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ANALYSIS: 2019 Legal Tech Investments Top $1B After Strong Q3

Oct. 11, 2019, 10:31 AM

Quarterly investment in legal tech companies reached new heights in the third quarter, with nearly $700 million in disclosed funding to legal tech firms. Q3’s results mean that funding of legal tech in 2019 has exceeded the $1 billion mark well ahead of year’s end.

According to figures compiled by Bloomberg Law, Q1 saw $408 million in legal tech investment and Q2 had $122 million in investment, which bring total 2019 legal tech investment to $1.229 billion.

2018 was a record year, with legal tech investment hitting $1 billion. As Bob Ambrogi pointed out, half of that $1 billion was attributable to a $500 million investment in Legal Zoom. After 2019 Q3, it’s clear that this year is seeing large-dollar investment in a wider diversity of legal tech firms.

Top 10 Funding Rounds

The strong Q3 total , which is based on an analysis of Crunchbase data and other reports on the sector, might be slightly understated. Some companies with applications in legal, such as artificial intelligence or SaaS companies, are not designated as “legal” by Crunchbase, and thus could have been missed in this roundup. And nine additional funding rounds, in Axiom (U.S.), a360inc (U.S.), CodeLex (Singapore), digitalCounsels (Switzerland), iCONECT Development (U.S.), Legal Utopia (U.K.), LexFox (Germany), orthodox.ai (U.S.), and Usercentrics (Germany), were for undisclosed amounts.

First, note the number of investments at $50 million or more: six. There was only one investment of $50 million or more last quarter: $50 million to Litify. And three Q3 deals topped the $100 million mark, reflecting an increased comfort level among investors with putting big dollars into this sector.

The largest investment, $250 million in legal practice management software firm Clio, helped cement Q3’s soaring investment numbers.

Another theme from Q3 was the number of investments in contract lifecycle management and analytics companies. Icertis, ContractPodAi and Ironclad all had investments in the top 10, and three other companies (Lexion, ThoughtRiver, Genie AI) in the contracts space received investments in Q3, for a total of $230.7 million in the contracts review, automation, and management segment. This includes a nearly $1 million grant to Genie AI from UK Research and Innovation, a UK innovation NGO.

$150M in Litigation Finance Firms

The litigation finance segment saw two large investments in Q3: Legalist raised $100 million, and Validity Finance raised $50 million.

Legalist seems to be both access-to-justice-focused and commercially minded. It approves funding for individual plaintiffs, but is also targeting law firms seeking advances on pending settlements. The startup targets the “middle market” of commercial cases: co-founder Eva Shang told TechCrunch that the company mainly funds cases that require less than $1 million. Retired 7th Circuit Court of Appeals Judge Richard Posner joined Legalist as an advisor earlier this year as part of his professed mission to increase access to the court system.

Validity Finance adds its $50 million Q3 investment to the $250 million it raised in June 2018. The company is less explicit about the dollar values of cases it funds, but it is focused on commercial litigation. Its founder/CEO and several key upper managers previously worked at Bentham IMF, a large public litigation funder.

Outside the Top 10: Axiom, Wilson Sonsini Investment

One significant funding round doesn’t appear on the top 10 list: legal staffing provider Axiom accepted an undisclosed investment from Permira Funds in September. The investment was notable because the company had announced in February that it was spinning off two business lines to prepare for a public offering. Axiom shed contract analytics service Knowable and legal process consultancy Axiom Managed Solutions to get down to its core business of on-demand legal talent.

Axiom CEO Elena Donio told Bloomberg Law that private equity was a “superior option” to an IPO.

Incidentally, Permira Funds is the largest stakeholder in LegalZoom—they acquired a $200 million majority interest in 2014 after LegalZoom scrapped plans for an IPO in 2012 due to valuation concerns.

In a smaller deal, Wilson Sonsini co-invested $4.2 million in Lexion, an AI-powered contract analysis startup. It’s not uncommon for a law firm to invest in a legal tech startup; some firms, however, elect to “invest” by developing their own in-house tech to market to clients and others. Wilson Sonsini is doing both—it launched SixFifty, a legal tech software subsidiary that develops legal process tools, in February.

Another example of how Wilson Sonsini is out ahead on tech engagement: in August it became the first major law firm to start using transactions platform Doxly to automate document signing and closings for an entire practice (its emerging companies group).

Investment by Customer Type

For all the talk about how legal tech can enable greater access to justice, it’s clear that investment interest is greater in the B2B segment of this market. Companies that market their services to law firms and companies are simply raising more dollars than those that target justice solutions to individual consumers.

Only two B2C companies were in the top 10 for legal tech investments in Q3. Notarize, an e-notary app that markets to individuals and businesses, received $36.9 million from lead investors Realogy Holdings, Polaris Partners, and homebuilder Lennar Corporation. While Notarize markets to individuals, the interest from real estate investors suggests more about Notarize’s aims in the B2B space going forward.

Parking ticket and small claims court automation app DoNotPay edged into the Q3 top 10, with $4.6 million in investment.

That’s not to say that B2B legal tech companies have done nothing for access to justice. For example, Clio, the law practice management software that received a $250 million investment in Q3, provides legal practice management and client engagement tools aimed at solo and small law firms.

Clio’s CEO and co-founder, Jack Newton, said in a statement accompanying the investment, “Over three-quarters of legal problems don’t receive legal assistance, yet lawyers are struggling to find new clients—it’s clear that something in the system is broken.” Clio’s system focuses on “unlocking new efficiencies and entry points to legal services,” in part for the purpose of “[making] legal services more accessible,” Newton said.

Whether Clio’s tech is translating into lower rates and greater access for clients is unclear, but companies like Clio are certainly creating efficiencies for small law.

Investment by Country

U.S. companies outperformed other legal tech firms on investment for a third consecutive quarter. Clio’s raise of $250 million put Canada among the top countries for legal tech investment for the first time this year. The U.K., which has held its place every quarter among the top countries for legal tech investment, bounced back from a slow $5.5 million in Q2 to $70.1 million in Q3.

Q3 Deals

Litera Microsystems, the document drafting and management software company that was sold in May to Hg Private Equity Group, closed two acquisitions in Q3: of Workshare, a competitor document platform, and Doxly, which makes transaction management software. Litera’s CEO Avaneesh Marwaha said of the Doxly deal that it would “extend the key attributes of our products to the transaction space.”

Another big deal in Q3: Thomas Reuters’ acquisition of legal and regulatory collaboration platform HighQ, which currently has more than half of the Global 100 firms as customers, according to a TR press release. The HighQ platform enables collaboration between law firms and in-house legal, its CEO and founder Ajay Patel said in a statement. TR is aiming to sell the workflow tool to more large and mid-size law firms and corporate legal departments.

Finally, not on-list because it’s a joint venture, Lexis Nexis announced it is partnering with Knowable, the Axiom spin-off. Knowable is a machine learning-based contract review and analysis tool and, according to Artificial Lawyer, represents Lexis’ first move into legal AI doc review.

Did we miss a big deal in Q3? Have other thoughts on legal technology investment’s impact? Email me at mmcevoy@bloomberglaw.com or connect with me on Twitter: @megmcevoy.