Technology

When VC Meets JD

Venture capital is getting in on the law game. Will Wall Street follow?

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Julia Shapiro

It’s been a sizzling couple of months in the legal technology world. Hundreds of millions of dollars have poured into legal tech startups since May, and the pace will likely only increase over the coming years.

The biggest round of funding in recent memory, and one of the biggest in the history of legal tech, went to LegalZoom, the do-it-yourself legal document company fronted by famed OJ lawyer Robert Shapiro.  Investors sunk a cool half-billion into the company, in a deal valuing LegalZoom in the $2 billion range.  That’s hot on the heels of the $100 million invested in Exterro, an eDiscovery company out of Oregon looking to incorporate artificial intelligence into its legal services products.

LegalZoom and Exterro may be the big fish, but numerous other litigation tech companies have been seeing recent eight-figure buy-ins from the venture capital world. Most have been artificial intelligence companies with an eDiscovery bent, presumably looking to apply Big Data techniques to reduce the costs and time sinks of traditional discovery methods. Technology solutions to maximize efficiency and automate previously human-based tasks seem right in the traditional VC wheelhouse, and now that investors are starting to place their bets, we can probably expect an explosion of eDiscovery investment in the coming years from follow-ons and copycats.

THE BAD OLD DAYS

Legal tech investment only heated up very recently, however. In fact, that industry has traditionally been anathema to outside investment. I recently spoke with Julia Shapiro, the founder of Hire An Esquire, an online legal staffing solution that’s been growing substantially since its launch in 2011. After two years of organic growth based entirely on hustle and sweat, Shapiro and her colleagues started seeking outside investment from venture firms to fuel their growth.

They mostly ran into brick wall after brick wall. To start with, according to Shapiro, “The research shows that actual venture capital firms like to fund young white men who went to Ivy League schools. And if you’re a woman that gets funded, you usually went to an Ivy League school and you’re usually pushing a fashion, makeup, or clothing company of some form.” Shapiro, a USC and Temple Law grad who was selling legal solutions, says the mindset that dominates the VC world made securing funding a frustrating process.

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More than that, legal tech was a near-impossible sell to investors because, until recently, tech has been nearly impossible to sell to the legal profession. Shapiro was approaching potential client firms with a stable of vetted, credentialed, qualified contract attorneys to hire, a platform to hire them on, and a support system for her clients. She got turned down time and again in favor of what the firms had been doing already: Craigslist ads. I wish I was exaggerating, but yes, firms working on multi-million dollar deals were happy finding their contract attorneys on the same forum you can use to buy old gym equipment. It didn’t matter that what Shapiro was offering was better in every way; it mattered that law firms resist change, resist new technologies, and don’t want to fix what they don’t see as broken. Lawyers’ documented mistrustof their ability to adapt to change is well-founded.

Despite these hurdles, months of hustling led to Shapiro securing some modest investment, making her one of the OGs of venture capital funding in the legal space. Shapiro’s been leveraging that investment into substantial growth, and if the VC world is prepping for a free-for-all on legal tech investment, she may soon find herself fielding more offers for a cash infusion.

LONDON CALLING

So far, the institutional investment revolution has been limited to legal technologies, not the broader legal industry, but it’s entirely possible that we’re heading for a confluence of events that would either massively entrench, or massively disrupt, the Biglaw ecosystem.

Law firms, when run well, are consistent profit-generating machines. They seem like they’d be catnip for investment from outside funds, but our ethics rules against fee-splitting with non-attorneys have always been a huge practical bar to that concept. The fear has always been that giving non-attorneys a share of a law firm’s pie, without those non-attorneys being subject to our ethical rules, may lead to lawyers being pressured into making unethical choices. The United Kingdom decided to see if those worries were well-founded. As I’ve discussed previously in this space, in 2012 it legalized investment, management, and equity ownership of law firms by non-attorneys. Thus far, it appears the sky has not yet fallen. Law firms are getting the financial boosts they need to grow, investors are seeing returns, and firms’ ethical obligations appear to be intact.

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MORGAN STANLEY, ESQ?

I suspect it’s a matter of when, not if, the American bars follow suit and liberalize their own approach to permit outside investment, and when they do the effects will be enormous. VC firms looking for massive growth may spot hot legal talent and fund their firm, hoping for a hit. A venture capital firm with a disrupt-and-conquer business model would probably salivate at getting onboard a contingency fee practice, which can potentially obtain seven- or eight-figure fee awards for a massive return on investment. We already see inklings of this in the exploding litigation financing industry.

On the other end of the risk spectrum, traditional institutional investors like mutual funds might seek equity in the biggest of Biglaw, hoping to carve out a percentage of a reliable cash-generating machine with nearly guaranteed profits. If a firm like Kirkland & Ellis had a few hundred million in cash suddenly at its disposal, its chances of permanently remaining at the pinnacle of the legal profession go up drastically.

Money warps the world, and a lot of it may be heading into the legal marketplace in the coming years. The cloistered, genteel profession of the past is long gone, and an investment revolution would render the market even less recognizable than it already is. Whoever gets in on the game first stands to be a huge winner. The question is, when does the feeding frenzy start, and who profits when it does?

James Goodnow

James Goodnow is an attorney, commentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of an NLJ 250 law firm. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.

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