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Legal tech booming while pace of investment in legal tech is stalling

Chatting with Bob Ambrogi, while he was visiting Seattle this week, we agreed that legal tech was growing like at no other time.

Tech’s been around legal for a long time and we’ve had a lot of folks like he and I involved in legal tech companies and its coverage for a couple decades or more. But the last three or four years have brought us a slew of companies and solutions disrupting legal like never before.

So I was surprised to read Holden Page’s story at crunchbase that investment in legal tech startups hit a hard peak in 2015 and has been on the decline since.

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.

Here’s the peak and valleys of venture capital investment depicted.

legal tech vc investment

2015’s peak was made by a couple big investments. $125 million in Chicago-based Relativity and $71.5 million in Avvo, representing the majority of the $132 million total raised by the Seattle company.

While VC investment is on the decline, VC money may not be needed. It doesn’t take as much money to get a tech company up and going as it has in the past.

Open source, lower hosting costs and social media for marketing/selling has made it possible for those willing to put in sweat equity and, in some cases, to take a small investment. Ambrogi’s charting the growth in the number of legal startups, now close to 700, is proof positive of that.

Page also notes that seed-stage funding (smaller investment until business can cash flow or until it is ready for further investment) in legal tech companies has risen in 2017. For many companies a seed investment is all they’ll need,

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.

Page cautions that larger investments could also remain tough in legal with bar associations fighting innovative legal services and lawyers slow to grasp technology.

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.

Smart legal tech entrepreneurs should not view the decline of venture capital investment as limiting their chances for success. Most companies do not need venture capital and raising such money is not always a sign of success. Ask around, raising money can be a curse.

VC money in legal tech may be on the decline, but law firms and large traditional legal players such as RELX (LexisNexis), Thomson Retuter (West), and ALM should not expect to see disruption in legal slowed. Both law firms and these companies will be heavily impacted by legal tech startups which never received venture capital.

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