Debt and the Difficult conversation we should have in Legal
Just like the rest of the economy, legal tech is now loaded with debt. Let’s have a calm conversation about it.
We analyze the numbers and match them with conversations we have with our friends. First the numbers: we registered an increase in funding and acquisitions during 2021. On the surface, this looks encouraging for everyone in the legal industry. We ran a poll on LinkedIn and 91% voted that growth is real. The public views private capital injections as proof of a healthy industry.
Honestly, so do we. We collect, and clean data to calculate the numbers that measure growth. During this process, we discover many financing variations. And some of these discoveries have us concerned. One is the type of funding, and the financial engineering underlying them. For instance, there’s an uptick in debt financing [ paywall] of legal tech startups, as mentioned in Law360. Also, note the increase of private equity financing of acquisitions by Legal IT Insider. Other signs are down rounds, bridge rounds, or current investors passing on later rounds. It is especially worrying when this happens in crowded areas.
What concerns us is that all this money isn’t chasing demand for legal products or services. You make money by selling, you fake money by funding. Because funding is debt. Don’t panic. Almost every government has plunged into debt during the pandemic, and it has not spelled the end of the world. Banks printing money is a temporary measure to stave of worse. That ‘money’ is being channeled into companies as loans. However, perhaps we should spur demand for products rather than serve as a crutch to companies. Something akin to the US infrastructure plan. Let’s call it a ‘Liberty Bill’.
The companies, we track, offer support to lawyers. Most support the law by helping companies and citizens play by the rules. They all impact the demand for legal services in various ways. One boost the pandemic gave the legal industry is the increased focus on financial security (FinSec) and ESG. Companies and citizens alike were making sure that investments were secure, money’s in the bank, or in a bit of Bitcoin. Seriously, everyone wanted their contracts signed, invoices cleared and their affairs in order. Generally, these transactions go through lawyers. But since the pandemic forced remote work, they all went through legal technology. That’s one narrative that has fueled funding this year.
Remember the conversation we had? Most companies aren’t run by the CEOs alone, CFO’s and especially accountants play a huge part. They run the numbers on your company as well as many others. This provides them with a pretty broad perspective on profitability. Their influence grows when debt accumulates. At some point, the accountant will pull you aside to talk about the numbers. Usually, the moment arrives around three to four months before the company is about to burn out of existence.
I admire entrepreneurs because they combine commercial savvy with financial smarts to make profits. Occasionally, it takes a technological tweak to ensure the cost to produce is lower than the price you pay. Yet, this isn’t necessary if demand for your product keeps growing. This last point is key: demand drives down costs. Automation drives down cost, but automating in legal is really expensive. Getting attention in legal is really expensive. That’s why many companies in legal need funding to stay afloat on their way to sustainable revenue.
Like a supernova, we see the surges of growth throughout the legal galaxy. That’s why we can also pinpoint the black holes in that same galaxy we mention in the video below. We support entrepreneurs in legal because they take a risk on an industry that doesn’t take kindly to disruption. They bet on a surge and, with a bit of luck, the gamble pays off. With a bit of data analytics, the payoff is huge.
Remember, there is no such thing as free money. The world is in a “buy now and pay later” phase, and so is legal. At some point, we should expect to get a Margin Call just like the 2011 movie. If you haven’t seen it, I recommend The Big Short: same story, fewer suits, more spreadsheets, and humor. A bit like us.
Originally published at https://www.legalcomplex.com on August 31, 2021.