We all remember the horrors that followed the failure of the subprime. All of a sudden, we faced a collapse of the entire financial system. Surrounded by bankruptcy and devastation, even the optimists struggled to see the light at the end of the tunnel.
There was a bright side buried in the midst of all the chaos. Such intense crisis often leads to formidable change. We were compelled to wake up and examine the situation, and this happened in 2008/9. A reality check struck the public, and there was a general sense that the conventions we had so comfortably adopted were flawed. We felt betrayed.
The world became extremely wary of the financial system. Banks and their generously remunerated bankers were blamed and disliked. The banking sector was out-dated and needed disruption. In stepped the innovators.
Since 2008, global investment in the fintech sector has tripled, from $928 million to $2.97 billion, and is forecasted to reach up to $8 billion by 2018. We’ve seen Lending Club raise $392 million and Prosper — a peer-to-peer lending marketplace — raise $354 million…not to mention the incredible success of PayPal, and the up-and-coming money transferring startup backed by Richard Branson, TransferWise.
It appears that the loss of trust in the banking system has opened the world’s eyes to these alternative forms of dealing with our finances. Which then brings us to look at another sector that often goes hand in hand with financial services. Why have such leaps in innovation not been observed in the legal services industry?
There are a few inspiring players leading the way (such as LegalZoom), but it appears the industry has not yet wholeheartedly embraced the benefits involved in legaltech. Nevertheless, legaltech is trending amongst entrepreneurs and innovation is rising from every angle. Increasingly popular and already fairly established are the legal marketplaces.
Avvo, which has raised $132 million to date, works by providing a directory of lawyers who are then rated by both the platform and the consumers. Companies like Linkilaw have taken a different direction by placing itself as the matchmaker between consumers and lawyers.
Other businesses have focused their energy on facilitating tasks on the lawyer side. Clio is a powerful tool, enabling lawyers to track their time more efficiently and make better decisions through smartly presented generated data. There are case research tools such as Lex Machina and Ravel Law that are particularly powerful and used by judges and law students.
More recently, we have seen an uprise in B2C businesses within legaltech. Modria is an e-commerce dispute-resolution platform enabling consumers to avoid the tedious bureaucracy involved in settling a dispute. Remedying a similar need is Fixed, an app that appeals parking fines on your behalf. Fixed is becoming increasingly popular after appearing on Shark Tank and receiving a $700,000 investment from Mark Cuban.
Another very interesting consumer business is SupportPay, a platform that enables separated parents to divide childcare costs in a simple, yet effective manner.
The burgeoning of legaltech may lessen the demand for lawyers and decrease their earnings.
A significant obstacle in the rise of legaltech has been the common conception of the legal industry as a traditional sector with a smaller demand for technological innovation. Prominent and powerful figures in the sector are established, many of whom do not desire changes in the industry they have come to command. It also has a lot of crossover within the public sector, which is generally slower to respond to innovation.
Legaltech threatens the stability of these individuals because it has the potential to disturb the status quo. Legaltech brings about transparency and increased competition, and grants more capabilities to non-lawyers. Thus, the burgeoning of legaltech may lessen the demand for lawyers and decrease their earnings.
In spite of these hurdles, “Research and Markets” forecasts that the legal sector is on track to generate an annual $815 billion by 2017. Bearing this in mind, it wouldn’t come as a surprise to see an influx of investors and entrepreneurs enter the legaltech industry. The best year thus far for investment in legaltech companies was 2013, when the industry received more than $150 million. Although the following year faced a substantial decline in funding, the legaltech sector exhibits resilience and is continuing to evolve.
So, are we seeing the same hockey-stick growth of investment that fintech has enjoyed? In short, no, we’re not. Legaltech is far behind when it comes to attracting the same levels of investment.
Investors seem to find fintech up to 10 times more attractive. In 2014, the fintech industry received more than $12 billion in funding, the equivalent of 0.1 percent of the total financial industry. On the other hand, the legaltech industry raised about 0.01 percent of the global legal industry. Legaltech is overshadowed by fintech.
Another factor to keep in mind is that the legaltech industry is still in its early years. The industry is only about five years old, and many legaltech startups are not older than this. The delay in the development of the legaltech industry is partly because lawyers present a formidable challenge to change due to their knowledge of the law and proximity to policy makers.
Now is the opportune moment for legaltech to take-off. The legal market is shrinking, and competition is rising. Because lawyers often aren’t good marketers, increased competition is pushing them to pursue innovative means in order to better position themselves in the market. Furthermore, both private individuals and companies are becoming more conscious of their costs. Solutions brought about by legaltech can help control costs and slash spending.
Legaltech is an emerging sector, with an untapped potential that investors should not overlook. The legal industry currently finds itself in need of the innovative solutions for marketing, competition and cost-effectiveness that the legaltech sector can provide.