Why Worry? Five Insights from Legal Funding and M&A Activity after Q3 2023

5 min readOct 20, 2023

What were the Q3 2023 results, and what is the current market climate? How is AI impacting the Legal Tech industry?

TLDR: Legal Funding in Q3 2023 is normalizing, with Europe surpassing North America in capital raised for Legal Tech. AI’s impact is more evident in consumer-focused companies.

Housekeeping: we skipped our September analysis, but we had a good reason. That is why you’re getting a double shot this October. We’re also generating our analysis with GenAI. Basically, we’re feeding the machine our stats and teaching it our style.

Ok, curious about this year’s Legal Funding and M&A activity compared to 2022? Did you see our input on Law360’s analysis? Then let’s dive right in.

Legal Funding Q3 2023

1 Legal Funding for Q3 2023 stood at $590 Million, a 26% decrease. Deals numbered 85, marking an 11% drop. Interestingly, the number of investors plummeted by 45% to 145. These numbers do not include Governance, Risk, and Compliance (GRC). If we did include GRC, the total would be $4.8 Billion, and it would still be down 26% from last year.

Now, what’s Legalzoom doing up there? Aren’t they a publicly traded company? Yes, but they did raise privately. Just like law firms are also raising capital on private markets. Since this train has been picking up steam, we are keeping track. Why? Keep reading…

Debt vs. Venture Funding

2 If we ignore 2021 and 2022, the 2023 funding numbers look in line with expectations. However, if we look at the types of funding, we see a pattern emerging. Debt funding for the quarter was $243 Million, 41% of the total. Over the past year, debt funding reached $2.18 Billion (image above). Venture funding was $1.52 Billion in the last 365 days, but is significantly less by comparison. Remember, we discussed the burden of debt all the way back in 2021. That is the year we registered a record $2.6 Billion of debt raised by legal ventures.

What does Debt tell us?

3 It’s essential to clarify our funding classifications. Anything not labeled as venture or seed is considered debt. This includes equity financing, which technically isn’t debt. Why? To determine two scenarios: a company’s stage and a market’s climate. These metrics tell us: are we early, thriving, or merely surviving?

  • Seed and Early-stage Funding: Companies lack a product market fit. It’s too early to judge them because they have yet to bloom.
  • Series and Venture Funding: These companies have revenue, yet they burn capital. Therefore, companies need to raise for rapid growth, indicating a thriving stage.
  • Private Equity or Debt: These companies need cash and can’t secure venture funding. They go into survival mode when growth stalls.

Except for grants, the financing options mentioned involve borrowing against the future. There is no such thing as free money. Nonetheless, Seed and Series funding are luxuries, while Debt is a necessity.

Exits & Geography

4 Exits totaled $5.39 Billion, down by a whopping 68%. Notably, Magnet Forensics led the exit deals, not CaseText. The number of exit deals was 76, a 30% decrease.

If we looked at where capital was raised, Europe, including Great Britain, outshone North America. EU plus GB raised $1.16 Billion in 2023, while North America secured $1.01 Billion. We can not recall this ever happening.

Areas of Growth

5 Excluding Tax, the top categories that raised capital were: Practice Management (30%), Contracts (13%), and Claims (13%). AI did not necessarily turn a company into a desirable object for investors. To the contrary, we have yet to figure out the true costs of copilots. AI’s influence is in creating new products with a much broader reach. That’s what we discovered after capturing 81 new companies in just 28 days. In total, we added 1549 companies plus 18 new cities in a 333-day timespan on Legalpioneer.org. As explained at the 4th annual Global Legal Forum, these companies were not all founded recently.

What are the Patterns?

In case you missed our inaugural event, these were some of the revelations. To recap:

  • Legal funding is back to realistic levels;
  • Better yet, early-stage companies have access to more capital;
  • The worry is revenue growth is stalling, and it has been since 2021;
  • By creating new products, Legal may find new revenue.

Listen to The Equity pod where Crunchbase explains the word: realistic (hint: context is everything). If you did listen to the pod, you’ll hear some deviating results. For example, that seed funding is down. In the context of legal startups, the opposite is true. This historic fact, we revealed to the University of Leiden 11 months ago. Contrary to later stages, young companies are yet “too early to judge”.

Who is being judged? Stalling growth is currently most noticeable with Legal Tech stocks. Remember, the legal numbers above do not include GRC. Which may explain the legal tech stocks outliers (again: context). In short, the legal space is more nuanced than others would like you to believe. So what are others saying?

  • 25% increase in caseload due to better Practice Management by Clio;
  • 64% of in-house legal counsel haven’t used AI for legal work by ALM.com;
  • Wheels Of Justice Slow To Accept Legal Tech As Funding Falls by Crunchbase;
  • The Q3 venture capital market explained in five charts by Techcrunch;
  • Global Venture Funding In Q3 2023 Falls Again Despite Late-Stage Rebound Led By Huge AI Deals by Crunchbase;
  • VC continues to stumble through 2023 by PitchBook.

In short, we do our own homework. If you value context around numbers. If you need to know, what it all means for your area of operations. Schedule a chat.

Note: This analysis is partially artificially generated using numbers and calculations captured by Legalcomplex Spark.

Originally published at https://www.legalcomplex.com on October 20, 2023.




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