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This year we’re on pace to set records in Legal Tech funding. Crunchbase and CB insights suggest it’s too early to party. Here’s an alternative toast.
CB Insights reported this October an uptick in overall venture funding of Legal Tech companies yet noted that seed money is down. This shouldn’t have come as a surprise since signs of winter were visible as early as last year. CrunchBase provided an extensive yet grim breakdown of Legal Tech funding. Both reported that the number of deals in Legal Tech was up however, a downturn in investments is affecting startups across all industries. This downturn even resulted in Crunchbase questioning if venture capital has peaked and Techcrunch declaring the end of startups.
This year we’re seeing bigger later stage rounds like Casetext raising $12 million for a total of $20.8 million or $24 million depending on who you ask. Likewise, we’ve witnessed record-setting seed rounds like Abfindungsheld $11.5 million (signup) or Atrium LTS $10.5 million. What we are looking at are anomalies which don’t represent signs of a strong legal market.
Here’s why: when the number of Legal Tech startups cumulatively rises each year but venture funding for this sector remains stable or declines, the net effect is less capital for the sector. This results in lower evaluations for younger startups. It’s also the reason why many are raising funds via Initial Coin Offerings (ICO) which further dilute evaluations. Samples are Smartcontract.com or Agrello. Just like a few good spirits will boost the taste in any blended whiskey, they also disguise the quality of the other added blends.
I stumbled upon this insight when skipping year by year in Legalpioneer Where. I noticed that the total amount raised remained stable or declined year after year as the number of startups grew, especially between 2015–16. The reason why this emerged from our database is the result of our tracking methodology which is different than Crunchbase and CB Insights.
The Legalpioneer database consists of legal- and regulatory startups with their approximate month and year of birth. Contrary to others, we go to great lengths to track dates to a month-level in order to provide this alternative view of the legal landscape. Adding the total disclosed investments for each startup enables us to expose the total amount of funding for a given generation of startups. Example: Peppermint Technologies raised its first round in 2015 but was founded around 2010 therefore we display them in the 2010 year bracket.
Tracking total investments for startups founded in a given year reveals the maturity of innovation in the legal sector in seasons. As Crunchbase noted as well: Legal Tech Class of 2015 was extraordinary. We noticed that 2011–12 is even better. That’s how I discovered: Legal Tech is like vintage wine.
Zooming out from quarters, seasons, all the way out to the entire lifecycle of startups offers another glimpse. One indicator for a healthy sector is the influx of capital, the other may be the return of that capital to investors. Barring death, there are two possible outcomes for startups: Aquisition or Initial Public Offering (IPO). Apptus is on track to IPO soon and is valued at $1.75 billion but next to them I have no others in sight.
We may even debate if Apptus fits the definition of Legal Tech but the fact is, IPO is an extremely unlikely exit for a Legal Tech startup. One reason may be that seeding startups with small amounts mean they have less time to prove their model works. Having a short runway in a market with notoriously long sales cycle is disastrous.
This leaves acquisitions as the most lucrative outcome. I’ve looked at over 80 acquisitions (signup) of companies in the legal industry stretching as far back as 1865. Usually, the price tags of these companies remain secret but it should be a safe assumption that it’s dropping with each new acquisition.
To summarize: an over-supply of new ventures in conjunction with a limited outlook on lucrative returns of investment is making the entire legal industry thirsty for cash.
This shouldn’t feel like a hangover. More deals means more activity and attention for the legal sector. Cheaper startups make more attractive acquisition targets for incumbents resulting in quicker not higher returns of investment. Increased competition for cash may actually produce more sturdy and diverse types of Legal Tech. Maybe these companies will broaden their horizons and not have such a strict view on what Legal Tech is supposed to be and who they should sell it to.
Here’s where Legalcomplex can help. Legalpioneer Recon (from Reconnaissance) is our next project in support of startups striving to succeed. We check if your company name is already used by any of the over 4000 startups in our database. You can match your concept against them and see if you are unique. Find out how many competitors you have and how much funding they have. Connect with like-minded companies and maybe partner with them. If you want this now, let us know here.
I’ll confess, I’m a single malt guy. Yet I’m open to any unique blend that lifts my spirit and that’s why I’m offering Recon for free.
Originally published at www.legalcomplex.com on October 30, 2017.