With early-stage investment in legal-tech hitting new records, it’s not only start-ups that are attracting investor interest. In this article, Xavier looks at what is it that makes the sector so appealing for later-stage growth and buyout investors.
"The legal sector, in general, is big and fragmented and there are lots of inefficiencies in the way services are delivered. I would suspect legal services businesses don’t look massively different in 2019 than they did in 1919, which doesn’t describe most industries. For investors that means two things: there are probably quite a lot of mediocre businesses out there, but equally there is an opportunity for someone to take that sector and make it more efficient and more effective."
What’s new? How is the sector evolving?
"We find the workflow management space interesting. Most large firms use workflow management tools, but they are using them in the context of the old-fashioned time and materials model. At the moment, they are not really incentivised to reduce the time spent on a task and, even if they think they are, there is a cultural conditioning towards maximising hours recorded. The other interesting area is how to get technology to perform tasks currently performed by lawyers. There are all sorts of activity around machine learning, AI and digital scanning. Those technologies have not been widely adopted yet but they will be and we want to invest in the ones that are going to win."
Are you looking at AI-driven businesses as viable propositions today, or building relationships for further down the line when the technology is more proven?
"The challenge for firms like ours is that the most exciting businesses are the ones that grow most quickly. That means the time period between being too small for us to invest in and too big, is shortest. I am always interested in meeting companies even if they are currently too small for us due to the size of the funds that we manage. If they do grow well, we will have already built a good relationship with them and understood the business, so we will be prepared when they are ready."
What do you look to bring to the table as investors?
"We don’t have a playbook that we roll out. It is very much case by case. But collectively we have seen a lot of businesses, a lot of business models and a lot of business challenges over 25 years. Because there are always challenges. Our job is to share that experience constructively to help management make the right calls on the big decisions, to help avoid missteps and to accelerate growth. We are not saying we can necessarily help the business do something it couldn’t do by itself but we might be able to get it there quicker. We have a lot of resource available to support customer acquisition, talent acquisition, data science, research, M&A and we are only too pleased to deploy it as shareholders alongside our management teams. When we win, we win together."
What particular challenges do you associate with investment in the sector?
"The challenge with emerging technology, generally, is predicting adoption, which is partly driven by having the right technology but also by a whole range of factors that are out of your control. There’s the classic example of Betamax versus VHS. Everyone found Betamax to be the better platform but it didn’t win. The earlier the stage and the younger the business, the more risk there is that while the technology sounds really cool, it just won’t sell. That’s why we focus on profitable businesses that have reached a certain scale rather than start-ups where, frankly, the job is much harder."
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