Raymond Blyd

Entrepreneurs need to tackle three things to be successful: lure customers to a great product with a competitive price at zero tax.

Zero

A country provides us with safe living conditions, crucial infrastructure, and services to do business. A government allows us to operate in peace. For this privilege, we pay taxes. By adding jobs aka taxpayers to the economy, entrepreneurs get a break and leverage to negotiate better rates.

When I set out on this journey, I took the time to take a course on taxes. Following my first credo:

love the things you hate because they allow you to do what you love.

The other reason to learn more about taxes is that I heard Jeff Bezos – one of the world’s richest – did not pay taxes. Operating a borderless e-commerce platform at a loss automatically helps you evade local taxes. Nevertheless, this drove 137 countries to agree on a once-in-a-century global tax treaty to close just this single loophole faster than you can say: climate change.

Two things I learn during the tax course which really surprised me: all entrepreneurs made tax mistakes because they copy each other. Second, those mistakes usually originate from accountants doing the same copying from other accountants. Perhaps you wonder why mistakes perpetuate? Not getting caught doesn’t mean it’s legal, it’s just a lack of enforcement. Huh, why? Enforcement is a political nuclear bomb too explosive for me to handle.

Hero

Mistakes can be as simple as a correct invoice, or as complex as knowing the various rules and rates in each country. Especially the lather is a game of cat and mouse where the cat is any country and the mouse is any digital product. Ever wondered why many crypto companies reside in George Town. Or corporations in the USA all seemingly come from Delaware. Care for some Double Irish with a Dutch sandwich? Yes please, I’d love one with my Panama Papers.

An honest tax lawyer will say it’s complicated because every country wants its own taxes and has no authority over others. The only way to simplify rates is if all countries agree to them. Now grab the popcorn because this movie is about to have an unpredictable ending. Meanwhile, if you have a great digital product, your job is to sell to customers everywhere at the most competitive price. That price should include a fair tax rate, which can be zero. Why? Because we can use all the help to compete in a borderless market.

A good tax lawyer understands this and will help you figure that out. A smart government will support this because…just like Jeff, we could each deliver almost a million taxpayers within a year.

Any economist knows that this is the only way to stave off inflation and our ticket out of this recession.

Anyone, help?

Just like the rest of the economy, legal tech is now loaded with debt. Let’s have a calm conversation about it.

We analyze the numbers and match them with conversations we have with our friends. First the numbers: we registered an increase in funding and acquisitions during 2021. On the surface, this looks encouraging for everyone in the legal industry. We ran a poll on LinkedIn and 91% voted that growth is real. The public views private capital injections as proof of a healthy industry.

Honestly, so do we. We collect, and clean data to calculate the numbers that measure growth. During this process, we discover many financing variations. And some of these discoveries have us concerned. One is the type of funding, and the financial engineering underlying them. For instance, there’s an uptick in debt financing [paywall] of legal tech startups, as mentioned in Law360. Also, note the increase of private equity financing of acquisitions by Legal IT Insider. Other signs are down rounds, bridge rounds, or current investors passing on later rounds. It is especially worrying when this happens in crowded areas.

Fuel ?

What concerns us is that all this money isn’t chasing demand for legal products or services. You make money by selling, you fake money by funding. Because funding is debt. Don’t panic. Almost every government has plunged into debt during the pandemic, and it has not spelled the end of the world. Banks printing money is a temporary measure to stave of worse. That ‘money’ is being channeled into companies as loans. However, perhaps we should spur demand for products rather than serve as a crutch to companies. Something akin to the US infrastructure plan. Let’s call it a ‘Liberty Bill’.

The companies, we track, offer support to lawyers. Most support the law by helping companies and citizens play by the rules. They all impact the demand for legal services in various ways. One boost the pandemic gave the legal industry is the increased focus on financial security (FinSec) and ESG. Companies and citizens alike were making sure that investments were secure, money’s in the bank, or in a bit of Bitcoin. Seriously, everyone wanted their contracts signed, invoices cleared and their affairs in order. Generally, these transactions go through lawyers. But since the pandemic forced remote work, they all went through legal technology. That’s one narrative that has fueled funding this year.

Burn ☄️

Remember the conversation we had? Most companies aren’t run by the CEOs alone, CFO’s and especially accountants play a huge part. They run the numbers on your company as well as many others. This provides them with a pretty broad perspective on profitability. Their influence grows when debt accumulates. At some point, the accountant will pull you aside to talk about the numbers. Usually, the moment arrives around three to four months before the company is about to burn out of existence.

I admire entrepreneurs because they combine commercial savvy with financial smarts to make profits. Occasionally, it takes a technological tweak to ensure the cost to produce is lower than the price you pay. Yet, this isn’t necessary if demand for your product keeps growing. This last point is key: demand drives down costs. Automation drives down cost, but automating in legal is really expensive. Getting attention in legal is really expensive. That’s why many companies in legal need funding to stay afloat on their way to sustainable revenue.

Like a supernova, we see the surges of growth throughout the legal galaxy. That’s why we can also pinpoint the black holes in that same galaxy we mention in the video below. We support entrepreneurs in legal because they take a risk on an industry that doesn’t take kindly to disruption. They bet on a surge and, with a bit of luck, the gamble pays off. With a bit of data analytics, the payoff is huge.

Remember, there is no such thing as free money. The world is in a “buy now and pay later” phase, and so is legal. At some point, we should expect to get a Margin Call just like the 2011 movie. If you haven’t seen it, I recommend The Big Short: same story, fewer suits, more spreadsheets, and humor. A bit like us.

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Reject / YouTube

We recently received several cries on how hard it is to raise venture capital for a startup in law, why? Valuation

Valuation

One of our most-read analyses is about the acquisition value of legal tech startups. Only recently we discovered why that is: it helps founders convince investors. Recent exits of SignRequest and Clocktimizer have largely confirmed the thesis: the value of a startup depends on the type of customer. Does your product work for consumers (B2C) or businesses (B2B)? As for the type of businesses: is it small or big? If so, are you selling to corporates or law firms?

Based on the recent exit values, our numbers show that the exit value declines when we travel along this spectrum. Small businesses represent a higher value and usually faster exits. The opposite is true for providers selling strictly to legal professionals. We speculate that the underlying reason is pure supply and demand. Perhaps in some popular areas, there is less demand and an oversupply of solutions offered to the legal service sector. So a startup valuation is largely determined by the customer and not necessarily the product itself.

Frequency

Why is your target customer such a factor? Well, you can get a large cheque from a few customers or get a small one from many. Both strategies have their challenges but the law sector has an ace: getting paid is almost guaranteed by the legal events. Case in point: without a signed contract it’s difficult to claim. If you do have a claim, you usually have to run it by a judge or arbitrator. If you have to appear in court, you’ll need representation. We explored the Legal Roadmap and identified Contracts and Claims as two of over 10 areas with high-frequency legal events. And BTW, don’t forget to pay your taxes.

However, there’s one decisive variable we only explored in the roadmap: frequency. When a startup latches on to a high-frequency event, the more likely its valuation will increase. Let’s address the elephant: signing a contract happens more often than reviewing or drafting one. Therefore, e-Sign companies sit on top of the food chain. The addition of DocuSign to the NASDAQ-100 means it is one of the 100 fastest-growing ‘tech‘ companies in the world. That’s just for signing sales contracts and before they decided to go after high-value \ high-frequency contracts like mortgages, and estates. Nope, we won’t discuss Ethereum, smart contracts, and zero-proof. We’re saving that for a special Facebook-Tesla edition.

Network Effects

Since we did bring up the blockchain, we may as well talk about the actual force behind frequency: network effects. The network effect is the mesh of human interactions that multiplies the use of technology. Google and Facebook are the biggest examples of tapping into a network of commerce. Even though most legal events are enforced by law and don’t require networks, they can leverage networks like finance. Financial security is the network that propelled DocuSign into unicorn stratosphere.

Now buried within the network of financial transactions reside numerous legal events. The pandemic accelerated mergers and acquisitions which reportedly boosted many law firm earnings. We’re also waiting on a barrage of bankruptcies that need legal handholding. In our latest Legal IT Insider chart, we debut an overview of areas using advanced tech. The biggest area to capture capital was fraud detection and a notable round in geo-analytics. One reason we keep nudging Geo is that it directly underpins some high-frequency legal claims. Case in point: real estate disputes are arguably the single largest source of legal conflicts in the world. This is a vibrant area we recently explored in our access to justice breakdown.

Legal Events

Now that we’re talking about Geo, here is where it gets tricky: when is a solution part of a legal event? Moreover, since we’re determining valuations: do we want it to be a legal event? A legal event can be the result of regulation like fraud detection or be a monopoly such as court proceedings. Both RiskTech and LegalTech markets look attractive since they are difficult to enter. However, due to their closed nature, legal events aren’t easily fueled by outside forces. A state we described in The Fall of Legal Tech and our most popular “Will lawyers be replaced by GPT-3?” And unfortunately, this is where the crying starts.

And perhaps we can offer a tissue. Not all legal events originate from the same universe of rules. Some even spontaneously appear based on cultural shifts due to societal events. Covid made us value CivicTech and privacy, even more, when we largely rejected contact tracing apps. #MeToo was a catalyst for HR apps to consider using virtual reality as a solution to help us behave. And the biggest growth engine is the ESG movement we discussed in our previous analysis. None of these insights come from anecdotes or experience, they are directly derived from metrics in the Spark dashboard. We are not the experts, our data is.

Funding

Enough prognosis, let’s be practical. Here is a StartUp Fundraising Checklist we stumbled upon with a great set of tasks to undertake to get funded. When you run through the list, you’ll notice that there is some tedious research you need:

1. What’s my market size? We use the CAT™ model for an instant and exact calculation ;
2. Who are my competitors? Check out our Challengers analysis;
3. What’s my valuation? Start reading from the top;
4. Setting up an investor CRM? Our Investor dashboard with FOMO filter is just 5 clicks

But yes, we agree. All of the above is too long, didn’t read (TLDR). So we are announcing the launch of a one-click platform to provide all four answers instantly on a single page.

stay tuned..

Environment, Social, and Governance (ESG) seems like nitro for investors but capitalizing on this trend starts with lawyers and startups.

TLDR: ESG is aligning wealth creation with nature and decency. Lawyers are excellent guides navigating this process and accelerating the growth of RiskTech. But the jury is still out.

ESG

Deliveroo, the food delivery startup, recently offered new stock to the public, but there wasn’t much ‘appetite’. At the moment of writing, shares in Deliveroo traded at 30% below their proposed value. The analyst blamed the failed initial public offering (IPO) mainly on their advisers, the Banks. While the pandemic has benefitted everyone in logistics, the public remembered how Deliveroo treated their workers. Now Goldman Sachs is reportedly forced to buy $103 million in Deliveroo stock to boost the IPO price. An action described in this podcast: as buying all of your own kid’s scout cookies.

The reason we bring up workers’ rights is that this is now playing out on a much grander scale at Amazon: one of the biggest employers in the USA. We’re curious if attempts to block employees unionizing will impact Amazon’s stock price. While managing human capital makes financial sense, it’s still bad for business if you’re ignoring the S in ESG. Both companies aren’t breaking any laws, but they’re drifting close to the edge of human decency. Looking strictly at the numbers, you can’t blame accountants for not identifying these risks. Yet, your general counsel would be doing cartwheels to get your attention.

What is ESG? As human beings, we should take care of our environment, be socially conscious and fair in order to create sustainable prosperity. ESG aims to create a level playing field for all by emphasizing rules on emissions, security, diversity, and inclusion. It is an investment thesis to identify long-term wealth opportunities by going beyond the numbers to find companies that practice ESG. If you feel fluffy and flustered by this, talk to your local legal professional. They can best explain the vast array of rules surrounding ESG. Or you can swing by EcoVadis, one of the biggest in Civic Tech, and OneTrust, the biggest in Legal Tech, to see what they offer.

Surge

This brings us to the nitro. On March 16 we released the Top 11 Legal Tech companies of all time. By March 23, the list was outdated when OneTrust acquired a couple of Legal Tech companies. In the first quarter of 2021, we experienced a surge in venture funding we haven’t seen since 2014. We debuted an exclusive chart in issue 340 of Legal IT Insider by Caroline Hill. The chart featured venture funding of private companies operating in Legal & Regulatory. How we define the Regulatory space is key to understanding the impact of ESG.

We mentioned the surprises, like PatSnap ($300M) and Fadada ($138M) who listed respectively 4th and 9th overall in round sizes for Q1. PatSnap patent research we classify as ‘Legal’ because it’s a job traditionally done by lawyers. Fadada is an e-Signature provider and listed in Regulatory which is a collection of Governance, Risk & Compliance (GRC) tools. GRC are mechanisms, like e-Signatures, created by lawyers to be used by companies to manage risk. These mechanisms help to avoid the risk of litigation or fines by the government. Fines like the record $2.75 billion for anti-trust violations leveled at Alibaba by China.

That is why GRC is twice the size of Legal based on our numbers. In Q1, GRC raised $4.01 billion while Legal managed half with $2.11 billion. Both broke the previous record for a single quarter. Legal’s previous record was set back in Q1 2019 with $1.29 Billion. As for GRC, the surge wasn’t just pushed by the urge to manage risk. Risk management actually was the smallest of the big three. Governance and Compliance took the bulk of fresh funding with notables in Fraud Detection and Tax. However, most rankings only look at the size of the rounds or the amount raised. And that’s where many get it wrong.

Signal

Do you really want to know the future? Then ignore dollars but look at deals. Big funding rounds usually signal the end of a cycle rather than the beginning of a trend. We’ve seen this pattern play out in venture funding of legal marketplaces, practice management, and contract tech. Case in point: in the first quarter of 2021, Tax shot to the number three spot with 12 deals. This is more deals than Contract Tech could muster in the same quarter. This discovery was so powerful that it inspired the unique setup of the Spark™ dashboard.

Counting the number of deals within various niches of Legal and Regulatory reveals where the action is. Deal numbers not only show areas warming up but also the ones cooling off. We indicated Legal Tech slowing down because legal doesn’t need that much tech to explain the risk. However, by explaining risk, it has propelled the use of Risk Tech. Especially the risks to people and our planet.

With ESG, we’ve decided to invest in long-term prosperity as opposed to profiting from the apocalypse. This has driven companies to install more security on their platforms and checks in their balance sheets. They are looking at accounting and supply chains to measure their impact on nature and communities. Companies can even check if their banks are green or fix their toxic culture with virtual reality. At least, that is the thesis so let us all follow the ticker symbol AMZN closely.

We’ll give three reasons why the legal profession doesn’t buy tech. Stop the gaslighting because all three are legit.

TLDR: providing the legal industry with secure easy to use systems is essential for any democracy. Compromised lawyers and overloaded judges can’t pursue justice.

Gaslight

While cruising the clubhouses, we noticed a tendency to sow fear, uncertainty and doubt (FUD) among lawyers. The basic message: there is so much brilliant legal tech so lawyers should adopt or die. In ‘World of Robots‘ we provided numbers and examples of the speed at which they adopted technologies like the pager, Blackberry, and iPad. The first digital case law search engine was created and used in the early seventies. Correct, lawyers went ‘online’ to retrieve case law before the internet was even invented.

The last decade of legal tech didn’t live up to the hype, but we’re at the dawn of a new one. This decade we start with smart technologies like GPT-3 and a pandemic accelerating tech adoption. However, major legal obstacles remain and the industry is perhaps in the worst shape it’s ever been. Here’s why.

Security

Legal professionals traditionally practiced security by obscurity, an approach rejected as far back as 1851. Then the Panama papers exposed law firms as the weakest link and quickest route to sensitive information. Now the Solarwinds hack reminded us that digital systems can be jeopardized at many junctures. A perfect illustration is the recent hack of 7th ranked global law firm Jones Day. It’s simple: a law firm with many tech vendors just increases their risk profile and exposure to attacks. If you’re shocked at a $2 Billion law firm being a soft target, imagine how our government-hosted courts and judges feel.

If financial and health records get exposed, we can hit the perpetrators with a lawsuit. But how do we prosecute when judges and lawyers are also compromised? When both digital and legal defenses go down, we don’t have a fair society. If many do not trust their legal system, they’ll march on the Capitol. A secure legal industry is the safety net for our society. Its participants must be able to use systems securely to reach a fair judgment.

Continuity

Security doesn’t only mean impenetrable but also means continuity. It’s one of the reasons some professionals still prefer paper. The law states that judges are nominated for life and lawyers enjoy confidentiality no matter what. In practice, no system can offer confidentiality for life.

The reality is that new technologies offer an ephemeral solution. Systems are flexible and update frequently to stay secure and competitive. They save data encrypted in proprietary formats in many places at once. These formats are only supported until the next release, the company runs out of money, gets acquired, or the developer disappears.

Here’s where the legal industry struggles to live up to its ethical duty while considering innovating. At some point, lawyers moved from stone to paper and from paper to email. Nothing lasts forever and change is inevitable. However, when legal commits, they are required by law to make it last.

Data

Whenever the next big investment announcement rolls around just be sure to check if there were any law firms mentioned as investors? Another hint: when a tech vendor lands a large contract with a Tax or Justice department or a Law institution. Besides the essentials like email security or eDiscovery, legal seems most intrigued by technologies that already have the data they need. Legal doesn’t invest in populating your software with their data or training your algorithm. Spoiler: legal actually doesn’t have that much data. On the contrary: they seek more data to make better decisions.

How did we uncover the pattern of security, continuity, and data investments? We used Spark⁺ to analyze investments by Corporates and Law Firms to break them down by type of company. Two samples, typical of what we’ve seen, are Palantir and Spark Beyond: both have fascinating deals with law firms.

As the last line of defense, legal does have some special considerations when it comes to choosing tech. There is data to prove legal professionals are quick to adopt when it’s right for them.