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by Melissa Rogozinski, Chief Executive Officer
A version of this article first appeared in the November 15, 2022 issue of Legaltech News.
Legal technology might be cutting edge, but it’s not new. It dates as far back as 1973 when Lexis invented the first digital terminal to access a database of case law. This was closely followed by the invention of the first word processing machine. These two technologies – the case law database and electronic document drafting – now form the basis the modern legal practice.
This observation begs the question: what’s the next big breakthrough in legal tech?
Legal technologies are hot commodities
Over $6.5 billion was invested in legal technology just in the year 2021. Venture capitalists (VCs) and other investors are discovering the true potential of hot legal technology prospects. These money-making experts have their ears to the ground for new opportunities in the legal tech space, but they are not interested in making bad investments.
Every VC looking to invest in the legal technology space is motivated by the pursuit of profit. But how do they know whether a particular legal tech product or service is going to generate a positive return?
The answer lies in an intersection between experience, analysis, and return on investment (ROI).
Investors want expert evaluation of legal technology prospects
Legal tech is a unique field. It’s not quite law, nor is it squarely technology. It’s technology that is useful specifically in legal applications – and without an understanding of the distinctive nature of law and technology, it is difficult to fully assess a good investment.
Industry insiders across the legal technology sector have ed decades of experience under their belts. However, since legal technology was a relatively small industry until quite recently, many of these industry insiders have segued into other careers. Some have joined the legal practice themselves, and others have become vendors in ancillary legal services. At least a few have become industry entrepreneurs and investors, and now this once scattered group of legal tech experts are coming back together into a cohesive community.
Any VC or other investor looking to add legal technologies to their portfolios would be wise to seek out consultants or others who have a greater depth of knowledge in the legal tech space.
Investors want an assessment based on known criteria
Technology fuels economic growth. Investing in good technology improves profitability of companies seeking ways to improve efficiency and cut costs. As more and more companies purchase and use good technology products and services, they become more agile and fuel broader growth. As this happens, the technology companies who came up with the great idea in the first place can become extremely lucrative investments.
Most legal technology innovators are looking for a pathway towards this very destination, and most VCs in legal technology are looking for these legal technology innovators. But how exactly do VCs and other experts determine if there is sufficient potential in a particular legal technology?
Investors tend to use one of three asset valuation approaches when investing in technology: cost valuation, market valuation, or income. The income approach is most common, but it is also the most vague. In this , investors estimate the future earning potential of a particular technology based on expected applications. Unfortunately, there has yet to be a set of criteria developed that can reliably determine this future value.
As a result, VCs and other investors must rely on legal technology experts to help them understand the current and potential value of technology applications in the legal marketplace.
Investors want ROI on legal tech investments
Technology investing is not for the faint of heart. It requires a forward-looking perspective and a willingness to take the reins with respect to business development. After all, the best way to achieve a strong return on an investment in legal technology is to work to make sure that the technology makes a definitive impact on the legal industry. This requires coordination with a network of seasoned legal insiders, influencers, marketers and strategists.
By working with individuals who understand and advocate the applications of new technologies in the legal industry, investors can ensure that their investment develops a strong brand and growth strategy. This requires identifying key stakeholders that exist at the intersection of law and technology – people who know how to drive results in this space.
Legal technology investors want great advice
The legal industry historically has a strong culture of risk aversion, which means that the legal technology buyers are not usually among early adopters of new technologies. There is good reason for this. Attorneys in charge of firms are responsible for resolving complex legal matters for their clients while also operating a business in a highly competitive and regulated space. It’s a situation that’s riddled with potential pitfalls, and smart practitioners are cautious about every step they take. This means any decision to adopt new technology will be met with some degree of resistance. There are many VCs who have invested in incredible legal technologies that simply have failed to establish a foothold in such a difficult space.
VCs and other investors want high-returning investments. But in the legal tech space, this can be very difficult to achieve without some degree of partnership with legal industry insiders. By aligning with the right network of experienced, veteran legal professionals who are with a new technologies, investors can put themselves on the right track for a strong legal tech portfolio.
