AI is already being used on a wide scale throughout the legal profession, and there is little doubt its impact will grow with additional use cases emerging daily. From contract drafting, to document review to legal analysis, AI is revolutionising the industry. Tools like these are empowering lawyers to bypass traditionally time-consuming processes, enabling them to focus on more strategic, higher-level work for clients. AI’s promise to enhance the efficiency and productivity of firms globally is what makes it an essential part of the future of legal practice - only the path for start-ups to be a part of this is riddled with fierce competition and risk. Enter Venture Capital…
Written by: Marcus McGrigor
Market Dynamics & VC perspectives
AI-related investments in legal-tech had been gaining momentum in the decade leading up to the 2021, with a record $2 billion raised in venture capital that year. Since then, investment in the sector has dropped off, falling 23% in 2022. By 2023, the legaltech sector faced another funding slowdown, with only $725 million in venture capital investments, echoing a broader trend in tech funding, though not quite as severe as other sectors.
Source: LSE - AI in Law & the Legal Profession
Despite this unnerving backdrop, VCs are optimistic, looking to fund legal-tech businesses and capture significant market share going forward. Rapid market growth, underpinned by substantial investment in Legal-AI startups with high valuations, signals huge investor confidence.
As trends suggest, legal-tech is set to experience a significant resurgence in funding and a subsequent boom in the development of AI-driven legal solutions throughout 2024. The market is predicted to grow at a CAGR of 29.27% between 2023 and 2031. Venture capital firms are anticipated to ramp up their investments, driven by landmark deals such as the $650 million acquisition of CaseText.
The growing reliance on generative AI to automate legal processes and enhance efficiency is a major catalyst, pushing law firms to adopt advanced AI-powered legal-tech solutions to stay competitive. With legal departments expected to triple their tech budgets by 2025, the demand for automation, streamlined workflows, and better collaboration is likely to drive increased legaltech investments in the coming year.
Source: LSE - AI in Law & the Legal Profession
What is legal-tech and AI?
‘Legal-tech’ refers to technology used by lawyers, clients, law firms or governments to execute or manage their workflows. Legal-AI then, is said to be the most significant, high potential and hotly debated subcategory of legal-tech. It concerns the use of AI technologies, such as natural language processing (NLP) and machine learning (ML), in relation to legal tasks.
Valued at $454.12 billion in 2022, the global AI market is expected to contribute an estimated $15.7 trillion to the global economy by 2030. However, as we know, AI is not a standalone market and each development has specific use cases for a variety of industries. The legal profession is one of these and stands to be transformed more than any other industry. This is because the foundation of law is rooted in written language. AI’s ability to rapidly analyse legal documents through natural language processing (NLP) offers lawyers and their clients a powerful new capability for navigating complex legal texts. As investors, picking the AI-businesses that deliver these services most effectively and at the right time, is of paramount importance.
The two faces of Legal-AI - a force for good or bad?
When it comes to the practice of law and the pursuit of justice, the stakes are already unequivocally high. When you add AI into the mix, things go up a notch, providing a major dilemma.
This revolves around the tension between innovation and risk. On the one hand, AI and legal-tech solutions offer the potential to revolutionise the legal field by automating routine tasks, improving efficiency, and making legal services more accessible. This side of the debate is driven by the promise of innovation, cost-effectiveness, and enhanced productivity.
On the other hand, there are significant concerns about the implications of integrating AI into legal practice. These concerns include the potential for job displacement, ethical dilemmas, the accuracy and fairness of AI-driven decisions, and the risk of undermining the human element in justice. This side of the argument reflects a cautious approach, rooted in the preservation of traditional legal values and the complexities of applying automation to nuanced legal matters.
Thus, the aim for all stakeholders is to strike a balance between embracing the transformative potential of AI and ensuring that the core principles of law and justice are upheld in a technology-driven future. This is easier said than done.
Pros, Use-cases & Opportunities
For now, let’s look at AI’s upsides and some of the specific and transformative use cases it has in the legal profession today. AI is utilised across a broad spectrum of tasks and applications, but broadly speaking, it can be categorised into three main branches:
1) Contract Review - reading and analysing legal agreements, such as commercial contracts and leases, extracting useful data from them, and/ or checking them against rules or current laws. In some cases, this involves helping people to finalise contracts.
2) Intelligent Interfaces - interactive, web-based, Q&A systems that users can engage with through text inputs to gain legal information, or that can guide lawyers/ non-lawyers in completing basic legal documents and forms. An example of this would be an AI-powered legal chat bot.
3) Legal Data Research - legal research and litigation prediction systems covering statute and case law as well as case outcomes, i.e. not specifically looking at contracts, but rather examining the data produced from the practice of law and from laws/ regulations.
Source: Thomson Reuters - Legal AI: A beginner’s guide
As you can see, AI can be a useful tool helping lawyers to be more efficient, reducing case backlogs and pushing the sector towards more cost-effective and enhanced service delivery. Adoption of Legal-AI is picking up as well, reflecting a realisation of this fact.
Research from LSE reveals that 75% of solicitors' firms now incorporate AI into their practices, a figure that has nearly doubled over the past three years. Moreover, more than 60% of large law firms and one-third of small firms are in the process of evaluating or implementing new generative AI systems. The allocation of corporate legal budgets to technology, which stood at 3.9% in 2020, is projected to exceed 12% by 2025. Compounding the need for technological solutions, 92% of lawyers report experiencing work-related stress or burnout, with 25% facing burnout daily, underscoring the urgent demand for tools that enhance efficiency, effectiveness, and well-being in the legal profession.
Cons, Challenges & Risks
Given the buzz surrounding Legal-AI and associated technologies seen as ‘disruptive’, it is important to understand areas of resistance and the barriers to AI adoption as perceived by legal professionals themselves. The legal services sector has generally been reluctant to innovate, and slow to adopt new technologies compared to other high value sectors due to a number of risk factors:
Structural Challenges: The existing structures within law firms may not be conducive to integrating AI. This includes rigid hierarchies, billing practices, and established workflows that can be disrupted by new technology.
Technological and Market Pressures: Law firms are under pressure to innovate due to technological advancements and market demands. However, balancing these pressures with the need to maintain high-quality legal services can be challenging.
Business Model Disruption: AI has the potential to disrupt traditional business models in the legal sector, particularly those based on billable hours. It is difficult to convince highly profitable law firms their business model needs to change.
Skill Gaps: There can be a lack of in-house expertise to implement and manage AI technologies effectively. This creates a need for new skills and training, which can be resource-intensive.
Cultural Resistance: Many law firms have deeply ingrained traditional practices, and there is often resistance to change. Lawyers may be sceptical about AI, fearing it could undermine the profession’s traditional methods or reduce the need for human expertise.
Human Capital: Legal-AI systems are passing exams with higher marks than their human counterparts and can carry out legal work at the level of a junior lawyer or paralegal already. This is a major concern for the jobs market if it becomes cheaper and easier not to employ young talent.
Accuracy & Misinformation: perhaps the biggest risk is to do with AI governance. Problems with biassed data, and a lack of accuracy and accountability, have hindered its uptake across the industry. Earlier this year, New York lawyer Steven Schwartz found himself in his own court hearing after he used ChatGPT to search case precedents for a lawsuit involving a man suing an airline for personal injury. Six out of the seven cases he cited turned out to be entirely fabricated by the AI.
Legal-AI seems a tough nut to crack, both with powerful arguments for its adoption and major ethical and practical concerns seemingly counteracting. However, one could argue the issues with AI adoption actually lie on the human side rather than with the technology. In other words,”the limits on AI’s use are more about the imagination of the users, than the technology itself”. We know generative AI is not 100% accurate and yet mistakes are more often made when tools are handled incorrectly, lacking human oversight, as demonstrated by Steven Schwartz.
Therefore, start-ups in this space will do well to translate and identify areas within the industry that are most prone to disruption, but also where opportunities can be realised realistically without uprooting the system entirely - known as ‘AI diffusion’. Many businesses are already doing this effectively by offering a ‘co-pilot’ service.
Through the Tunnel: Exit Landscape
The future looks bright with increased and consistent demand for innovative legal-tech and AI solutions going forward. Lawyers are expected to spend more on legal technology in the coming years, meaning there is plenty of opportunity for both investors and start-ups.
By 2030, we expect to see institutions that have invested in legal-tech begin to explore exit options having achieved growth and profit. Legal-tech exits to date have overwhelmingly been seen to favour M&A versus LBOs and IPOs. An estimated 200 liquidity events took place in 2018 alone, a figure which has since boomed in both volume and value terms. It is also important to note that the market is hugely swayed towards the US with the majority of exits and funding in the sector taking place there. The legal market in the US is 10X the size of the UK’s.
Source: LSE - AI in Law & the Legal Profession
A major cause for concern for investors and start-ups is how competitive the space has become. In fact, companies like Definely, which has Microsoft and Octopus Ventures on its cap table, are keeping their lips sealed when it comes to new products they are developing. This is to avoid giving competitors any kind of boost or advantage. According to the Legal Geek Start-up Map, there are over 250 legal-tech start-ups and scale-ups currently in operation. So, who are the front runners and one’s to watch?
Startup Spotlight
Robin AI is one of the sector's biggest triumphs, and is London’s most famous Legal-AI start up. Founded in 2019 by Richard Robinson, a former lawyer at Clifford Chance and research scientist at Imperial College London, he has built the “smartest AI contract copilot on the market”, raising a $26M Series B round in January of this year.
Led by Temasek and a host of other investors, including QuantumLight, Plural and AFG Partners, the company is poised for further growth. The product leverages the power of generative AI to automate and speed up the process of drafting and negotiating contracts, as well as extracting information from huge contract repositories through simple search. It is essentially a legal co-pilot and plug-in to Microsoft Word.
Reducing the time it takes to review contracts by 85%, Robin AI is gaining traction: it grew its customer base 4x, and revenues, 5x, in the last 12 months. It is proving particularly successful in Private Equity and M&A, where speed is of the essence in getting deals over the line. Major corporations such as Pepsico, PwC, Yum! Brands, AlbaCore Capital Group, and BlueEarth Capital can all call themselves happy customers.
With such big names going from strength to strength, what is the outlook for earlier-stage start-ups in the space? Is there room for them; how are they going to succeed?
There are many who are not deterred and seem to be cutting their own path in this super competitive environment. For example:
Farillio (UK) - is helping SMEs to access and understand legal resources, including guides, videos and checklists in a cost-effective way.
Hopkins (Germany) - is using algorithms to predict case outcomes and is providing optimal negotiation strategies for lawyers specialising in consumer rights.
Henchman (Belgium) - is an AI-powered contract drafting software. It connects to a law firm's repository of saved contracts and extracts all written clauses making them seamlessly available to the lawyer.
Juro (UK) - provides a platform to manage contracts across their whole lifecycle, from drafting and reviewing to signing, tracking and storing. It is most popular for HR and sales functions.
Orbital Witness (UK) - is automating the legal due diligence of property transactions. Its solution scrapes property data and uses machine learning together with proprietary risk models to produce diligence reports.
As legal-tech and AI continue to reshape the profession, the industry stands at a critical juncture. While the long-term prospects are encouraging and potential for innovation is vast, the challenges of fierce competition and cautious adoption cannot be ignored. For startups and investors, navigating this space will require not only a keen understanding of technology but also a strategic approach to market entry and scaling. Those who can balance the promise of AI with the inherent risks stand to gain significantly; those who do not are likely to fade. Nevertheless, as the demand for efficiency and automation in legal services grows, the future of legal-tech looks promising, albeit with hurdles that must be thoughtfully addressed.
Comentários