The legal tech field can be a tough one. and one of the most challenging aspects is fundraising. Finding investors who understand what you do can be difficult. Our recent "Investment in Legal Tech" event brought together an enthusiastic panel to try and shed light on this issue.
Our panel was moderated and hosted by Lynn Loacker, Managing Partner at Davis Wright Tremaine. She was joined by Jake Heller, CEO at Casetext; Jules Miller, COO at Hire an Esquire (and co-founder of Evolve Law); Vipin Chamakkala, VCV Associate at Work-Bench; Nic Poulos, Principal at Bowery Capital; and Lorine Pendleton, a legal tech angel investor.
One of the most obvious question when it comes to the topic of legal tech investment is, what type of legal tech companies or investment opportunities are investors looking for? The investors on the panel were able to identify several things that they would look at when considering a legal tech company. Is the market for that particular product or offering a large one? Is it solving a problem for law firms or in-house counsel? Is it subverting a problem or difficulty in the legal industry? Investors are looking at the legal market and thinking about where your company fits into it, and how big the opportunity is. The panelists weren't necessarily concerned with a company's numbers; their focus was on whether companies had a good product and potential.
Given that the legal sector is a $500 billion industry, there is a lot of opportunity in the legal tech space. Between the amount that companies and firms as well as individuals spend on legal services, there is room for growth and adoption with those who haven't yet taken to legal tech. And for any startup, landing a big contract with a Fortune 50 or 100 company with a considerable budget is a significant achievement, especially if it's something they can roll out to the entire company. But the long lead time that's involved in working with big companies means that you can lose momentum. And within large law firms, there's often no incentive to move quicker or change the way they operate.
It is that inertia that makes the legal tech industry a challenging field. Not all attorneys are technophobes, but there are those who are leery of legal tech. And there are even more attorneys who are afraid of change. Plus, there's a thought (possibly a misconception) that selling to attorneys is an altogether foreign process, entirely separate from selling to any other business. It can be difficult for non-attorneys who are trying to sell to attorneys and law firms to understand their potential clients, and frustrating to those unfamiliar with the seemingly glacial pace at which large firms seem to move. Trying to work your way into the collective conscious of such an inherently skeptical group is a challenge for anyone in legal tech.
But the fact that the legal industry is seen to be such a challenge means that now is the time to work on disrupting it. There are tremendous opportunity for entrepreneurs who are prepared for the challenge. For example, legal tech is a great opportunity for in-house counsel, who are under increased pressure to justify their existence; legal tech offers a great way for them to cut their expenses. And many law departments at companies are growing larger, and that's affecting outside law firms. Being able to present them with legal tech solutions that will help them be more efficient and bring in additional clients is a great sales pitch. For entrepreneurs looking to make significant changes in a particular industry, legal tech would be the field to go into.
Part of successful fundraising for legal tech is finding an investor who understands the industry. Unlike other sectors, the legal tech industry has a longer sales process and a longer lead time in terms of growing revenue. Many investors that come in don't understand the innate differences in legal tech and try to push startups to speed up a process that isn't going to move beyond degrees of slow, and that can create friction and make for a bad match between investor and investment. Fortunately, there's a trend of angel investors who are attorneys that understand the challenges in the legal industry and see the opportunity in legal tech.
The discussion ended with each panelist offering their own tips in raising money:
Jake Heller: Know your business. Don't make fundraising an end in itself.
Jules Miller: Raise money by selling. It's easier to raise money when you have more revenue.
Vipin Chamakkala: Go big or go home. We look at big markets and companies that have big potential.
Nic Poulos: Have a very defined argument for how you're increasing the pie for lawyers and law firms.
Lorine Pendleton: When you're fundraising, know your investor. Target people who know the space.
Darwin Talk: Why LegalTech Companies Should NOT Take VC Money
The evening's Darwin talk was given by Alma Asay, CEO of Allegory Law. As the title suggests, her talk focused on the drawbacks for legal tech companies in taking investment money from venture capital firms. She highlighted six reasons to pass up funding:
Professional investors are looking for quick returns and that isn't really possible in legal tech. And it's hard to convince them to stick with it for the long term.
Fundraising steal time away. Investors will wonder why you don't have more traction in the market when you've spent all your time on fundraising and not on growing sales.
Flexibility to try new things. In legal tech, you have to try new things to see what sticks. With professional investors, you may not have the flexibility to try something new and different.
Equity takes away your stake in the company. If you have to dilute your own equity in the company that you've spent years building, it can be tough to swallow making a lot less of a return on your own investment of time and energy. That's especially true for lawyers who leave a good salary at a law firm to start their own business.
Having a life. Not having to answer to investors means that you can be free to pursue what makes you happy in your personal life, wherever that may be.
There's no need. Working in the legal industry, many would-be entrepreneurs know people with money. Even if it's smaller amounts, it helps to have a preexisting relationship with someone who's willing to believe in and invest in you as a person. Legal tech entrepreneurs also tend to be older, and more able to budget and spend wisely.