Untapped Potential Amid Hesitation: The Evolution of the Legal Tech Startup Landscape

Topics: Alternative Legal Service Providers, Business Development & Marketing Blog Posts, Corporate Legal, Law Firm Profitability, Law Firms, Leadership, Legal Innovation, Midsize Law Firms Blog Posts

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In spring 2014, I attended ReInvent Law in New York City with hundreds of others interested in legal technology.

It was then that I realized that my software company, Traklight, was part of this ‘LegalTech’ vertical.

Being labelled as legal tech can be a double-edged sword — the law is a large untapped market, but investors are hesitant to back legal tech startups.

It’s no secret that the technology adoption within legal has been an evolution rather than a disruption. Over the years, lawyers who are purchasing software insist on bespoke or custom solutions rather than using proven mainstream alternative products for major workflows like accounting or customer relationship management. At the same time, many attorneys are extremely vocal about their reluctance to adopt early — never wanting to be first, fifth or even the 10th firm to buy-in. Also, many new companies make time-consuming, expensive changes and feature-additions in order to land clients.

The legal tech vertical has exploded in the past three years to include more than a thousand startups and early-stage companies. The harsh truth is that many of these companies will not make the one- or two-year mark because many wither on the vine after a prolonged drought of sales and investment. This points to several unique challenges faced by legal tech startups with respect to revenue and capital, such as:

  •        Long sales cycle, which can mean a failure to hit venture capitalist (VC) goals if funded;
  •        Scarce capital, because of the long sales cycle;
  •        Law firm aversion to operating with strong business principles;
  •        The total addressable market with respect to verticals like FinTech or EdTech is comparatively small;
  •        Lack of a “Unicorn” — there has not been a huge initial public offering or exit topping that magic billion-dollar mark in legal tech.

Some companies also will cite regulatory issues as a barrier to rapid growth but that is common in other industries. I believe that part of the problem is a lack of awareness of whether the idea has become a company, a product or a feature. Many legal tech founders turn their idea into a product that solves one part of a client’s workflow problem but does not easily integrate with existing systems.

legal tech

Another issue is that legal tech often cannot do the scale-up using the freemuim model to acquire thousands of users because attorneys are often skeptical of free software and unwilling to go off-brand and take a chance on a new company. The largest brand companies still carry much weight. Overall, people want one-stop shopping and ease of use for any technology, and lawyers are no different. Without investment and a struggle for sales, we simply have too many small companies in the legal tech space. The best path to success is sales revenue but often that path is too onerous, as well.

Innovators should consider the following:

  •        Strategic partnerships with large established companies to leverage their brand, build-up their customer base, as well as integrate and improve upon the product. Partners can provide pilot funds, technology and customers.
  •        Collaboration among innovators to create a robust offering through either integration or actual combinations of products or features. Sharing overhead and sales resources would be an additional bonus.
  •        Roll-up of the various complimentary products into one new, large brand by either investment or the utilization of a large consulting or accounting firm.

The answer is not to halt all innovation by founders, but to create opportunities that support sales and investment while recognizing the above challenges to create a more attractive legal tech sector. Investors cannot be expected to change their requirements or thesis; however, strategic partners can work with the innovators to provide customers and investment.

CTA – Investors and strategic partners are welcome to attend our inaugural Evolve Law Summit on April 4th in NYC where we hope to create partnerships and investment, more information is here . The summit will be followed by a happy hour where the public can view the legal tech innovation, tickets here.

  • This is a very insightful post. There are too many small legal start-ups that are not real companies — they are built around a single focused application that is not scalable across a broad range of law firms. Most lawyers are not early adopters so brand is a big issue for them. Many/most law firms will not buy into a new brand and prefer the established brands such as Thompson/ReutersWest and Lexis. One consequence is that the legal industry continues to lag behind other service industries in incorporating the benefits of Internet technologies into their delivery models which in turn can lead to lower costs and entrance into latent markets. The prohibition against private capital flowing into law firms means that software innovation occurs outside of the law firm in the vendor market. It would be interesting if there could be a safe harbor for investment in law firms directly that would enable law firms to develop software powered delivery systems that are end to end -meaning that the law firm creates a sustainable competitive advantage by using the power of Internet service models to connect with new categories of clients in an innovative way.