Another is the impact of innovation and technology on all business areas, including lawyers and the legal services sector.
Law firm Orrick Herrington and Sutcliffe’s recent investments in Priori Legal and term sheet data analysis provider Aumni, coinciding with Latham & Watkins and Clifford Chance’s joint investment in legal tech platform Reynen Court’s $4.5m round, reflect the strategic interest in so-called legaltech startups.
This is a change from nascent activity up until last year. A flurry activity at the start of 2010s, such as Google Ventures’ (now known as GV) backing of Rocket Lawyer and VC success for LegalZoom, saw Dentons launch its Nextlaw Ventures, an early-stage venture capital firm focused on legal technology set up by Dan Jansen, back in 2015.
But as the Legaltech Startup Report 2019 by Thomson Reuters, a media group and publisher of Westlaw case histories and analysis services, said: “The appetite for innovation of new technology solutions has not yet become the default way to work.”
This might be changing. Nextlaw Ventures is raising its second fund with external limited partners, Jansen said on his LinkedIn profile, while serial entrepreneur Zach Posner has turned his attention to the sector with an investment in Aumni and creation of the LegalTech Fund.
Neel Lilani, managing director at Orrick, said its separate Legal Tech Fund had been started at about the same time one of its most senior partners, Don Keller, in January spun out Joinder, a software-as-a-service collaboration platform that connects companies to their lawyers.
Lilani said Orrick’s fund made small investments to access information rather than greatly affect the capital table in case being a larger shareholder affected its guidance as a founder-friendly counsel.
He added: “There is a need to innovate. Alternative law practices, such as Axiom Legal, [a UK-based provider of on-demand lawyers,] and Clerky, set up by Orrick associates to use our forms as the basis for formation documents without the need for a lawyer, are battling for early-stage deals [on cost].
“We have wanted to work with early-stage entrepreneurs and then continue to provide counsel through the later stages so cost efficiency on pricing is important.
“Innovation is deep in our culture. Orrick was one of the first firms to onshore its back office in West Virginia for research and finance and it has developed its innovation centre.
“Cost efficiency is important, but founders recognise the importance of good counsel.”
The innovator’s dilemma argues incumbents in lucrative sectors underplay threats from cheaper rivals that start with less comprehensive offering. Different threats abound, with accountants and tech and media firms buying or investing in lawyers, including accountant Deloitte’s purchase of law firm Kemp Little this week, while last month discovery service Disco raised $60m.
The new legal fund complemented Orrick’s General Tech Fund, which takes stakes in some clients as participant rather than lead investors in a round.
Its direct investments are chosen for upside potential, quality of who else is involved and management capabilities, rather than in lieu of fees, Lilani added.
In the dot.com bubble era before the millennium law firms had a reputation for asking for 1% of equity in startups in lieu of fees but Lilani said the market would not bear this now as it created scepticism of portfolio company quality.
Instead, the venture market itself has become more competitive and even through covid-19 average valuations have broadly been seen to increase.
