Since 2016, the only sector impacting the legal industry which showed measurable growth of new ventures and funding is RiskTech. So is this the new “LegalTech”?
What is RiskTech?
RiskTech is technology that is helping you avoid prosecution from the government, litigation from anyone or bankruptcy by stupidity. We’ll get to the stupidity in a bit.
Originally the term RiskTech is derived from the more broad sector term RegTech which stands for Regulation Technology. RegTech was used to describe the companies and technologies that assisted FinTech companies in implementing financial regulations. How did RegTech become an industry in itself? I once studied the number of laws per sector in the Netherlands and the financial sector was a clear winner with the most number of rules.
We quickly realized that RegTech wasn’t limited to the financial sector during the analysis of profiles. We discovered a breed of technology companies managing risk and regulations in heavily scrutinized areas like Cannabis and Health. Recently Snoop Dogg backed Metrc raised $50 million to track weed. Other popular topics companies are tackling are Identity, KYC (Know Your Customer), Fraud and Privacy.
Not only the companies that prevent risk but also the ones that are insuring against it are considered RiskTech. While a lawyer may offer a legal product, like a contract, to cover a defined set of risks. Insurance companies use complex calculations on data to issue you a blanket coverage on the same set. Therefore almost everyone regularly pays for some kind of insurance policy but few have a legal counsel on speed dial.
Last but probably the first RegTech in human history is Tax. Everyone needs to pay taxes and not paying them puts you on a likely path towards bankruptcy.
There are over 170 unique labels we managed to put on RegTech companies in the Legalpioneer dataset. Here’s how we aim to make sense of the landscape:
| Sector | Market | And they do? |
| Legal | LegalTech | does legal work |
| Law | find legal work | |
| RegTech | RiskTech | avoid legal work |
| FinTech | comply with regulations | |
| WealthTech | a (rich) FinTech subset | |
| Tax | ..obviously.. | |
| CivicTech | influence the law |
Why is RiskTech growing?
First, we were digging for gold, then we were drilling for oil, now its hoarding Data. Tim Cook’s blistering attack on the ‘data industrial complex’ wasn’t just an indictment of “free” services such as Google and Facebook. It actually was the best marketing for the RiskTech industry.
This simple dynamic of danger in data has driven the growth and there is a metric that revealed this: Valuation. The average valuation based on our data set is calculated by taking the total number of companies in each sector and dividing them by total dollars raised in their sector. The horizontal ax shows the year a company was founded. By this measure, RegTech companies started in 2010-11 are now hitting full stride and for “as little“ as 14 million dollars in the bank, you have a fair shot in this market.
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How does RiskTech work?
Just like your email spam filter, RiskTech uses smart technologies to filter risk in data. A straightforward way to achieve risk-free data is to anonymize it. The latest 2018 funding dashboard featured two FinTech companies that offer to process payments anonymously in crypto or cash transactions.
Another approach to minimizing risk in data is to lock it up cryptographically with Blockchain. In our analysis of Initial Coin Offerings (ICO’s), we discovered that the second most popular use case for Blockchain was securing user data to monetize it. Ventures like ONO Social and Yours collectively raised 61.7 million dollars this year alone which is part of 133 million dollars raised in this area.
Finally, as an individual, you would like to avoid having a lapse in judgment send you to jail. It took Elon Musk a single tweet with two specific words (“Private” and “Secured”) and one $ amount (“$420”) to almost accomplish this.
If tech could have stripped any of these terms from the tweet before it hit the net, the Tesla board would have been very happy. This tech is already in use but, unfortunately, not for this purpose.
Saving A Fair Society
This post started as another RiskTech love story since the numbers showed more money sits in RegTech as opposed to Legal. However this year, all markets have been receiving a firm handshake from investors.
We all enjoy free but it comes at a price and giants like Facebook are slowly coming around to regulation. Therefore, RiskTech is making Legal great again.
So when you need to diffuse a bomb or clean up the damage, you hire a lawyer like Elon or testify before Congress like Mark.
But if you like to avoid the hassle or contain the drama, you build or buy RiskTech.