Legal tech is booming: Are we heading for crash or shooting for the stars?

There is a massive boom in legal tech investments. Now, the billion-dollar question that is being raised multiple places is whether the development marks the final breakthrough for legal technology, or we are witnessing a legal tech bubble that is about to burst?

August 31, 2020

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Legal tech is booming: Are we heading for crash or shooting for the stars?

A few weeks ago, the company behind Legal Tech Weekly, Contractbook, raised €3.5M from a syndicate led by Gradient Ventures, Google’s AI-fund, and the Nordic venture capital fund byFounders. An investment of that size is not massively significant in a legal tech context anymore, but the fact that it comes from a Google-backed VC is remarkable. It marks 2019 as the year that big tech entered the legal tech scene as Amazon also unveiled a new trademark platform earlier this year. This new trend underlines the massive boom in legal tech investments in the past few years. Capital is finally flowing into the industry. Now, the billion-dollar question that is being raised multiple places is whether the development marks the final breakthrough for legal technology, or we are witnessing a legal tech bubble that is about to burst?

There is no doubt that investments in legal technology have boomed in the past two years. The exact amount is uncertain since not all numbers have been disclosed, but an article in Forbes suggests that in 2018, investments in legal tech saw a 713 % growth. In 2019, the total amount of investments in legal tech seems to have already surpassed 2018’s investment in September when the numbers reached $1.2 Billion. Venture capital is flowing into the industry, so there is no reason why next year couldn’t be another record year for both investments and exits. The investments obviously come in all sizes but there has been already been a few that are significant enough to be potential game-changers in the global legal industry: A company like LegalZoom has received $500 million in funding, Atrium received $65 Million to replace lawyers, and earlier this summer Thomson Reuters acquired HighQ.

Legal tech is booming: A VC-bubble?

This explosive development has let some to ask whether we are experiencing a VC-bubble and a general legal tech hype that will eventually lead to a legal tech crash.

As Artificial Lawyer rightly points out, some otherwise promising companies have had to close because of lack of funding. He also notices that there are still very few publicly listed legal tech companies, no unicorns and that the legal industry is a relatively small market. Even though he goes on to conclude that: “Investment into legal tech may be expanding like a bubble, but it is nowhere near close to its limits”, the fact that we even have this debate testifies to how severe risk-averseness nature of lawyers really is. As soon as there is a bit of momentum around legal tech, the fear of a bubble arises.

It is, of course, worth mentioning that we have earlier warned about a more technology-specific AI-bubble caused by cheeky startups creating overhype around pseudo-ai solutions that are even Mechanical Turks or just simple automations. And as noted in that same article, we might even be heading towards a general recession in the global economy. That might, of course, slow down investments and threaten some liquidity of some tech companies. But luckily for legal tech, law firms are usually not that affected by recessions as the legal demand is constant. And what is even more reassuring, the 2008 crisis actually paved the way for the current boom in legal tech according to some experts.

Legal consumers are calling the shots

Instead of a luring legal tech crash, there are signs that the explosive growth in legal tech investments is a result of an increase in legal tech usage. As pointed out in elsewhere, investors have been reluctant to invest in legal tech because of the slow adoption in the market. Because “why would they? There are some lawyers still drafting up briefs and contracts in Corel WordPerfect on a Windows 95 machine.”

Maybe that is the reason that some of the best-funded companies offer legal tech solutions that are not directly used by lawyers but rather challenges the traditional legal industry by making legal services cheaper, more accessible, efficient and transparent for the legal consumers. Many of these services can afford to ignore the old-school parts of the legal service providers and their slow-paced technology adoption as long as there is a sufficient consumer-demand.

As noted by Bob Ambrogi, “Of the 41 companies where the investments are known, at least 12 are focused on some aspect of contracts and contracting — including contract management, contract review, and contract automation.” That might because contract-related matters are often high-volume/low-complexity matters that are easily solved by the consumers themselves when they have the right tech tools available. These contract management platforms simply do not require the traditional legal services providers to adopt the technology in order to be successful. Instead, they are known for empowering legal clients and since they can work across different jurisdictions and language-areas, they are also super scalable.

As Mark Cohen points out in his well-written piece about the phenomena, it is the customer-centric providers that turbo-charge the legal tech movement. While the practice of law is unchanged, the delivery of legal products has changed immensely. Since the global financial crisis, the consumer dynamic has transformed radically, and law firms have lost the hegemony to the big four consultancy houses and all the before-mentioned contract management platforms. Legal consumers have gained more power, so law firms cannot dictate the prize and delivery model of legal services. As the legal consumers are getting used to using digital products in all other parts of their professional life, they will also demand that their legal work is handled with the same efficiency:

“Why the sudden legal investment boom; what’s changed; and what does it portend? Short answers: legal delivery is ripe for scaled transformation; legal buyers are driving change and have disaggregated legal practice from the delivery of legal services; and the lawyer-centric, labour-intensive, fragmented legal industry is ripe for tech and process-driven consolidation,“ Cohen remarks. Elsewhere he notes that “Clients — not lawyers — are now calling the shots and driving the transformation of the legal industry.”

With all that said, the consumer-demand has also changed the legal industry in the past few years. Despite being known as conservative, risk-averse and technophobic, the industry is taking important steps as more law firms establish innovations labs, tech hubs and development partnerships. With an industry this ripe for transformation that so far is largely untouched by technology, tech providers also have a massive potential to disrupt significant parts of a large and profitable space.

You can never say that there are not parts of the legal tech industry that is over-hyped and maybe even over-heated. But the market is still massively under-developed and the consumers consistently demand new delivery models that are mostly enabled by technological innovation. In that light, the current boom might only be the beginning of the great transformation.

As noted by Artificial Lawyer: “Investment into legal tech may be expanding like a bubble, but it is nowhere near close to its limits.”

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