Legal Tech Makes Its Case With Venture Capitalists, Tops $1B In Funding This Year – Crunchbase News

On Sep 23, 2021

The legal world’s sometimes glacial pace does not obviously lend the industry to being disrupted by new technologies—but venture investors seem to be betting big on exactly that.

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“When you look at the cloud and other technology, the legal industry has been resistant to it,” said Jesse Wedler, a partner at CapitalG who has been watching the legal tech space for about eight years. “Now you are seeing people have an increasing appetite for this technology. But it’s still early innings—like the first or second inning.”

Legal tech companies have already seen more than $1 billion in venture capital investments so far this calendar year, according to Crunchbase data. That number smashes the $510 million invested last year and the all-time high of $989 million in 2019.

Industry insiders say the increased investment is due to challenges brought about by the COVID-19 pandemic and what was already a plodding, but steady, change in the legal world to accept cloud and other technologies that are attempting to bring the sector into the 21st century.

While dollars are higher, deal flow is a little behind previous years, with 85 funding rounds being announced so far in 2021, well behind the pace of 129 deals last year and 147 in 2019. Some of the largest rounds in the sector this year include:

San Francisco-based Checkr, a platform that helps employers screen job seekers through initiating background checks, raised a $250 million Series E at a $4.6 billion valuation earlier this month;
San Francisco-based legal services provider Rocket Lawyer closed a $223 million venture round in April; and
Boston-based on-demand remote electronic notary service Notarize raised a $130 million Series D in March at a reported $760 million valuation.

“This mainly is a paper-based industry,” said Patrick Kinsel, founder and CEO at Notarize. “However, COVID exposed inefficiencies and it forced people to look at everything you do and explore new ways.”

COVID and the cloud

Just as in many industries, the cloud and other new tech had been slowly changing the legal world for more than a decade. However, after COVID caused offices to close and legal processes and documents to go virtual, adoption of those technologies skyrocketed.

With those changes, investors started to eye technologies that took many firms “in-house” processes and moved them to the cloud—many involving documentations and filings as well as tools to help better communicate with clients.

“There’s no doubt COVID provided huge tailwinds for legal tech growth,” said Jack Newton, co-founder and CEO at Vancouver-based legal tools platform Clio, which raised a $110 million Series E at a $1.6 billion valuation. “It was the forcing factor for firms that had put off their transformation.”

“Since the midpoint of last year, we’ve seen an acceleration of our business,” said Vishal Sunak, co-founder and CEO at Boston-based management tool developer LinkSquares, which used that increased interest to help raise a $40 million Series B in July.

While the legal community has traditionally been slow adopters of new technologies, Sunak said that is starting to change as general counsels are now coming from a “cloud-first” generation and know the importance of things such as data insights that can help predict outcomes. Just as data and AI has changed marketing, sales and finance, the legal community is now catching on, he added.

“They say, ‘I want that too. I don’t just want to be a cost center,” Sunak said.

Wedler, who led his firm’s investments in legal tech startups Notarize and Oakland, California-based legal discovery platform Everlaw, added that many parts of the $750 billion global legal services market revolve around issues and processes technology can make significantly better.

“There’s so many repetitive processes technology can help with,” he said. “Technology can make so many of these processes faster and more compliant.”

Sunak, whose company provides contract management tools for in-house legal teams, said advances in AI and language processing are helping drive new innovation in the staid sector.

“I just think you are seeing the changing of the guard,” he said.

Investors see the appeal

Those changes and advancements in tech are causing VCs to take note. While some investors have eyed the space in the past, Sunak said he now sees more knowledgeable VCs looking to invest.

“This raise, I see more investors have knowledge about contracts and legal tech than I anticipated,” he said, adding the company received multiple offers during its fundraise. “I didn’t have to explain the market.”

In 2019, Clio—which provides web-based tools that help law firms in practice management and client collaboration—raised one of the largest growth equity rounds in the legal tech space by securing a $250 million Series D.

“We saw a tsunami of interest after our Series D,” Newton said .

“Given some of the recent shifts in the sector, however, we believe the time is right for legal tech to take a major step forward,” said Brady Broadbent, partner at Sorenson Capital, which invested in LinkSquares.

“The environment has certainly become more competitive over time,” he added.

No Goliath

With no large incumbents in this space, how investors may see returns becomes a popular question.

Horizontal software companies like Microsoft or Salesforce1
could become interested in the space—as legal tech has data and analytics those types of companies find useful, Wedler said.

Some companies in the space also have found private equity a viable exit, with films like Providence Equity rolling up players such as HotDocs and Amicus Attorney several years ago.

However, perhaps more interesting to some startups is the legal tech space even saw an IPO this year, with Austin, Texas-based Disco going public on the New York Stock Exchange in July. The company’s market cap now sits at $2.8 billion.

One thing most seem certain about is that while the legal world’s tech revolution may have been brought on by a once-in-a-century event—there is no turning back.

“Customers said they did this because of COVID, and they are not going to go back now,” Wedler said.