Most companies selling AI will not be profitable anytime soon. Nevertheless, we have numbers to measure how valuable AI companies are.
TLDR: In Data, Distribution & Deals, we looked at the value of public companies operating in the legal sector. Now, we’ll do the same for companies in the private sector.
Validate
Brace yourselves, for this one is stacked with numbers. Starting with two lists: AI companies and Legal companies. The listed examples underscore the current market conditions:
- Inflection AI: Raised $1.5 Billion in funding, but reported negligible revenue. Microsoft agreed to pay Inflection AI $650 Million to acquire the tech and talent;
- Stability AI: Their expenses exceed its revenue, with spending estimated at $8 Million per month. They already raised $256 Million and are discussing a potential sale to private equity;
- Humane AI: They are looking to sell the company barely a month after the AI Pin release. Humane raised $230 Million from prominent investors like OpenAI’s Sam Altman.
What is happening in Legal? The chart above shows what we have for this year.
- Septeo: Private equity firm Hg reportedly wants to sell this $4 Billion Legal Tech company;
- DocuSign: acquisition talks to private equity were reportedly halted around February 2024;
- Eigen Technology: One of the most well-funded Legal AI startups, with $59.4 Million in total funding. They were acquired by Sirion Labs for an undisclosed amount;
- Henchman: Belgium contract drafting tool was acquired for $160 Million by LexisNexis. Henchman was founded in 2020 and has raised $11.4 Million in total.
- vLex: acquisitions talks with Harvey AI collapse for undisclosed reasons. Before the collapse, Harvey was set to raise $600 Million but now projected to raise $100 Million.
Legal exits have been on a downward slope since the beginning of 2021 as illustrated in the chart below. Statistically, only 19% of law acquisitions reveal their price as observed in the 2022 analysis with Law360. The amounts above offer a glimpse into the market value of companies.
Valuable
Henchman, and CaseText acquisitions should be celebrated for their transparency. Respectively, the Henchman was 14x return, and Casetext achieved a 10x return on invested capital in those companies. The return is calculated by dividing the purchase price by the total amount raised. For Henchman that is $160 Million divided by $11.6 Million equals 13.8x to be exact. It is not NVidia territory, but is it a good return? Let’s see.
Valuations are visible when an acquisition price or share price is offered to the public. Those valuations are calculated based on existing revenue. Case in point: Google announced interest in acquiring Wiz for a reportedly $23 Billion. Wiz’s annual recurring revenue (ARR) is reported to be around $350-$396 million. Using the higher estimate of $396 million and the proposed acquisition price of $23 billion, we can calculate the revenue multiple ≈ 67x. However, Wiz has raised $1.9 Billion since 2020. This would offer their investors a 12x return on investment (ROI) within four years.
For some context, “The Best Acquisitions of All Time“, made by Acquired, offer ROI guidance for multiples. Spoiler: the winner is 153x return of investment (Instagram by Facebook). So how does legal stack up? Check out the chart below. Better yet, the median ROI for the tech sector is 5.03x, measured across 515 deals. For the companies in legal, the ROI is 8.47x, calculated from 58 deals.
Voodoo
This brings us to the most mysterious process in venture fundraising: pre- and post-money valuation. As stated at the start, the Harvey-vLex deal fell through. As reported, Harvey would have been valued at around $2 Billion if it had acquired vLex. Without vLex, the value is $1.5 Billion. Simple math reveals the valuation of vLex to be estimated at $500 Million, as pointed out by a commenter. This is less than CaseText and perhaps the reason their private equity owners walked away. Harvey has raised $106 Million in total. If Harvey were to be acquired for $1.5 Billion today, the ROI would be equal to Henchman (14x). Hence, this is a reasonable multiple for Harvey but what about vLex?
To answer this question, we compared the size of CaseText to vLex based on a rough headcount. At the time of acquisition, CaseText was half the size that vLex is now. So vLex valuation would be closer to $1.3 Billion. You can imagine the powerful private equity executives leaving the negotiations laughing. In the snippet below, you’ll read the reason Harvey has not raised is a hesitancy towards AI investing. We posted a Goldman Sachs podcast that elaborated on the AI bubble scenario. In our previous analysis, we explored the value that AI will deliver. Short answer: productivity, but no profits yet…except for one company in legal.
The future of AI is currently cloudy with a chance of rain. According to Goldman Sachs, we have between now and the end of 2025 to figure out a path to AI profitability. Meanwhile, we will dream of all the possible products that will push legal into the future.
