Legal Tech’s Area of interest Market Is not (Utterly) Scaring Off Investors

While over a billion dollars in private equity was raised by legal tech companies in 2021, it’s still a fairly small sector compared to the broader tech market, which private equity firms have publicly backed with over $401.7 billion in 2021 alone. Still, that isn’t stopping interested investors from funding the legal tech market.

However, legal tech companies’ limited scope can narrow their ability to raise outside funds, noted Hector Guinness, a member of private equity firm Hg Capital’s New York team. “Not all investors are happy with a very focused strategy,” he said.

But to avoid being perceived as a niche provider, some tech companies servicing the legal market are avoiding the legal tech label to appear more enterprise-centric, Guinness noted. “That’s certainly a dynamic we see a lot. Even some of the best legal tech companies will present themselves as being a much broader solution, even if they are not,” he added.

Still, despite being a small pond, investors see opportunities in legal tech.

“They understand that there is kind of a buzz about the market,” said IDC Corp. privacy and legal technology research manager Ryan O’Leary, who advises investors on the legal tech market. “They’re just going where the money is. A lot of conversations I’ve had [with investors] are explaining the landscape and the opportunities and what everyone is doing, the need for the tools and the players in the game. I think it’s a very niche market at times, and unless you’re entrenched in it … it’s an odd little duck. It can be a mystery piece.”

To be sure, investors’ limited knowledge of legal tech isn’t unique, O’Leary noted. “I don’t think it’s uncommon that investors don’t obsess over the minutiae of the everyday needs of legal tech and what the pain points are,” he said. However, “they understand there’s a market opportunity there and they’re more than happy to provide the backing.”

Some private equity firms also have the patience to wait for a return on their investment to improve lawyers’ well-known change aversion, Guinness noted.

“There are certainly investors like Hg that are prepared to take a long-term view and understand that the ROI on growth and driving change in law firms takes time to go through,” Guinness said. In late 2021, Hg Capital announced it led Litera Corp.’s investment round for an undisclosed sum after initially investing in the legal tech company in 2019.

O’Leary agreed that investment opportunities are available to interested legal tech companies. However, it’s up to the company to ensure ROI expectations are aligned, he noted.

“There’s certainly players there, private equity, that are looking for the long game. That comes down to the due diligence of the legal tech folks that are taking fund rounds and investments— they need to make sure the investors are on the same page and looking for the same goal as them, versus looking for a quick flip,” O’Leary said.