What Is The Right Valuation Of Any Legal Tech Startup?
We recently received several cries on how hard it is to raise venture capital for a startup in law, why? Valuation
One of our most-read analyses is about the acquisition value of legal tech startups. Only recently we discovered why that is: it helps founders convince investors. Recent exits of SignRequest and Clocktimizer have largely confirmed the thesis: the value of a startup depends on the type of customer. Does your product work for consumers (B2C) or businesses (B2B)? As for the type of business: is it small or big? If so, are you selling to corporates or law firms?
Based on the recent exit values, our numbers show that the exit value declines when we travel along this spectrum. Small businesses represent a higher value and usually faster exits. The opposite is true for providers selling strictly to legal professionals. We speculate that the underlying reason is pure supply and demand. Perhaps in some popular areas, there is less demand and an oversupply of solutions offered to the legal service sector. So a startup valuation is largely determined by the customer and not necessarily the product itself.
Why is your target customer such a factor? Well, you can get a large cheque from a few customers or get a small one from many. Both strategies have their challenges but the law sector has an ace: getting paid is almost guaranteed by the legal events. Case in point: without a signed contract it’s difficult to claim. If you do have a claim, you usually have to run it by a judge or arbitrator. If you have to appear in court, you’ll need representation. We explored the Legal Roadmap and identified Contracts and Claims as two of over 10 areas with high-frequency legal events. And BTW, don’t forget to pay your taxes.
However, there’s one decisive variable we only explored in the roadmap: frequency. When a startup latches on to a high-frequency event, the more likely its valuation will increase. Let’s address the elephant: signing a contract happens more often than reviewing or drafting one. Therefore, e-Sign companies sit on top of the food chain. The addition of DocuSign to the NASDAQ-100 means it is one of the 100 fastest-growing ‘’ companies in the world. That’s just for signing sales contracts and before they decided to go after high-value \ high-frequency contracts like mortgages, and estates. Nope, we won’t discuss Ethereum, smart contracts, and zero-proof. We’re saving that for a special Facebook-Tesla edition.
Since we did bring up the blockchain, we may as well talk about the actual force behind frequency: network effects. The network effect is the mesh of human interactions that multiplies the use of technology. Google and Facebook are the biggest examples of tapping into a network of commerce. Even though most legal events are enforced by law and don’t require networks, they can leverage networks like finance. Financial security is the network that propelled DocuSign into unicorn stratosphere.
Now buried within the network of financial transactions reside numerous legal events. The pandemic accelerated mergers and acquisitions which reportedly boosted many law firm earnings. We’re also waiting on a barrage of bankruptcies that need legal handholding. In our latest Legal IT Insider chart, we debut an overview of areas using advanced tech. The biggest area to capture capital was fraud detection and a notable round in geo-analytics. One reason we keep nudging Geo is that it directly underpins some high-frequency legal claims. Case in point: real estate disputes are arguably the single largest source of legal conflicts in the world. This is a vibrant area we recently explored in our access to justice breakdown.
Now that we’re talking about Geo, here is where it gets tricky: when is a solution part of a legal event? Moreover, since we’re determining valuations: do we want it to be a legal event? A legal event can be the result of regulation like fraud detection or be a monopoly such as court proceedings. Both RiskTech and LegalTech markets look attractive since they are difficult to enter. However, due to their closed nature, legal events aren’t easily fueled by outside forces. A state we described in The Fall of Legal Tech and our most popular “ Will lawyers be replaced by GPT-3? “ And unfortunately, this is where the crying starts.
And perhaps we can offer a tissue. Not all legal events originate from the same universe of rules. Some even spontaneously appear based on cultural shifts due to societal events. Covid made us value CivicTech and privacy, even more, when we largely rejected contact tracing apps. #MeToo was a catalyst for HR apps to consider using virtual reality as a solution to help us behave. And the biggest growth engine is the ESG movement we discussed in our previous analysis. None of these insights come from anecdotes or experience, they are directly derived from metrics in the Spark dashboard. We are not the experts, our data is.
Enough prognosis, let’s be practical. Here is a StartUp Fundraising Checklist we stumbled upon with a great set of tasks to undertake to get funded. When you run through the list, you’ll notice that there is some tedious research you need:
- What’s my market size? We use the CAT™ model for an instant and exact calculation ;
- Who are my competitors? Check out our Challengers analysis;
- What’s my valuation? Start reading from the top;
- Setting up an investor CRM? Our Investor dashboard with FOMO filter is just 5 clicks
But yes, we agree. All of the above is too long, didn’t read ( TLDR). So we are announcing the launch of a one-click platform to provide all four answers instantly on a single page.
Originally published at https://www.legalcomplex.com on May 18, 2021.