The Author is the founder of CompetitionAI, an AI platform streamlining work for M&A regulation lawyers. He has over a decade of experience advising on competition and foreign direct investment (FDI) in mergers and acquisitions.
Lawyers are specialised and the LegalTech products that they use need to be specialised as well.
The rise of advanced LLMs presents a historic opportunity to transform the practice of law. Goldman Sachs’s frequently cited prediction that 44% of legal tasks could be automated using AI has focussed minds on the potential for transforming law with AI. However, the key question is not just how much can be automated but how this could be done. What approach should entrepreneurs and investors take to ensure that AI lives up to its promise for lawyers?
LegalTech firms like Harvey and Leya have achieved initial success by offering platforms that enable lawyers to leverage the latest LLMs. These efforts started with broad tasks such as summarising materials, reviewing documents, and drafting. However, lawyers’ roles are highly specialised. Clients wouldn’t instruct a corporate lawyer for tax advice, or a finance lawyer for employment matters. The work lawyers do is often highly technical with specific workflows tailored to particular areas of law. From law school, to trainee to junior associate, it takes several years of studying and practice to train lawyers to independently advise clients in these specialist areas.
Written by: Daniel Schwarz
What does this mean for LegalTech?
(1) Lawyers are specialised and the LegalTech products that they use must be specialised too.
The LegalTech products that lawyers value most are the ones that reflect what lawyers actually do and are closely tailored to them. They will integrate seamlessly into the lawyer’s workflow and will be seen to be an extension of the lawyer itself. This hybrid approach will involve the lawyer continuing to take responsibility for providing legal advice, while being turbocharged by AI software that dramatically extends their abilities. However, turbocharging specialist workflows requires specialist knowledge to create specialist LegalTech solutions. “GPT wrappers” will never be able to offer this.
(2) LegalTech firms founded by specialist lawyers have a significant advantage
To design, test, and build specialised legal tools, you need highly experienced lawyers from top law firms. This is difficult as they are already earning very high salaries, may have spent a decade chasing partnership, and LegalTech is a very new career path. For example, attorneys at BigLaw firms on the “Cravath Scale” with eight years experience are likely to receive total compensation over $500,000 each year. This gives start-ups founded by senior lawyers from elite law firms a major advantage over those who may need to hire them.
(3) Specialist areas of law are bigger markets than most investors think
Peter Thiel, in his book Zero to One, recommends that when founding a business you should start with as small a market as possible - even a few thousand people - and then expand from there. “A valuable business must start by finding a niche and dominating a small market”, he writes. He gives the example of eBay starting off by selling to Beanie Baby enthusiasts. This “land and expand” strategy is particularly effective in law as in the US the average revenue per lawyer of the AM100 Law firms is $1.1mn per year. This means that even if you’re starting by targeting an area with only a few thousand lawyers, those lawyers generate billions of dollars in revenue. “Small” or “niche” areas of law which investors may never have heard of, are actually much bigger than you would think. The phrase that “the riches are in the niches” is more likely to be true when those “niches” are worth billions of dollars and offer the opportunity to expand into connected areas.
(4) Specialist providers have wider moats than generalist providers
Companies are more likely to generate significant profits in the long-run if there is a ‘moat’ preventing others from competing away their business. AI-powered software that is deeply integrated into the workflows of lawyers is much more likely to drive customer loyalty than generalised products. As VC fund Greylock explains, “a deep domain-specific focus is a viable wedge to establish defensible moats”.
(5) Specialist LegalTech companies will generate bigger returns for entrepreneurs and investors
Investors are much more likely to invest in companies solving problems they understand. Entrepreneurs without backgrounds in law are also more likely to start companies addressing issues they’ve seen and that do not require legal expertise. This may have contributed to the significant investments that have been made into many of the 100+ companies offering ‘AI for contracts’, alongside the large market and potential. These areas are therefore likely to become highly-competitive, making it more difficult for entrepreneurs and investors to achieve the outsized returns they seek.
In contrast, lawyers who start specialised LegalTech companies and investors willing to invest in them are likely to face fewer rivals and therefore achieve higher returns.
(6) Investors are increasingly attracted to Vertical LegalTech
For several years, venture capital investors were attracted to Vertical SaaS - cloud-based software tailor-made for specific industries. More recently venture capital investors, such as Index Ventures and Greylock, have spoken about the rise of Vertical AI - AI applications that are able to maximise utility for customers by targeting specific industries. Within LegalTech, we should be thinking about “Vertical LegalTech” - AI software targeting specific practice areas. This contrasts with “Horizontal LegalTech” which offers solutions across practice areas, such as Harvey, Leya and DeepJudge.
Venture capital investors are increasingly attracted to Vertical LegalTech. Bessemer has invested in Solomon (tax), Lightspeed invested in Noetica (corporate bonds), Y Combinator invested in Solve Intelligence (IP) and SeedCamp invested in Orbital Witness (Real Estate). Investors are therefore starting to recognise the potential of Vertical LegalTech.
The Future of LegalTech is Vertical
The future of LegalTech will include specialised solutions targeting specialised lawyers. These will closely integrate into lawyers’ daily workflows, maximising the productivity boost that LLMs can provide and ensuring loyalty from the lawyers that frequently use them. They will be able to sell multiple products to the same customers, before expanding into other markets to achieve venture-scale returns.
Over time, Vertical LegalTech firms will look more like Horizontal LegalTech firms as they expand into new verticals and Horizontal LegalTech firms will look more like Vertical LegalTech firms as they offer more specialist solutions. Ultimately, all providers will end up as Vertical LegalTech as customers demand products increasingly tailored to their specialised needs.
I spent 10 years as a competition lawyer in a Magic Circle law firm in London and at the IMF in Washington DC before teaming up with AI software engineers to start CompetitionAI. I saw that AI agents offered the potential to radically improve the practice of competition and regulatory law, but the only way that could be done was by building a platform focussed on the work that these lawyers actually do. We’re starting with the regulation of M&A deals (competition law and FDI), before moving on to other areas of regulation. Lawyers love this approach and more than 700 have signed up, asking thousands of questions on our platform. As Peter Thiel would say - we’ve landed. Now it’s time to expand.
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