues to accelerate, supply will rise with demand; as will revenue. And amid the vast SaaS landscape, sophisticated investors can be sure there’s a “PayPal of legaltech” on the horizon.
Raj Goyle is co-founder and CEO of Bodhala, a subsidiary of Onit, which acquired Bodhala in September. Before founding Bodhala, Goyle served two terms in the Kansas House of Representatives. A leading voice in legaltech, Goyle is frequently cited on investment, diversity and legal spend issues in publications such as The Wall Street Journal, Business Insider and Law.com. He is a graduate of Harvard Law School and Duke University.
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