Legal tech companies do a pretty good job of getting angel funding, but sometimes it is harder for them to get interest from venture capitalists. Even so, the more important task for most in the sector is “access” to the market, based on interviews with several of those familiar with the current environment.
When asked about the investment climate, Roland Vogl, executive director of the Stanford Program in Law, Science and Technology, said the best way to describe the current climate for legal technology companies is “sporadic.”
“There is no trend towards investment in legal tech,” he told Legaltech News. “It has always been a somewhat exotic category from a VC [venture capital] perspective, and it continues to stay that way. However, angel investors with a deep understanding of the legal space are investing in legal tech, and can get really good returns.”
“I think the outlook for legal start-ups to attract angel funding are pretty good,” he added. “There is a growing number of investors that I have met who had successful legal tech exits themselves, or were law firm managers or senior execs at the large legal information companies. I am trying to connect the start-ups with these investors, because they bring really smart money to the equation. These investors can help the start-ups tremendously not only with their investment, but also with their industry insights and connections.”
VCs, though, may not jump into legal tech startups. “For a variety of reasons there is hesitance among VCs to invest in legal tech companies,” Vogl adds. “Frequently, VCs with no background in the legal space need to be educated about the significant size of the opportunities in the legal market.”
Moreover, Vivek Wadhwa, a fellow at Stanford’s Rock Center for Corporate Governance, said VCs “really don’t understand the legal tech market, but do understand the big opportunity for automation.”
“Technology is making it possible to automate almost any human job that requires thinking and analysis,” he added. “For better or worse, computers are now developing the ability to do this better than humans. So there are immense opportunities.”
He advised entrepreneurs starting legal tech companies “to position this as a disintermediation opportunity and explain the size of the market.” He also added, “VCs look for growth and sizeable markets. They look for companies that enter existing sectors and disrupt.”
From Wadhwa’s vantage point, the outlook for investment in legal tech companies is “excellent—as in many other fields.”
In addition, Vogl recalls that panelists at a Jan. 12 CodeX “Building the Legal Start-up” program explained that “lawtrepreneurs pitching VCs have to have a good explanation on the total addressable market (TAM) for VCs. The VC business model only works if it's a very sizable market and they can make a multiple of their investment.”
“One of the legal tech investor panelists, Miriam Rivera [of Ulu Ventures], also pointed out the following: If legal tech start-up founders are lawyers that don't have a technical background which they can leverage to build the product, they should also have a technical co-founder to increase their chances of attracting VC funding,” Vogl said.
Similarly, Jules Miller from Hire an Esquire has highlighted the necessity for legal tech companies to try to get to sales and revenue without VC funding, Vogl recalled. Perhaps, he said, they will have “a bit of friends and family/angel funding.” Under this scenario, they go to VCs to “scale and build out the business.”
“That makes a lot of sense for legal tech start-ups,” according to Vogl.
When asked about investment in legal tech startups, Joshua Kubicki, president of the Legal Transformation Institute, pointed out that generally it takes longer for legal tech startups to find their niche. “The market is still heavily fragmented,” he said. There tends to be a good amount of angel capital and seed funding available for legal tech startups, he explained.
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