Trends in Legaltech Investing
Remote work and exit activity have driven investor conviction
At the onset of the Coronavirus pandemic, many believed that investors would become hesitant to fund new investments. In the knowledge worker economy, uncertainty focused on how individuals and organizations might adjust to remote work. However, once that shift occurred, it became clear that organizations demanded improved tools and technologies.
As a result, venture capital investment overall grew in 2020 and the first half of 2021: However, according to Pitchbook’s data, $156B was invested in startups and $74B was raised by VC funds in 2020, and $150B has already been invested in startups through the first half of 2021. And contrary to popular narratives regarding corporate venture capital (CVC) activity in uncertain economic environments, CVCs nearly matched their 2018 high water mark by investing $68B in 2020.
As in other sectors, legal technology (“legaltech”) also experienced an influx of capital in 2020. Legaltech funding grew to an all-time high of $1.3B in 2020, up 24% from 2019. This trend continued in the first half of 2021, as investors appear to have grown comfortable allocating capital remotely. First half 2021 funding of $1.8B has already outpaced the entire prior year, with drivers of this funding in the legaltech market including:
- The rise of remote work and required adoption of new technology solutions as a result of Covid-19
- Recent exit activity in legaltech, most notably the IPOs of InTapp and LegalZoom, which helped drive conviction in the category
- Increased willingness by law firms to adopt cloud solutions, versus requiring on-premises (“on-prem”) storage for legal documents
Including data from PitchBook and NVCA’s quarterly Venture Monitor report, this analysis shares highlights from the U.S. VC industry as a whole, as well as observations specific to the legaltech startup market, based on Touchdown’s work within the sector.
Legaltech & VC Funding Highlights
2020 was a record year for VC activity in the U.S., with $156B invested. However, the total deal count decreased from 2019, indicating that VCs concentrated funding in larger deals for fewer companies.
The legaltech sector, however, experienced growth across the board with $1.3B invested in 196 companies, an all-time high in both deal value and volume. Specifically, online legal service providers and document lifecycle management solutions received a significant portion of the funding.
Here is the legaltech deal count compared to the overall U.S. market:
Covid shifted operational approaches to legal services: historically, security and privacy concerns slowed adoption of cloud-based solutions, with many law firms lagging the transition seen in other industries. However, work from home increased appetite for cloud-based solutions. In tandem, innovative document and contract management solutions attracted significant venture investment, as did litigation-focused solutions, e-discovery tools, and others.
In CVC, corporate funds deployed 48% by dollar value and participated in 26% of deals in the U.S. in 2020. As shown in the chart below, the $68B invested by corporations was nearly $10B more than 2019, which suggests CVCs stayed in the market despite economic uncertainty, as my colleague Scott Lenet forecasted in this post from 2019.
CVCs are an important source of capital for legaltech and professional services-focused startups. In particular, CVCs can be especially beneficial to technology providers selling into large professional services organizations, or those bridging the gap between legal and business professionals. For startups developing such products, the expertise and guidance of large corporations, particularly in understanding how a tool is best integrated and sold into organizations, can be critical to success. The following CVCs have recently been particularly active in legaltech and adjacent categories:
- Lexis Nexis Group, a provider of computer-assisted research
- M12, the corporate venture capital arm of Microsoft
- Salesforce Ventures, Salesforce’s cloud-focused CVC arm
- MDR Lab, an accelerator program in the UK run by Mishcon de Reya
Notable Legaltech Deals and Exits
- Online legal solution provider, LegalZoom.com raised $535M in its June 2021 IPO, with a market capitalization of $5.8B at IPO.
- InTapp, a provider of business management software for professional services, raised $273M in its IPO in June 2021 at a $1.5B market cap.
- In August 2021, legaltech provider Litera announced its acquisition of Kira Systems. Litera has acquired 6 companies so far in 2021.
- Leading professional services software providers AbacusNext and Zola Suite announced a merger in July 2021 to provide “the strongest portfolio of legal software solutions on the market.” In this transaction, Abacus acquired Zola Suite with the backing of its sponsors, Thomas H. Lee Partners, Goldman Sachs, and Morgan Stanley.
Legal Innovation In the News
- Did a robot write your contract? — Seeking increased efficiency and shifting lawyers’ time to higher value work, legal professionals continue to look for tools and technologies that can help automate document drafting.
- Knowledge management has become a focus for law firms, but hiring battles may slow progress — Law firms are investing in knowledge management innovation, but there may not be enough management talent to implement these solutions.
- The market may expand, as Arizona and Utah jumpstart regulatory reform — New laws and regulations allowing non-lawyer ownership of law firms may expand the number and type of legal practitioners, increasing the number of potential adopters for legal technology and reducing the cost of legal services.
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Adam Lebovitz is a Senior Associate at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs.
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