London, 1928. Alexander Fleming returned to St. Mary's Hospital after a holiday and began the day by examining his petri dishes. All of them contained colonies of the infectious bacteria Staphylococcus but in one of them he noticed something surprising; a mold was growing instead of the usual colonies. Somehow, a tiny piece of fungi had landed in the petri glass and secreted something that prevented the Staphylococcus bacteria from growing. By accident, Fleming had discovered the antibiotic penicillin; an effective remedy for tuberculosis, scarlet fever and syphilis, and possibly the most important medicament ever discovered. An estimated 200 million lives have since been saved by that serendipity.
Likewise, it was not exactly the plan that John Engholm should lead one of the most successful legal tech adventures in Scandinavia when he quit his job in a major Swedish law firm to work as general counsel at Serendipity, an investment group that builds companies around innovative researchers. Nevertheless, that is what happened.
Today, Engholm spends 90% of his working hours on InsiderLog - a legal tech tool that was originally developed to solve an internal issue in Serendipity. The product is used by more than 350 companies, and they are trying to capture the European market with support from a substantial exit. This is an unusual legal tech bootstrapping story but is it too unusual to imitate?
In 2016, the EU's Market Abuse Regulation introduced and enforced new stricter rules for documentation to prevent insider trading. With five publicly traded portfolio companies, Serendipity was hit hard by the amount of paperwork the regulation forced them to do.
“We were prepared. But even though we knew what to do, it took up a lot of our time in practice. It was very manual and very boring, to be frank; just moving data back and forth from email to excel sheets, noting timestamps manually, and trying to keep track of different versions of a document,” Engholm explains to Legal Tech Weekly.
“It is very simple administration; it just takes a lot of time. But the fines are huge, and it’s often managed by a very over-qualified person in the company. It is not something you can delegate to the most junior assistant because they should not know that this information even exists. You often have an in-house legal counsel or in smaller companies, it might even be the CFO that manually sits there and types stuff into excel. So, we developed InsiderLog because we needed it,” he elaborates.
The first idea was to make a simple setup with some excel macros or Outlook distribution but after talking to some IT-people, he realised that the step to make an actual product was not that big. He created a powerpoint with mock-up screenshots with some designers and then made contact with other legal counsels to see if they wanted to co-fund the development. All the positive feedback encouraged them so much that they decided to launch a commercial product.
“It was a well-defined problem and we had a tailored solution. That made the decision quite easy for a lot of firms, so a simple email campaign kept going from there. We got a ton of responses, went around town to different meetings, and once we had a critical mass it started spreading through word of mouth,” Engholm explains.
A year after the launch, they were contacted by Euronext that operates the stock markets in Paris, Amsterdam, Brussels, Lisbon and Dublin. After a few negotiations, Euronext acquired a majority stake in the company. InsiderLog is now the market leader in Sweden, has a big chunk of the Finish market and the tool is used by companies in 10 different markets. Currently, they are in the middle of a European expansion.
“I don’t know of any other legal tech company that made a substantial exit within a year,” says Engholm.
So what was the key to your success?
“When meeting with other lawyers at prospective customers, it was a huge success factor that I was not just this IT-consultancy guy trying to sell them something. I was more of a peer. I was also working as a general counsel of a listed company, so I could say: “I know your pain, and I have a simple solution that solves this so why should you not also use it?” From a credibility and trust perspective that was an important factor,” answers Engholm.
Then he elaborates: “We also had the advantage, like those working with GDPR, that there are big sanctions backing the regulation. Of course, it helped because if you mess up, which is quite easy to do, you face the risk of big fines from the authorities. From this perspective, InsiderLog was a must-have rather than a nice-to-have.”
You have seen both sides, now. You have been a lawyer and now work as a legal tech provider. Do you have any advice for other legal tech providers who are trying to break into the market?
“The key thing is really to keep it simple and remember that no one cares about your technology. I’m not interested in whether this is blockchain or AI or whatever. Focus on the problem it solves. Our product is a simple plug-in java application, but it solves a big practical headache. A lot of tech-companies focus too much on their own technology which makes the product sound more complicated than it is, and people don’t really understand it. They are creating a hurdle for themselves by making it more obscure for the lawyers because most lawyers are risk-averse, and if they do not understand how it works then they might be more reluctant to use it,” says Engholm.
Do you think there is too much bullshit in legal tech?
“There’s a lot of bullshit in all sorts of #tech. It is as if I would go around bragging about how we use “Secure Socket Layer” for email encryption. Yeah, who cares? I just want the message to be delivered.”
It is a rare incident that a legal counsel develops a commercial product and tries to make a profit of it. Engholm believes that the reason why it was possible for him, has to do with the company culture of Serendipity which is synonymous to “accidental discovery”.
Their legal department was already working as an external law firm selling consultancy to other companies. This model is used across the whole company as the HR-department also does recruitment and the marketing team takes projects for external companies. In this way, they have more specialised knowledge available without having to carry the heavy burden for salary expenses.
“I think it can be copied by others. A lot of companies have resources that are not optimally used. There is more capacity than is being utilized and that capacity can be sold to someone else,” says Engholm, “A lot of companies could have that approach and make their people more business oriented. We cannot just be this tired internal department that only does what we are told with a minimum amount of effort,” says Engholm.
He believes that general counsels and law firms are perfectly capable of imitating the model, invent new legal tech tools and bring them to the market. In fact, he is baffled that no one did it before him.
“Law firms already have a customer base, they have the credibility and they definitely have the resources. They just do not do it. We had to start from scratch without any traction in this market and we were still successful. It is weird that law firms are only turning to small startups to get tools that are mainly made to make the law firms more efficient internally, without any ambition to change or add to their business model. Why do they not develop, or at least buy, tools that the clients can use on their own against a monthly fee? That kind of license revenue is so much more scalable than producing documents and selling hours.
I’m not talking about replacing law firms, since few in-house counsels turn to their law firm for the manual administration of insider lists anyways. It is more about law firms recognising the needs of their clients and offering new services that also diversify their own revenue streams.”
There are examples of law firms trying to develop tech tools but then realising that they are not really qualified to develop technology?
“Why should a law firm not be able to hire a software developer? I am not saying that lawyers should do the actual coding, but it seems simplistic to say that a law firm could not develop and launch a software product. It is just a matter of getting the right people.”
But then you develop what lawyers think they need and not the innovation that they did not know they needed?
“I guess you need a bit of both. I do not think our product would be anywhere near as good as if we had not been lawyers. We understood the need perfectly; we did not have to do any market research, or interviews with customers, or guess how it should work. We often had to hold back our developers because they wanted more features and cool functionalities, so we had to say “Wait, that is not required, and nobody wants a fancy product”. I think the best legal tech team is both lawyers with actual experience and fresh graduates who are tech-savvy. I am just saying that law firms should be able to pull those teams of relevant people together and build products themselves, instead of relying on an ecosystem of startups to provide them stuff,” says Engholm, and then finishes with an encouragement to the legal industry:
“If I was a managing partner of a law firm, I would think that my organisation was well-equipped to do this. We need to bring in some competent people and do it ourselves. If a startup with a bunch of law graduates can do it, why should we not be able to with all the resources and insights we have?”.