Why VCs and Private Equity See Increasing Possibilities in Legal Tech

If you have some spare change laying around, legal tech seems like the place to put it these days. Earlier this month, legal contract AI company LinkSquares raised $4.8 million during its latest round of financing. In February, Amity Ventures and Village Global led a seed funding round that saw Evisort raise $4.5 million. Numerous other businesses have also seen an influx of cash that has led to a host of M&A activity.

So is this just a temporary fad or a trend in the making? The answer might be a little bit of both depending upon how confident investors are that lawyers are improving their traditionally tempestuous relationship with technology.

“I think the skepticism that they’ll have is that lawyers have been bad customers of technology, and can tech vendors surmount that? ... I think that’s probably the biggest question that a venture person will have in almost any of these areas,” said Don Keller, a partner and member of the Technology Companies Group at Orrick.

Tyler Sosin, a partner at the venture capital firm Menlo Ventures, agreed that lawyers have been notoriously resistant to adopting new technologies. He views the increased interest in the legal tech market as part of a larger trend that sees cloud-based software seeping into departments or verticals that have traditionally been tougher to breach.

“More generally, just across the economy, you see that large banks and other institutions that never went to the cloud in the past are now more inclined to adopt it wholesale,” said Sosin.

It’s an inclination rooted in a tremendous amount of necessity. Lawyers can encounter thousands of documents in the course of a single case, and technology such as artificial intelligence or cloud-based e-discovery tools can help cut straight to the most pertinent information with little cost.

A venture capitalist evaluating the situation from the outside might notice what Sosin referred to as a “tremendous amount of surface area,” or places where providers of technological solutions can insert their products to address pain points that can no longer be ignored.

That certainly played a significant role in Menlo’s attraction to Everlaw. Last June, the firm led a Series B funding round that netted $25 million for the cloud-based e-discovery platform.

Sosin pointed out that the practice of e-discovery, for example, sits at the head of a much longer workflow, from the initial collection of documents all the way down to building files for deposition. There’s plenty of room along the way for new innovations and solutions that can make the practice of law easier, meaning tech companies have space to grow and expand.

“I still think that a lot of software needs to be built. A lot of workflows, delightful workflows, can be built to make the lives of everyone in that legal ecosystem better,” Sosin said.

Mike Dalewitz, president and founder of Review Right, identified data privacy, information governance and data security as pain points tangentially related to the e-discovery space that are opening up new opportunities for investment in private equity.

“You’ve got private equity money coming because the returns on investment of e-discovery actually have been good from a private equity perspective. Very good, very quickly,” Dalewitz said.

Lately the e-discovery space has been a hub of consolidation and M&A activity. January alone saw HaystackID acquire eTERA Consulting and e-discovery company Omnivere brought into the fold of legal services provider Driven Inc.

Dalewitz expects to see a lot more consolidation in that space, particularly among companies worth $30 million and under. If that development comes to pass, it could bring some overall benefit to the marketplace.

“One thing again, with consolidation comes consistency and best practices,” Dalewitz said.