Legal tech funding and financial markets have taken a hit recently, but the longer-term picture shows a different and more positive story, with the number of legal tech funding rounds jumping over the past ten years.
In the early teens of this century, such as 2012, the number of legal technology funding rounds per quarter was less than 10, for example, in Q3 and Q4 of 2012, there were only 4, then 2 rounds respectively. Today that would be unthinkable.
What is this chart from Legal complex shows that around this time investment in legal tech started to accelerate and really didn’t see a significant decline until very recently, and even then it was due to much broader macroeconomic reasons rather than anything particularly “wrong” this sector.
As you can see, 2012 was a year where if you mentioned “legal tech” to a group of investors, some might – and understandably – responded, “Huh? What is this?’
But from there, things developed. The average number of investment deals varies from 10 per quarter, to 20, to 30, to 50, and then around 2018 it goes wild. Although there have been highs and lows, and we are certainly at rock bottom right nowquarterly investment deals ranged between about 80 and 120 from Q1 2018 until very recently.
The past four years have shown that the investment world has truly embraced legal technology: the chart shows hundreds investments in just the last few years.
That won’t just evaporate, even if fund managers are no doubt putting pressure on tech companies to 1) cut costs and 2) increase revenue. Pushing these companies to sell now isn’t a great move for many VCs, and in fact, many companies haven’t had enough time to show their true potential yet. So… hang on if you can, is the message.
Also, if you look at the second table below, courtesy of the Global Legal Tech Report from a few years ago, you can see that there was a surge in new legal tech companies between 2015 and 2019 – and that too has increased the number of funding rounds. Most of those companies are still with us, and they’re also where a lot of the VC money is invested. It doesn’t stop there. VCs are now engaged in a market shift that we can trace back to a few years ago.
But pessimists will still want to know the answer to this question: will the current decline become permanent or even worsen, and will we then descend to the small numbers once seen in 2012?
Artificial lawyer doesn’t believe the broader macroeconomic picture says anything particularly negative about legal tech at all. Are some legal tech companies overestimating the size of the addressable market, especially in the short term? Yes, they do. Do some companies post completely stupid valuations, like $30 million in revenue, but claim to be a unicorn soon? Yes, that happens too. And will some companies go bankrupt? Yes, and this is completely expected, even under “normal” market conditions.
Plus, it’s worth noting that this site has heard through the grapevine that, in addition to the well-publicized layoffs at DocuSign, for example, several other well-known legal tech companies have cut headcount over the past six months to cut cash. burns but are otherwise in stable shape. They realized they couldn’t come back for a solid round of funding anytime soon, and so they needed to expand their runway, even if they were still growing revenue.
So, this sector has its challenges, but is generally in solid shape with a mass of investors deeply committed to an ever-growing number of legal tech companies. And while there are far fewer new startups than in 2016, they still arrive year after year. There is also a ton of “dry powder” in the VC world just waiting to be used up.
In conclusion, if you’re looking for money today, then Artificial Lawyer has huge sympathy for you and your company – it’s a tough time to be looking for new money. But if you can hang on and keep going, the longer-term picture is positive because the investing pattern that started a few years ago won’t go away, even if the next quarter or two will be tough for many.
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PS Raymond Blige, CEO of Legalcomplex, commented: “In the short term, we do not expect the fourth quarter to show any improvement, but the early signs of new rounds to come are encouraging. We hope to see a recovery by the end of the first quarter of next year. These are traditionally the strongest indicators of VC funding.”
He also noted that the numbers for the third quarter of 2022 have been revised upwards due to rounds that were not originally taken by Legalcomplex.
Amid The Chaos A More Positive Longer-Term Funding Picture Emerges
