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.
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.
According to various start-up founders:
“This mainly is a paper-based industry. However, COVID exposed inefficiencies and it forced people to look at everything you do and explore new ways.”- Patrick Kinsel, founder and CEO at Notarize
“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.
Here are a few observations on what is going on:
- Impact of 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. 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.
2. Cloud-first generation: Many 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, and many don’t just want to be a cost centre
3. Increasing investor knowledge: The increasing market and scaling legaltech start-ups are causing VCs to take note. While many investors eyed the space in the past, more investors have knowledge about contracts and legal tech, and founders do not tend to have to explain the market
However, the market is still small albeit growing and no ‘goliaths’ exist in the space. With no large incumbents, how investors see returns remains a popular question.
This may chance if, for example, horizontal software companies like Microsoft or Salesforce could become interested in the space—as legal tech has data and analytics those types of companies find useful, Wedler said.
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.