Mergers & Acquisitions

Legal Technology: Why the Legal Tech Boom is Just Getting Started

By Casey Flaherty and Jae Um of LexFusion

In quick succession, legal technology finally saw its first IPOs:

With private money pouring into legal tech startups and based on our own conversations inside the industry, we at LexFusion expect more IPOs on the horizon. Thus, a primer on legal tech as a category to watch. This Part I summarizes the legal market fundamentals driving unprecedented investment in enabling tech—much of which extends beyond the boundaries implied by “legal” as a descriptor.

We’re Playing Catch-Up. The Time For Legal Technology Should Have Been Yesterday.

Size the prize – it’s bigger than you think. We estimate a current market size of $14 billion across 3 related categories that used to require heavy touches from lawyers: legal tech, compliance (RegTech) & contracting (KTech). The new breed of tech in these categories often harness leading-edge advances in machine learning and cloud computing to enable, automate, or wholly displace (very) expensive labor at rates ranging from $400 to $2,000 per hour. The current market size may pale as against the size of the $849 billion legal services market, but the expected growth rates change that story. We expect these 3 categories to triple in size in the next 5 years, while the underlying legal services space is projected to grow at a 4.4% CAGR in the same timeframe.

Silent explosion of demand for legal expertise. Governments have introduced exponential growth in legal complexity as they attempt to manage real-world complexity through legal and regulatory means. Consider that, over a 20-year period, the variety of regulations cited in 10-Ks tripled (3x) while the total volume of citations to regulations quadrupled (4x)—with associated trends in the quantity and severity of fines levied on corporations for failure to satisfy these intersecting legal obligations. Ours is a “law thick” world only growing in complexity, with a resultant increase in demand for legal domain expertise – what’s changing now is that businesses now want and need that expertise leveraged and delivered through process and technology.

Rising legal costs and endemic underconsumption. Historically, legal services have never scaled. Legal productivity gains have lagged behind the broader economy causing legal costs to increase on a relative basis (the classic cost disease). Paired with the uptick in demand, this cost inflation (substantially outpacing CPI) has resulted in an underconsumption of legal services both among individuals and corporations. Individuals tend to forego necessary legal assistance—sometimes characterized as the “justice gap” but more fully understood as the decline of the “PeopleLaw Sector” since the problem extends beyond the low-income population. Whereas growing corporate legal budgets have proven insufficient to keep pace with growing legal complexity.

Disruption is under way but expect some growing pains. While projected CAGR for legal services is 4.4%, the projected CAGR for global data volumes is 26%—to point where “the amount of data created over the next three years will be more than the data created over the past 30 years.” This data explosion complicates even standard legal matters. The concept of due diligence is rapidly changing in M&A, following the path of discovery in litigation/investigation (e.g., the 2.94TB document dump of the Pandora Papers comprising “almost a million Bibles of data” is routine from large corporate litigation perspective).

A pivot point appears to be upon us. Considered unthinkable a decade ago, US states and Canadian provinces—following similar reforms in the UK and Australia that have resulted in the first publicly traded law firms—are rapidly creating regulatory sandboxes to expand current rules limiting (a) who can provide legal services and (b) who can own those businesses. In theory, this opens the door to all manner of innovations in the legal space. Less theoretically, corporate law departments, which increased wallet share dedicated to technology by 150% between 2017 and 2020, are on track to triple legal tech spend by 2025. In response, record levels of venture capital are flowing into legal tech. By one estimate, legal tech companies had, by August 2021, already raised as much ($4.16B) in the private equity markets as in the two biggest previous years combined ($2.09B in 2018; $2.41B in 2019)—with considerable activity since then in a landscape that not too long ago was almost devoid of unicorns.

A clear but muddled picture. The legal tech boom is firmly rooted in latent demand and an intensification of unmet need. Part II will tell the tale of two IPOs —LegalZoom (LZ) and Intapp (INTA)—to illuminate distinctions we at LexFusion believe have confounded some otherwise smart money.

About the authors:

Casey Flaherty is Chief Strategy Officer at LexFusion, where he consults with legal tech companies and advises both law firms and corporate law departments on navigating the new legal tech ecosystem. Casey is an attorney, legal tech founder, and legal tech investor.

Jae Um is an Advisor to LexFusion, among other legal tech startups. Jae is the Executive Director of Six Parsecs, a research & insights company focused exclusive on legal markets, where she provides executive briefings and strategy consulting to large law firms and legal tech investment vehicles.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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