The Covid-19 crisis hit sales projections and altered roadmaps for LawTech startup, but it also has increased the need for technology adoption at law firms.
In May, following the enforcement of lockdown measures worldwide, Barclays Eagle Labs surveyed more than 70 LawTech firms and found that just 8% were put at extreme risk of having to close completely. The majority of startups seeking funding said their rounds were unaffected, with some reporting an improving environment. Like most businesses, however, the vast majority (85%) had to lean on some form of government financial support package.
Of the firms surveyed, most were pre-seed or seed, with almost half (44%) between 2 to 5 years old. More than half (55%) of respondents were UK businesses, with the rest made up from a global spread, including firms from Australia, US, India, Japan and South Africa.
The scale of change approaching the entire legal industry is more significant, with thousands of high street and sole practitioner law firms predicted to shutter as a result of the Covid-19 crisis, according to a recent report from the Law Society. Cash flow pressures and lower fee income have a lot of practices in England and Wales at risk. Law firms have had to furlough staff and now we’re seeing redundancies as the scheme winds down. Firms have been forced to focus on costs in a way they never have before, which is driving innovation.
Chris Grant, LawTech Director at Barclays Eagle Labs, says that the legal industry is perceived as one which is almost resistant to change, particularly when it comes to technology.
“Covid-19 has been difficult for all of us, but it has created an environment where change has become part of everyday life, and the legal industry in particular has risen to that challenge,” he explains.
“We are seeing LawTech being adopted at a faster rate than ever before, with lawyers seeking help from LawTech startups to solve the new problems that are being faced and some of the old ones which never quite embedded. The LawTech community is coming together and all signs point towards opportunities for growth and improved legal service delivery.”
Laura Bygrave, Innovation and Ventures Lead, Deloitte Legal, also remains optimistic for legal technology startups over the next 12 months, despite the obvious challenges posed by the pandemic. The shift to remote working has accelerated the adoption of technology and resulted in significant cultural change on a scale which couldn't have been anticipated at the start of 2020.
“A number of startups have accelerated their funding rounds as a result of valuations holding strong due to clearer, more focused roadmaps as customers better communicating their needs. We've seen a number of early stage companies pivot their roadmap based on new opportunities and client demand. Being early stage enables the agility to respond to market demand in a way enterprise companies simply cannot.”
The sales outlook
The survey revealed a mixed impact on sales and revenue for LawTech firms because of Covid-19. While there was disruption, only 15% reported a drop in demand, with 24% seeing moderate losses to sales, 13% saying it was about the same and 18% actually seeing an increase in demand. Over the three months prior, two thirds recorded an increase in revenue.
Dan Sinclair, Strategy Manager and Head of MDR LAB, Mishcon de Reya, says that Covid-19 could be a catalyst for growth in certain circumstances. “Covid-19 has challenged the status quo. It has forced firms and lawyers out of their comfort zone - whether that be adjusting to remote working, or a renewed willingness to use different tools to complete work and collaborate with colleagues and clients,” he says.
“If you are an early stage business with a clear identity and value proposition, and you have a good handle on who your target customers are, Covid-19 could be a catalyst for growth.”
Despite the relatively optimistic growth figures, founders cited myriad challenges they expected to face due to Covid-19 and lockdown.
Sales took the number one spot, with 68%, followed by raising investment, sourcing new customers, cash flow and expanding into new markets, as other challenges on the horizon, each at around 30%.
In terms of product roadmaps, 60% have marginally reprioritised, but have largely stuck to their plans. Around 18% planned no changes at all, 17% planned significant changes, and 5% totally changed course.
Shruti Ajitsaria, Head of Fuse, Allen & Overy, believes this may reflect an increased need for legal tech while many have been working from home. “My expectation is that some of that reprioritisation may also involve an acceleration of certain features, which I think will be to the ultimate benefit of the respondents,” she adds.
Dan Sinclair agreed: “A roadmap is a living and breathing document, so it is great that this cohort of companies are using this time to zoom out and ensure that their product strategy and vision remains relevant in light of the changing market conditions.”
When it comes to paying for space, the vast majority of startups were either not paying or have been able to renegotiate rent. Only 7% have been unable to successfully achieve a reduction.
“It’s encouraging to see that these companies have largely not had to pay full rent. It will be interesting to see how the landscape changes as we begin to return to the workplace,” said Ajitsaria.
When it comes to funding rounds, a tenth of the firms surveyed said Covid-19 hadn’t affected their funding at all, though more than a third (35%) reported it had. Meanwhile, 7% said it actually improved their funding environment.
“Largely those who were mid-fundraise were successfully able to close. It will likely take some time before we are able to understand the full impact of how people will change the investment decisions going forward,” says Ajitsaria.
Sinclair adds that he sees a shift back to the "go-big-or-go-bust" approach to fundraising, with founders opting to raise larger rounds that will see them through a 18 to 24 month period. “This is understandable, so long as it is the right thing to help drive the business forward. The larger the round, the higher the price, the harder the next hurdle is to hit.”
The survey showed a 50/50 split as to whether respondents were being helped with business knowledge by their investors. “Perhaps this is an opportunity for the respondents to more proactively consider how they can develop an ask of investors, to ensure that they are more personally invested in the business,” advises Ajitsaria.
Unsurprisingly, the vast majority of firms have used government support schemes were possible. Around 80% used the furlough scheme, which ends in October, and 85% applied for a Government Business Interruption loan.
When asked in what ways the government could support their business, access to loans and grants was the number one response (57%), followed by opening up of public data (11%), employment support (7%) and information about procurement data (7%).
As the government schemes are withdrawn, Sinclair says that the LegalTech community has to “come together to ensure the right support is in place to sustain the growth and adoption of technology so that we can continue to improve the way legal services are delivered.”
Opportunities for growth
As the wider economy and legal industry deals with the continued fallout from Covid it is clear than despite clear challenges, it has created opportunities and avenues for growth in LawTech. The new environment is more fertile for change with legal tech solutions and adoption been pushed to the forefront. As with all adoption and significant change there are costs attached but firms understand that to survive and succeed they need to invest in the future and new ways of working.
In addition, there will be more people seeking legal support, for example in employment and finance. Access to justice and legal information will be more important than ever, particularly in an environment where it is difficult to meet face to face.
“Hopefully the tide has turned for good and legal will not roll back to the way things used to be done,” adds Chris Grant.