Jan 10, 2018 | edocr |
Trevor Martin, Principal Ben Howe, CEO Fred Joseph, Partner 2 Legal Tech: Seeded and Ready to Launch Legal tech is very much an emerging sector. After several years of furious start-up activity, the industry is prime for its first wave of consolidation and later stage growth financing. Over the past five years, more than 700 legal tech start ups have been formed according to Tracxn Research 243 private placement deals since 2012 raising over $750 million in equity capital At the same time, the legal profession itself is playing catch-up to the IT adoption cycle blazed by the rest of the service-based industries, most notably the deployment of digital SMAC technologies (social, mobile, analytics and cloud) to achieve high productivity and a lower cost of delivery to the end market. Due to fee pressure, law firms are under pressure to perform more like hard driving businesses and less like laissez-faire partnerships Ironically, this promise of increased productivity has been the hang-up: as long as the legal profession bills by the hour, there's no rush to shorten those hours. These attitudes are beginning to change, as the following unfolds: A crushing workload that is outpacing net new additions of lawyers provides further impetus The shifting demographic mix of the lawyer pool itself (younger and more tech savvy) is forcing progress as it has in other change-resistant industries New marketplaces are emerging which are changing the status quo and cost structure Even so, the potential legal tech market is ~$16 billion with low penetration rates, making it ripe for opportunity Despite slow adoption, legal technology is finally at the cusp of accelerating growth and consolidation In this report we will examine historical themes and future trends, how the major players and smaller disrupters are redefining the legal tech market and what the future holds for the capital markets and M&A Source: Mitratech Holdings, Tracxn The US is the world's largest provider of legal services, with an estimated $437B in total annual revenues Whereas the typical US company spends 5.2% of revenues on IT, the legal industry spends significantly less, with 75% of law firms spending 4.0% or less At the same time, the US legal services industry, which employs 1.3 million workers, has a relatively high employee-to- revenue relationship in comparison to other industries 3 The Legal Industry: A Massive Market Underinvested in Tech Source: Law360, IBIS World, Inside Legal 27% 48% 18% 5% 2% 0% 10% 20% 30% 40% 50% 60% < 2% 2 - 4% 5 - 6% 7 - 10% > 10% Note: excludes soft costs such as staffing and training 75% of law firms surveyed estimated they spend between 0% and 4% of their total revenue on technology, well under the 5.2% average for US Companies 75% Law Firm Survey: What percent of firm revenue is spent on technology? Law firms have consistently dedicated a lower percentage of their budgets to IT spend 1,203 1,225 1,245 1,268 1,281 1,301 1,316 1,000 1,100 1,200 1,300 1,400 1,500 2010 2011 2012 2013 2014 2015 2016 Source: American Bar Association After a period of moderate growth, legal matters increased 20% in 2014 and have continued to rise since Source: Bureau of Labor Statistics Increased Efficiency is Needed More Work Fewer Lawyers Although roughly 1 in 250 Americans are attorneys, the number of attorneys has grown at a considerably slower rate versus the early 2000's, implying workload per attorney has increased substantially 75,000 new lawyers in the last 5 years, representing only a 1.5% annual increase on average Since 2009, in-house law departments have reduced their spend on outside counsel During that span, companies reduced the spend on outside counsel from 66% of total to 59% Due to fee pressure and rise of matter based pricing, law firms face pressure to operate more like traditional businesses with CEOs / CIOs versus outdated partnership model Less Outsourcing Huge Burden on In-House Dept Due to the factors above, Mitratech projects a 15-20% shift of legal work in-house This substantially increases the need for an efficient, streamlined legal process, making legal technology a critical tool for attorneys aiming to keep up with industry trends 130,839 132,930 135,072 137,374 140,372 143,085 145,325 120,000 125,000 130,000 135,000 140,000 145,000 150,000 2010 2011 2012 2013 2014 2015 2016 4 Number of Attorneys in the US (000s) US Non-Farm Labor Growth (000s) Benefits of legal tech are becoming harder to ignore as increasing work per lawyer has made efficiency mission critical $1,226 $1,203 $1,207 $514 $490 $538 $1,009 $514 $518 $523 $1,625 $611 $524 $649 $657 $488 $465 $437 $336 $825 $769 $768 0 500 1000 1500 $2,000 Law Firm Corporate  Includes calendaring/docketing ($574M), legal financial management ($556M), and legal process automation ($23M) Source: Mitratech Holdings ($USD Millions)Legal Software Addressable Market 5 While legal tech represents a large ~$16 billion market, low penetration rates make it ripe for opportunity The total addressable market for legal software is estimated at $15.9 billion, of which $3.5 billion is actually spent, implying less than 25% penetration $9.4 billion implied spend by Law Firms $6.5 billion implied spent by Corporate legal teams Much of IT legal spend is in financial matter management where on premise software still reigns supreme despite a narrow client base of roughly 500 1,000 larger companies 27% 19% Most funded sectors 18% Highest Corporate CAGR sectors Legal Tech Addressable Market by Product Type and End User Governance & Compliance and Contract Management offer the largest current market size with the strongest growth rate Established markets with less recent innovation, such as e-Billing, have remained relatively stagnant of late 6 Source: Mitratech Holdings Corporate Legal Tech Growth Areas Small market size Low Growth Large market size Low growth Small market size High Growth Large market size High growth While all 11 legal technology sub verticals are growing, Knowledge Management, Legal Analytics, and Legal Project Management are projected to grow the most in the next 3 years for the Corporate end user segment Legal Marketplace Legal Tech Landscape 7 DISCLAIMER: This is only a representative list and may not include all relevant companies. If your company is not on the list and would like to be added for future publications, please email firstname.lastname@example.org and we would be happy to consider. Legal Management Artificial Intelligence / Machine Learning eDiscovery / Legal Hold Legal Research / Analytics DIY Law Source: 451Research, Capital IQ 1 2 5 4 3 6 7 Represents corresponding pages later in the report Large Diversified Legal Tech Enterprise Content Management is another large legal subsector, please refer to AGC's November 2016 report for additional information 8 Source: Stanford Law, Altman Weil Slow Adoption Nothing New to Legal Sector 93% 44% of law firm leaders think a focus on improved practice efficiency is a permanent trend in the legal market of law firm leaders state they have significantly changed their strategic approach to efficiency Slow adoption remains an issue in the legal sector as long enduring standards, such as the billable hour, are making law firms hesitant to embrace technology with the potential to streamline time-consuming processes Diffusion of responsibility stems from the partnership model that is beginning to fade as law firms convert to a more progressive and streamlined management structure Recent research has shown law firms that have taken a more progressive approach to staffing, service delivery, and pricing commonly see improvements in gross revenue, revenue per lawyer, and profits per equity partner A clear disconnect exists between perceived and actual industry adoption of legal tech Importantly, legal tech has a long record of slow adoption, delaying efficiency The Billable Hour The accumulation of billable hours mentality provides a challenge to efficient legal practices Gives active attorneys minimal time to explore the adoption of new technology and / or learn new tools Apprehension in moving away from the billable hour, as this would require a new method of measuring value-add created by the legal profession The Partnership Model Money that would be spent on legal technology comes directly from the partner profit pool, creating a high bar to adoption Partnerships result in dispersion of responsibility and makes gaining the support of all partners near impossible Security Concerns / Lack of Infrastructure Law firms commonly have no / limited cloud-based infrastructure Tough to sell value proposition compelling enough to warrant overwhelming challenges of moving off legacy providers 9 Source: Stanford Law Speed Bumps to Legal Tech Adoption Cost Center Mentality Legal departments are viewed as cost centers within larger organizations, thus senior management is reluctant to approve high upfront technology investments Longer Sales Cycle Legal technology startups have stated that the largest impediment to selling has not been getting the initial meeting and a foot in the door, but rather moving from that initial meeting to final sale Individual Market and Lack of Awareness Unless already part of a larger organization, many smaller legal tech companies have difficulty persuading corporations around the effectiveness of their solution In order to combat the lack of trust stemming from lower awareness, legal tech solutions need to develop a brand which requires a large marketing budget Security Concerns Need to maintain a secure document environment has been a historical inhibitor as corporations perceive that in-house is safer The two largest end user populations have been historically slow adopters for a variety of reasons Law Firms Corporations Following their merger with Chinese law firm Dacheng in 2015, Dentons overtook Baker & McKenzie to become the world's largest law firm, with over 6,500 lawyers operating in 50+ countries In May 2015, Dentons announced the launch of NextLaw Labs, a global collaborative innovation platform focused on developing, deploying, and investing in new technologies and processes to transform the practice of law around the world NextLaw partnered with both IBM, who provides access to IBM Cloud and IBM's platform-as-a-service offering (Bluemix), as well as Seedcamp, who co-sponsors investments and provides training and mentorship NextLaw has now invested in 10 legal tech startups and has been profiled by American Lawyer and Law Matters, the latter of which stating: "The fruits of [Dentons] labor is creating advantages and opportunities, shaping the legal profession and transforming the industry" As global law firms begin to embrace legal technology, it will become difficult for other industry leaders to ignore innovation, as quantifying the value of legal services becomes easier as the industry shifts from an archaic system Others have already begun to follow Dentons' example, as LexisNexis (Relx Group) announced their own legal technology accelerator in early 2017 and announced their initial 5 participants in March (Visabot, TagDox, Separate.us, Ping, and JuriLytics) 10 Source: Dentons, Robert Ambrogi Case Study: Dentons Goes All In On Legal Tech World's largest law firm invests heavily in legal tech, now increasingly difficult for competitors to resist change Current Portfolio Background Innovation Looking- Forward Business Breakdowns Legal Performance Products $3.4B in 2016 legal revenue operating at 37% EBITDA margin Legal revenues decreased 1% over 2015 45% of legal revenue from Solutions business, and 41% from U.S. Online Legal Information Growth driven by subscription- based Legal Enterprise Solutions (Elite and Serengeti) U.S. Online Legal Information composed of Westlaw and Practical Law offerings Have indicated intent to grow SaaS- based offerings 1.6B in revenue from legal segment in 2016 Underlying Legal revenues increased by 2% 68% of revenue from North America, 21% from Europe, and 11% from rest of world Now serves legal customers in over 130 countries Flagship legal products are Lexis.com and Lexis Advance Focus on legal research In 2016, LexisNexis released new version of Lexis Advance, an innovative web application transforming how legal professionals conduct research 927M in 2016 legal revenue Legal revenues decreased by 1% over 2015 Legal revenue was 48% from digital, 41% from print and 11% from services In 2015, launched legal research platform Cheetah Growth in digital has been generally offset by decline in print Merging of Datacert and Tymetrix created one of world's largest and most recognizable enterprise legal management solutions 24% 27% 24% 25% Legal Tax & Accounting Health Governance Risk, & Compliance 11 Source: Company SEC Filings Public Companies with Legal Tech Presence 30% 13% 54% Legal Tax & Accounting Financial & Risk Other 24% 27% 35% 14% Legal Risk & Business Analytics Scientific, Technical, & Medical Exhibitions 1 Three large publics have huge divisions dedicated to the legal space 12 Source: 451Research, Robert Ambrogi, Bloomberg Players Get Smart on Legal Analytics Case Study #1: Market Leader Invests in Analytics Case Study #2: Industry Leader Acquires Analytics Platform / 2 Forward thinking legal tech players are differentiating themselves with legal analytics, through research and development, as well as inorganically through acquisitions In October 2016, Bloomberg Law announced the release of "Litigation Analytics", which allows attorneys to devised informed litigation strategies and anticipate outcomes of a trial. A sample insight released by Bloomberg was: "Judge Jack Weinstein in the Eastern District of New York has been almost four times more likely to deny a motion to dismiss in full than Judge Jesse Furman in the Southern District of New York. The disparity is particularly noticeable when it comes to corporate law cases, where Judge Weinstein has been five times more likely to deny a motion to dismiss in full." In November 2015, LexisNexis Legal, a subsidiary of Reed Elsevier, acquired Lex Machina for an undisclosed amount. Lex Machina provides a SaaS platform that helps lawyers predict the behaviors and outcomes of different legal strategies by mining, tagging, categorizing, and enhancing millions of Federal court dockets and documents. "Data and analytics are integral to the future of the practice of lawwe plan to leverage our extensive resources to bring the benefits of Legal Analytics to lawyers everywhere." (Sean Fitzpatrick, Managing Director, LexisNexis) 13 Source: Forbes, Robert Ambrogi AI Generating Early Excitement in Legal In 2016, Thomson Reuters announced it was using IBM Watson technology to develop artificial intelligence products specific to the legal vertical In February 2017, Thomson confirmed the Company has an AI legal product in beta with 9 customers, planning a full launch by mid 2017 In March 2016, Deloitte and Kira Systems announced an alliance "to bring the power of machine learning to the workplace, an innovation that could help free workers from the tedium of reviewing contracts and other documents." They are believed to be developing an AI tool to help diagram intricate corporate structures, as well as a self-service AI portal for law firms to configure custom AI tasks and more ROSS Intelligence, a startup utilizing IBM's Watson platform to answer lawyers' natural-language legal research questions, has raised over $2 million in seed funding and already secured blue-chip customers such as Dentons, Baker & Hostetler and Latham & Watkins Premonition, a legal startup applying AI to the largest legal database in the world, received a seed round at a valuation of $100 million 3 Both startups and established legal players have begun to invest in artificial intelligence as a means of streamlining efficiency within the legal process 2nd generation solutions are emerging Commonly offer multiple integrated functions (such as billing, accounting, and document management) These solutions also offer secure enhanced mobility access and are better aligned with the way that lawyers truly operate 14 Source: Mycase, OneLegal Legal Tech Moving to the Cloud Cloud usage growing with smaller, more flexible firms leading the charge Cloud usage grew 20% in 2016 according to the ABA LTRC's 2017 Legal Technology Survey Small firms are able to be more casual regarding confidentiality, security, and due diligence, leading them to use cloud-migration as an area of differentiation over large firms The potential cloud customer base is large but harder to sell into given higher churn rates and fewer scaled companies Belief that continued cloud adoption and growth will largely depend on vendor's and legal IT expert's ability to alleviate concerns around the cloud (mainly security) Elasticity is king with cloud-based solutions Historically, law firms have had to pay for IT infrastructure to handle peak needs, and double this for disaster recovery and business continuity Cloud based solutions allow law firms to pay only for what they need, saving money, time, and resources Litigation will lead the migration to the cloud Cloud-based software aimed at facilitating collaboration between litigation teams will allow teams of lawyers to share notes, documents, and evidence in a secure, web-based platform Hybrid-Cloud solutions are becoming increasingly popular, as they allow firms to migrate to the cloud at their own pace 4 Continuing the trend of slow adoption, movement to the cloud will serve as a competitive advantage for technology-forward law firms looking to bolster security, accessibility, and collaboration 15 Source: Gartner eDiscovery Sees Continued Consolidation The marketplace for eDiscovery solutions has seen a shift from large, legacy providers to younger SaaS offerings Newer solutions tout superior ease of use, more scalable architecture, faster release of new features and straightforward pricing Depending on the maturity of in-house eDiscovery processes, a shift to SaaS may not always be beneficial due to occasional high costs in migrating systems SaaS solutions are particularly attractive to organizations that have moved their data to the cloud (Office 365 or Google My Business), as well as for small and less complex cases with data volume below 50GB Large and growing market for eDiscovery software solutions Gartner estimates the eDiscovery market to be roughly $5 billion in 2015, roughly one-third ($1.7 billion) for software and the remaining ($3.3 billion) for services The eDiscovery market continues to grow due to rapid data growth * Differently colored boxes only indicated the main responsible team but not in an exclusive sense By 2021, roughly half of eDiscovery projects will be able to directly tap into Office 365 via built-in machine learning, up from less than 10% today eDiscovery represents a historically active M&A market eDiscovery service providers commonly host software from third parties, with some having proprietary technology Process optimization, price competitiveness, in-region expertise, quality of service / customer care, and technology portfolio are frequent areas of competition 5 eDiscovery represents a more developed legal tech subsector with a sizable market and a historically strong M&A market that points to further consolidation Rise of legal marketplaces allow consumers to be connected to the legal advice or contracts that they need Marketplaces provide directories that includes ratings, reviews and profiles and offer a wide range of products and services Additional goal of making the legal market more transparent, liquid, and fair to both buyers (law firms and corporate legal departments) and lawyers Companies that have had success in creation of marketplaces have embraced the "network effect" LegalZoom emerged as the most familiar consumer facing legal solution, offering standardized legal documents as an alternative to hiring a lawyer Avvo, founded in 2007, has received $132 million in funding and is a legal marketplace, lawyer's directory, Q&A forum, and offers legal marketing Other platforms such as Priori, UpCounsel and LawDingo make it quick and simple for consumers to learn about, compare, and connect with a massive network of legal professionals An increase in customer support channels increases the convenience of attaining necessary legal counsel Historically, support teams are only privy to 3.8% of customer problems, as frustration with customer support channels have caused clients to cease usage of products as opposed to attempting to seek help Legal marketplaces, such as Law Trades, have turned to new channels such as SMS and Facebook as a means of giving customers an array of customer support options, allowing them to choose what is easiest for them Currently, only 30% of customers interact with businesses through SMS, although the customer response rate is seven times higher than email, and the average American already spends 26 minutes per day texting Legal marketplace transformation provides a window into the future of legal services Law firms of the future may be a network of lawyers available through backend infrastructure, eliminating the need for human administration and allowing for lower prices for consumers and increased productivity 16 Source: TechCrunch, Above the Law, Mitratech Holdings, FrontApp Rise of Legal Marketplaces 6 Increased efficiency and transparency ushered in legal marketplaces, fundamentally changing the way legal services are bought and sold 17 Source: Tech Crunch, Robert Ambrogi DIY legal tech started with LegalZoom and has since significantly expanded the accessibility of legal products and services Although not aimed at displacing attorneys, DIY law allows small businesses an option to access affordable legal protection LegalZoom was the first company to offer a true alternative to hiring a lawyer, with a library of discounted standardized legal documents In many cases, lawyers and DIY law can work in unison, with legal professions providing guidance and strategy, but the clients taking control of the execution portion Mobile technology is revolutionizing the market for DIY law Increased accessibility is allowing legal contracts to enter smaller transactions Companies like Shake Law allow you to create, sign and send contracts quickly via mobile devices Legal contracts are now economically viable for transactions such as small freelance work, friendly bets, and minor loans Chatbots have entered the DIY legal space Legal chatbots have made it increasingly possible to secure sound legal guidance at reasonable rates Legally, 1Law, and LawDingo have all created similar chatbots to aid consumer's interactions with legal documents Mobile Drives Incremental Uptake in DIY Law 7 DIY law expands the boundaries of the legal sector by increasing the accessibility, affordability, and automation of simple legal transactions Thomson Reuters' acquisitions have been focused on their stated vision of being a leading provider of legal entity information, as seen by their February 2017 acquisitions of Avox and Clarient, which will be integrated into their portfolio of risk management offerings Thomson will look to continue targeting legal technology acquisitions in North America, where they forecast increased demand for legal services in 2017 due to changes in legislation and a more profitable financial sector 18 Source: Company SEC Filings, Company Earnings Calls Acquisition Focus of Largest Legal Tech Players 2000 - 2005 2006 - 2010 2011 - 2017 Reed Elsevier has placed an emphasis, through both R&D and M&A, on "next-generation legal research solutions that harness the power of Big Data and supporting the evolving information needs of the legal professional" Reed Elsevier's legal division is strongly focused on migrating off legacy infrastructure onto cloud-based subscription products, and will look to add bolt-on cloud analytics offerings to their New Lexis platform Most recent legal acquisition is Intelligize, a provider of SEC intelligence for legal professionals, in September 2016 19 Source: CB Insights Historical Legal Technology Financing 25 37 3 4 53 56 10 10 35 52 4 21 157 11 95 25 33 16 52 54 0 5 10 15 20 25 30 20 40 60 80 100 120 140 $160 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Investment ($M) Deals 2016 2015 2014 2013 2012 243 deals since 2012 raising over $750M in capital Legal tech deal activity hit an all time high in the 2nd half of 2016, with $106M invested across 46 deals, including 27 in Q4 2016 alone Largest quarter by invested capital was Q1 2015 with $157M invested, headlined by kCura's $125M raise in a round led by ICONIQ Capital Legal Tech: Deal Count and Invested Capital Dollars Invested ($M) Deal Count 67 Deals 60 Deals 48 Deals 21 Deals 47 Deals Historically legal tech has not seen the same amount of invested capital as other sectors, but momentum is building Source: Capital IQ, CB Insights, 451 Research 20 Top 10 Funded Legal Tech Companies Company Amount Raised Last Raise Investors Use of Funds $132M July 2015 TCV, Benchmark, Ignition, DAG Ventures, (2 others) Accelerate hiring Increase brand awareness Product expansion $125M February 2015 ICONIQ Capital Accelerate build-out of Relativity: platform for managing electronic data around litigation $100M  April 2011 Institutional Venture Partners, KPCB Fuel large marketing spend $72M May 2013 LexisNexis, Morgan Stanley, GV, August Capital, (2 others) Product expansion Potential acquisitions $54M May 2012 ABS Capital Partners, CIBC Product expansion: integrated delivery system allowing for effective managing of information Company Amount Raised Last Raise Investors Use of Funds $45M March 2013 Sorenson Capital Invest in new product development Fund general business expenses $36M February 2013 Carrick Capital Partners Invest in the commercialization of managed services offering $32M March 2012 FTV Capital Expand into new markets, including growth of Catalyst's Asia Division $26M March 2014 Bessemer Venture Partners Increase sales presence in Toronto and Europe $17M June 2014 K1 Investment Management Acquire eCloud Collect and push its services forward  Exact amount raised for LegalZoom is unknown, estimated to be ~$100 million Investor Number of Investments Most Recent Investment (Round Size) Companies Invested In 4 June 2015 - Ross Intelligence (
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