While investments in the legal technology industry seemed to have slowed down over the past few quarters, it doesn’t mean that investors’ checkbooks have been collecting dust.
In fact, legal tech funding rounds in Q2 show that advancements in generative artificial intelligence have become an attractive venture for investors, especially for those that may have overlooked the legal technology industry in the past.
Still, while generative AI is likely to continue to drive more legal tech funding going forward, industry experts note that investors still haven’t forgotten other areas of the legal tech market.
To be sure, some of the companies leveraging generative AI in their products had some of the largest funding rounds of Q2. Generative AI platform Harvey, for example, closed at $21 million in late April, while EvenUp, an AI-powered drafting solution catering to personal injury attorneys, secured $50.5 million in May.
Such investments are likely to continue throughout the rest of the year and beyond, said Raymond Blyd, founder and author of Legalcomplex.
“They have to. They have no choice,” he said. “The opportunity is so huge.”
The opportunity that Blyd is referring to is twofold for the legal tech industry. Not only is the financial potential behind generative AI-powered products significant, but the technology could also help grow the legal tech market as a whole.
“Those tools have just shot up in potential value. … I feel like the total addressable market of legal tech just went through the roof,” said Joe Borstein, CEO of LexFusion. He added, “The addressable market is really much bigger than it was just a few months ago.”
Some expect the investment boom surrounding generative AI to last for a couple of years as the technology puts the legal tech world on the radar of investors that may have disregarded the industry in the past.
“We are very interested in this and looking at companies now,” said Zach Posner, managing partner and co-founder of The LegalTech Fund. He added, “But what’s actually more interesting is how a lot of the traditional venture funds that have historically overlooked legal are looking at this space.”
Still, while generative AI is likely to spur significant investments in the legal tech industry, it doesn’t mean that the companies who won’t leverage the technology will be left fundless.
“Is AI the only thing keeping funding afloat? The answer is actually no. It is that there are companies that are doing really clever things in verticals instead of horizontally,” Blyd said. “That still will get funding.”
Indeed, although generative AI may have accelerated the industry’s adoption of technology, there are still many areas where the legal world is lagging behind.
“There is more than enough funding for entrepreneurs with good ideas that understand customers’ pain points. I know the numbers, the headlines look down, [but] I’m telling you, we are very, very excited to write checks into companies right now,” Posner said. He added, “There’s still basic workflows that need to be solved. There’s a huge opportunity in this space that we are excited to talk to entrepreneurs about.”
Of course, it’s still early on the generative AI timeline. While significant investments were made in the second quarter of this year, Blyd noted that leveraging generative AI can be costly for companies and whether these investments will turn into successful profits is, for now, an open question.
“AI is a really expensive operation … [and] that is why me and some others are curious about how some of these investments and acquisitions will pan out,” he said.
