Wheels Of Justice Slow To Accept Legal Tech As Funding Falls

After a couple years of robust growth, legal tech funding is on pace to have its slowest year since 2017.

Venture funding to legal tech startups is pacing this year to hit about $725 million, per Crunchbase data. That’s a steep decline from the past two years, when funding to such startups was around $2 billion each year — even last year as overall venture capital started to slow.

While it is true venture is down nearly everywhere this year — except when it comes to AI — it’s still striking to see legal tech funding on pace to decline approximately 65% year to year. While the legal industry has been slow to adopt new technologies for a variety of reasons — which include regulations — the industry did seem to make strides during COVID to integrate cloud and other new tech tools involving filings and communications

Little big money

However, that interest seems to have cooled, as the slowdown in dollars also matches a slowdown in deal flow — with only 129 deals being reported so far this year, compared to 268 last year and 284 in 2021.

Those deals also have not been big. While last year saw seven deals worth $100 million or  more — including San Francisco-based Ironclad’s $150 million Series E — this year has not seen one nine-figure round.

So far in 2023, there have only been three rounds of $30 million or more — compared to 12 such deals last year. Those rounds include:

• San Francisco-based EvenUp, which allows personal injury law firms to automate some workflows, raised a $50 million-plus Series B in April, valuing the company at $325 million.
• New York-based Masttro, a wealth information platform for high-net-worth families, raised a $43 million Series A in March.
• Israel-based Darrow locked up a $35 million Series B last month.

Darrow’s round is particularly interesting. The startup uses an AI-based data engine to take in publicly available documents and search for class-action litigation potential for lawyers.

Not surprisingly, investors see a lot of potential upside in AI as it relates to legal tech.

“There’s so much buzz around legal AI right now,” said Jake Saper, general partner at Emergence, at an AI conference last week in San Francisco.

AI’s influence on legal tech

Saper, whose firm’s an investor in Ironclad, said one of the things that excites him when it comes to AI is its ability to automate some aspects of high-value jobs.

That may help AI shake up legal tech, despite the industry’s notoriously glacial pace to accept new technologies. In fact, Darrow is one of a handful legal AI startups that have raised cash recently. Others, such as Portland-based Paxton AI, which employs generative AI to find regulatory insights, and Dallas-based Legalyze.ai, which uses the technology to generate legal documents, have raised money in the last few weeks.

Saper said lawyers know they have to adapt to new tech such as AI, as their customers are demanding it.

He also sees another important change in the industry — how the technology is being sold.

Once upon a time, many startups tried to sell directly to law firms. That proved futile in a lot of cases as lawyers have little incentive to automate tasks that they can bill to clients, and there can be regulatory concerns.

Now many companies instead are selling to corporations that have in-house legal teams — where productivity is heavily pushed.

Not easy

Others in the industry have a different view.

Kory Kelly founded his company — Austin, Texas-based Legal Karma — about three years ago. However, selling new tools to lawyers proved tough, and the company changed course to start selling its estate-planning tools to credit unions and banks instead.

Kelly — whose company just raised a $2 million seed round — said one of the biggest obstacles in the legal tech industry are rules (specifically the American Bar Association’s Rule 5.4) that can make investing in and using new technology innovations difficult for law firms.

The rule allows only lawyers to own law firms — with no outside investment — as well as offer legal services, which can complicate the use of technology.

“I think legal tech will struggle until it’s regulated by the state bar,” Kelly said.

Elizabeth Piñón — a partner at Miami-based VC fund TheVentureCity, which took part in Legal Karma’s seed — has been skeptical of investing in legal tech for those reasons but was swayed in this case because of Legal Karma’s strategy.

“I am very hesitant” to invest in legal tech, she said. “We have no other bets there. We are not actively seeking out legal tech startups.”

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Illustration: Dom Guzman