In 2013, when I first raised money for DISCO, very few venture capital firms were willing to consider a legaltech company.
They thought: (1) lawyers are slow to adopt new technology; (2) selling to law firms is hard; (3) the resulting market size is limited; and (4) the only material exit in legaltech was Clearwell’s sale for $390M to Symantec in 2011.
Fast forward to 2020 and things have changed. Startup investment in legaltech companies has boomed over the past few years: $50M to Ironclad; $50M to Kira; $12M to CaseText; $4.4M to Trellis; and dozens of other financings have followed the growth of the legaltech pioneers.
Last week, Forbes named legaltech companies DISCO and Icertis to the 2020 Cloud 100, Forbes’s annual ranking of the world’s top private cloud companies.
The Cloud 100 is an impressive list. Household names like Zoom, Slack, Stripe, Dropbox, DocuSign, and Snowflake are on it — or were, before their IPOs. The Cloud 100 has a total market cap of $267B. 87 of the 100 companies are unicorns (worth more than $1B). And the average exit value for Cloud 100 alumni at IPO or in an acquisition stands at nearly $3B.
What changed to turn all eyes on legaltech?
Let’s compare the old way of thinking to what the legaltech pioneers have proved out over the last eight years:
Old thinking: Lawyers are slow to adopt new technology.
New thinking: Lawyers demand technology designed and built for their unique ways of working.
Lawyers love new technology in their personal lives: lawyers use iPhones and drive Teslas. The idea that lawyers are Luddites is wrong.
What makes lawyers different is they have a super high product bar for products that they use in their practice. This is because legal cases are often mission-critical for the client and almost always mission-critical for the lawyer.
Most early legaltech offerings failed to win adoption because they failed to meet this product bar. But startups that build products designed for lawyers will see rapid adoption. After all, Westlaw and Lexis, which are ubiquitous among lawyers, were among the first successful SaaS products in any industry.
Old thinking: Selling to law firms is hard.
New thinking: It’s possible to build an effective go-to-market engine in legaltech. Once built, such an engine is a deep moat.
First, legaltech can be sold not only to law firms, but also directly to corporate legal departments — which exist in every company and handle all kinds of legal work. In fact, even when legaltech is sold to law firms, law firms generally pass on the cost to their corporate clients. Legaltech can also be sold to government entities and non-law-firm service providers.
Second, selling to law firms is not uniquely hard, it is just different. Law firms are deeply decentralized. A sales team needs to treat a law firm not as a single entity, but as a loose collection of partners, many of whom make their own buying decisions.
Old thinking: The resulting market size is limited.
New thinking: The true market size is $437B of corporate spend on legal services: the legal line item on every corporate P&L.
Thinking of legaltech as “vertical software” with a limited market size is misguided.
Some software sold to law firms, like CRM for a law firm, is vertical software: it’s sales software tailored to the law firm vertical. The market size for this kind of software is indeed limited. But this is not what we mean by legaltech!
The right way to think about legaltech is that it is technology sold to anyone that consumes legal services — which is every major enterprise! Legal is one of the last horizontals, like sales or marketing or support, that every company has but that doesn’t have a dominant software company.
The prize is capturing some percentage of the $437B market for legal services. The macro bet is that over the next 5 - 10 years, legal services spend will shift on the margin away from bespoke human labor and toward legaltech.
Old thinking: There are (almost) no big exits in legaltech to point to
New thinking: True — but about to change!
The Cloud 100 list is a clear proof point that legaltech is no longer a niche market — it can offer mature technology that’s impressive regardless of industry, and investors are taking note.
The first few companies to achieve real scale will have an opportunity to be true category creators for legaltech — as Salesforce was for sales or Amazon for ecommerce.
Legaltech is booming now. And real growth in legaltech has only just begun. Over the next 5 to 10 years, legaltech will establish itself as a large, fast-growing category of enterprise software. And one or two of today’s startups will become category creators — changing the world, producing billions of dollars of equity value, and helping to strengthen the rule of law.