Do we need a legal-specific venture fund?
While I’ve definitely heard legal-specific venture fund discussed a fair bit over the last 4-5 years that I’ve been active in the legal tech space, I’m not sure I’ve ever seen anyone articulate the respective pros and cons the idea, so I thought I’d give it a stab.
Just to get terminology straight, when I say “legal-specific venture fund” I’m thinking about some pot of money that’s set aside solely for the purposes of investing in companies or even innovations that are solely or largely in the legal vertical. Call it a “venture fund,” call “capital,” call it “innovation exploratory funding.” It doesn’t really matter. The notion is that there is cash specifically designated for risky early stage scalable ventures designed to solve problems in legal.
For the record, (and despite the fact that some people I really respect have explored and are currently exploring this idea) personally, I’ve always been a bit skeptical of a legal-specific venture fund. Here are the reasons: First, the source of a legal-specific venture fund would likely be lawyers or folks who have come out of the legal sector to begin with. While I have a lot of respect for colleagues and friends currently in the legal tech and innovation space (to be clear, I’m one of those people), I’ve never been bullish on the prospect of radically creative innovation coming from a group of legally trained folks with a decent chunk of change. Research on lawyer personality by Dr. Larry Richard found that lawyers score in the 90th percentile for skepticism. Constantly challenging ideas and others’ motives is great for the courtroom but lousy for innovation. Second, along these same lines, I’ve always thought that a big key to innovation in legal is letting go of legal exceptionalism. We need innovators and funders who view legal as one of many verticals that can be improved by the application of technology. As such, we want these funders to bring either (1) the same methodology they used in other verticals to come up with a creative world-changing idea for legal or (2) bring the same learnings they’ve successfully applied in a number of other verticals and apply them to legal. In short, we want “smart money” in legal. Money that can bring expertise gleaned from disrupting and revolutionizing other sectors to legal. I’m just not sure that legal folks with lots of money are the answer to our innovation dilemma. Finally, historically I’ve been unsure whether the legal sector is big enough to support significant venture investment. I’ve seen folks estimate the size of the legal market to be between $250 and $500 billion. That may seem like a lot but the global travel industry is >$10 trillion (think Expedia or venture darling AirBnB). And the global transportation industry is ~$5 trillion (think Uber or Lyft). While I’ve had some conversations recently that suggest there’s still lots of opportunity in a hundred billion dollar market, a small piece of a trillion dollar market is much more than a small piece of a billion dollar one.
Well . . . maybe.
One the other hand, despite headlines to the contrary over the last few years, it’s my contention that venture or innovation funding in legal lags other similarly sized and situated sectors. I’ve seen a bunch of different stats and numbers tossed around about outside funding in legal tech. I’m not sure that any of them capture what’s truly going on but by the measurement of one really important finance and business metric, initial public offerings or IPOs, legal tech is still lagging. I’m not aware of any IPO in legal tech in the last decade or so. It could be that legal just isn’t ripe (not lucrative enough, not big enough, too tightly regulated) for an IPO but it also could be that there’s not enough early stage investing in smaller companies one of which would, with proper investment, surely mature into an IPO candidate. Further, while we’ve seen a number of companies raise money from very well known and well-respected venture firms, a few of my anecdotal experiences suggest that there may be very good reasons for someone to bring a dedicated venture financing effort specifically to legal tech. First, I recently spoke to an early stage but well-run company working in the misdemeanor space. The CEO told me that while all of the investors he spoke with seemed genuinely interested, they ultimately decided to pass citing lack of familiarity with legal and fear of potential litigation. Second, I recently heard legal industry academic Bill Henderson suggest that Y Combinator has expressed a reticence (and it may have been an outright unwillingness) to fund anything in legal tech outside of matching or lead gen ventures due to long unpredictable sales cycles and other complications. This would suggest that others aren’t exactly jumping in with both feet. Finally, and perhaps most importantly, while I openly express skepticism about legal professionals-turned venture capitalists on one hand (in case you missed it, I did it in the paragraph immediately above) I also don’t think we in legal should wait around for someone from the outside of legal to come in and fix our problems. Here in the US lawyers and those who work with them have been granted a special monopoly to deliver legal services. In exchange for the monopoly, legal professionals have a duty to make the system as user-friendly and accessible as possible to consumers of legal services. And despite all the hype around technology, examples outside of law have demonstrated over and over that tech can make things more open and accessible. And so, who better to figure out how to bring the legal sector into the information age than the legal professionals whose responsibility it is to safeguard the system and continue to establish public trust in it?
So, I’m not sure I have a good answer to the question of whether we need a legal-specific venture fund. I will say that I’m much more bullish on the idea than I was.
While I’ve been mulling this post since before I talked to Christian Lang about it, the New York Legal Tech MeetUp is hosting an event tonight on investing in legal tech. It looks awesome. You should go. More info here.
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