Atrium Law’s Pivot Puts $75M Into Legal Disruption Perspective

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we ask how investors will react to Atrium Law’s pivot and draw comparisons between the law firm’s ambitions and Amazon Go convenience stores.

So, Atrium Law isn’t all that much of a law firm anymore. The much-lauded venture pairing a software development company with a law firm founded by Silicon Valley entrepreneur Justin Kan made headlines this week for reportedly laying off most of its lawyers.

Law firms who paper venture capital deals will breathe a sigh of relief. They might even pop some schadenfreude-fueled champagne.

Kan came to the legal business in 2017 with $10 million in financing, and a year later he landed another $65 million in venture capital financing in a deal led by Andreessen Horowitz.

To the managing partner set, Kan was a well-funded, fresh-faced competitor from outside the industry who sparked more than his share of curiosity and, at some level, fear. He envisioned radical changes and his pedigree earned him a different kind of press than your typical legal tech venture. TechCrunch, for instance, said he was aiming “to replace lawyers with machine learning.”

In reality, Atrium was sitting lawyers next to software engineers, hoping to build a system that could automate its way to lower fees on legal work for start-up companies and higher market share. In a Bloomberg Businessweek article last year, Kan said his software could save about five hours from the typical lawyer papering a VC deal. TechCrunch said in June that Atrium’s “boring” software “kills legal busy work.”

The effort doesn’t seem at this point to be transforming the law firm business model. Instead, Atrium said this week it will focus on developing a professional services network that provides more than legal advice to its list of entrepreneur clients. It will still have some senior partners. But the firm’s in-house lawyers “will shift” to have the option of working as “preferred providers” with the company’s professional services network.

That leaves one stakeholder left to consider: the investors. It’s easy to envision some level of concern among that group over Atrium’s announcement. The news could be seen as an indication that the much-hyped transformation of the legal industry is still too difficult to pull off in reality.

“It’s hard to be optimistic about third-party innovators in legal right now,” Jordan Furlong, a well-known analyst who writes about the future of the legal services market, Tweeted on Wednesday, referencing Atrium.

But there are also ways investors might view Atrium’s pivot as closer to a one-off occurrence rather than blaming a broader inability to make money betting on new businesses in the legal industry.

It’s important to remember Atrium took a big bite. Building a software-powered law firm from the ground up is one of the biggest, most expensive challenges in legal innovation. There are more proven businesses that also attract investment like selling temporary lawyers and building contract management software or legal project management tools.

“For any knowledge worker, not just lawyers, reinventing the way they work is hard,” said Jeroen Plink, CEO of Clifford Chance Applied Solutions and an investor in the legal tech community. “I think that is the biggest challenge, and they didn’t crack that nut.”

There were signs the firm’s attempts to pair lawyers with software engineers had challenges. When the Atrium law firm named two new partners in 2018, one of them, Hans Kim, told me it had been “incredibly challenging” to build a law firm and software company at the same time.

“Lawyers speak a certain language, engineers speak a certain language, and that is definitely something we’ve improved over time,” Kim said. “It is essential that we speak the same language and develop the right products for the marketplace. In this first year, we’ve focused mostly on getting this [law firm] off the ground, and I think we’ve done an incredible job getting to where we are.”

Elevate Services runs a law firm and a software business. The company’s CEO Liam Brown told me investors in the legal industry will “shrug their shoulders” over Atrium’s pivot. He said trying to build software to augment a law firm is “an opportunity to burn through a lot of cash.”

“All this proves is you can’t build a software company and a law firm easily,” he said. “Lots of people have built law firms and lots of people have built software companies. But building them both and doing it successfully without running out of money is hard.”

The discussion about Atrium’s vision of dramatic change made me think of Amazon.com Inc.’s effort to completely revamp the way people experience convenience stores. Amazon Go stores let shoppers scan in, pick up food items from shelves and then leave. Then, in what seems like an act of magic, the shoppers receive a charge for the items they took out of the store.

It’s an expensive project for Amazon, even if the company might have ambitions for the technology beyond simply eliminating cashier jobs. A Morgan Stanley analyst said in 2018 that Amazon could spend $3 billion to build 3,000 of the camera-filled stores. Bloomberg Businessweek last year chronicled the years-long development of the stores in an article titled, “The Zillion-Dollar Convenience Store.” The story’s main question: “Will all this work be worth it?”

All of which is to say, building a software-enabled law firm will take a lot of time and money. Probably more than $75 million and a few years’ time. And even when someone thinks they’ve built it, other people will probably ask whether it was worth it. In the meantime, investors interested in the legal industry will likely continue betting on more down-to-earth business strategies.

Worth Your Time

On Building Law Firms: In a more tried-and-true way to build a law firm, a group of 15 lawyers from top firms including Boies Schiller and Paul Weiss launched a boutique this week. Interestingly, the group also included a lawyer from plaintiff’s firm Robbins Geller Rudman & Dowd. Boies Schiller also shuttered a small Orlando office.

On Alternative Models: Axiom’s managed services business relaunched as Factor. The group, which is one of three now-separate businesses formerly under the broader Axiom brand, helps companies manage large-scale contract negotiation projects.

On Legal Tech Investment: In another example of a discrete legal tech business line, AI-powered transcription business Verbit raised $31 million in a Series B funding round. That brings its total funding to $65 million since launching in 2017.

That’s it for this week. Thanks for reading and please send me your thoughts, critiques, and tips.