What a Successful Legal Tech Entrepreneur (Jeroen Plink) Seeks in a Legal Tech Start-Up.
We read about legal tech start-ups daily. I thought it would be interesting to learn how an experienced and successful legal tech entrepreneur thinks about investing his own money in legal tech start-ups. I met Jeroen Plink about a decade ago when he came to the US to start the US division of the Practical Law Company, which was subsequently purchased by Thomson Reuters. He was kind enough to answer my questions:
We met shortly after you moved to the US around 2008 to start PLC USA, subsequently acquired by TR. Was that your first try at legal entrepreneurship or were there prior ones?
My first legal tech start-up was Legistics, a software company aimed at improving the due diligence process in M&A transactions. I co-founded this company in 2000 and we sold it to PLC in 2002. This was a SAAS business avant la lettre. It served a need, we did fairly well but it proved the importance of timing: we went live with the product in May 2002 when the bottom had fallen out of the market. We met with PLC a short while after launch of our product and the resulting acquisition was a great deal for all involved.
What are the top 3 factors you look at in deciding to invest? And, conversely, are there red flags?
One of the co-founders of PLC emphasized the three P’s: Product, People and Process. This framework has proven very helpful:
- Product encompasses everything from the actual product or service and its appeal to the market to total addressable market to technology.
- People is the most important factor for me: strong independent leadership with a strong vision, ability to identify skill gaps in the team, coachable. The people tend to be the making or breaking factor.
- Process is the appreciation of building the right processes from start to finish: how does the company build, market and sell the product. To what extent does the team understand this and to what extent do they have the processes in place.
The most obvious red flags for me relate to people: lack of coach-ability, lack of scrappiness, and especially when the founder is a former lawyer, lack of appreciation of sales process. I find that many legal tech startup founders don’t appreciate the complexity of sales in legal and therefore a large number of legal startups struggle with sales/scaling.
Can you share some of the companies you have invested in and why?
Some of the companies in my active portfolio include:
- Leopard Solutions is in the business of attorney data. It has developed a database of detailed data about 350,000 attorneys in law firms and in-house. The data is being used by recruiters (identify candidates) but increasingly for competitive and market intelligence (how does my firm compare to my competitors, how has the firm done with respect to retaining lateral hires, which firms are growing and or declining, what does the Southern California legal market look like) and thirdly for business development (Who in the in-house department in company X went to my law school or is connected to my partners). I invested because I believe in the team and in the power of using data to make strategic decisions.
- Hotshot Legal is a legal training company founded by two former PLC US colleagues of mine. Hotshot has created the new standard in just in time training by providing digital learning experience in both business and legal topics. I knew the team very well, the product is very high quality and with their PLC background Ian and Chris understand well how to bring a product to market.
- Co-Inspect is in the semi-legal space. This compliance app helps companies in the hospitality industry (for now but other industries are equally susceptible to it) to comply with food and health safety standards. For example, one of its customers is a national chain of restaurants and, instead of using paper-based checklists, each of the branches completes the relevant checklists to ensure compliance. I invested because Manik, the founder, is very impressive, the total addressable market is massive, and it is solving a big headache.
- Paladin, is one of my favorite investments. Its outstanding founding team has developed an application for managing the pro-bono process in in-house departments and in law firms. I invested in this women-led company because I am a firm believer in improving access to justice but at the same time build a business that can financially support this social responsibility goal.
If you invest, do you advise too, or are you sometimes only passively investing? What’s a typical advisory role look like?
I rarely only do passive investing. Part of the reason of making these investments is to have fun and, professionally, there is nothing I enjoy more than working with founders and helping them build their companies. So for every company I invested in, I help out as much as I can through advisory roles. In addition to rendering advice to my portfolio companies I also work closely together with companies that I am on the board of (Kira Systems, Casetext and Compliance.AI). Most of my advice evolves around go to market strategy. In a few instances I am very involved with the product as well. In all cases, I try to make introductions to customers and potential customers. The latter is sometimes hard as the “I would like to introduce you to five unrelated companies” message to a law firm leader can be confusing.
Exit strategies for legal start-ups seem somewhat limited to me. (see my recent post What Are Legal Tech + Legal Service Provider Exit Strategies?). Two questions: Do you agree with this? How does the exit question affect how you think about personally investing?
This is a great question which probably lends itself to a lengthy debate. I would say that until a few years ago I would agree with your view that the exit market was limited to RELX, Thomson Reuters and Wolters Kluwer. In recent times, private equity has taken a more active role (compare Omers acquisition of DTI and Epiq, Audax acquisition of Corsearch), Bloomberg has also appeared as a buyer. In the IP space, I expect Clarivate to aggregate a few businesses. it is also interesting to notice that some of the Big 4 are starting to acquire certain assets in legal tech (EY’s acquisition of E-Stet). Finally, on the exit through acquisition front, Clifford Chance’s acquisition of Carillion could be indicative that firms might be more open to acquiring strategic assets.
I do believe that a few companies will exit through IPO. This will primarily be the case for those innovators that are predominantly in services. (I find that the traditional buyers don’t have much of an appetite for service-oriented businesses). There is also a segment of the market that includes venture funded companies where the funders’ expectations of exit value don’t align with multiples traditionally paid by the strategic buyers. This segment will increasingly be forced to move towards public markets.
The number of legal start-ups has grown dramatically in recent years. Thoughts on why?
I think there are a number of factors that are at play here. First of all, the rise of AI as an enabling technology. 17 years ago when I started Legistics, my due diligence startup, the thought of having a computers system credibly review thousands of documents was unthinkable. Kira is now the leading provider of AI powered due diligence for the majority of leading law firms. Secondly, the number of lawyers that think “there has to be a better way to do this” is on the rise. This probably correlates with the rising number of millennials in the legal industry who have grown up thinking differently about technology than previous generations. Using humans for tasks that software can do as good and, in many cases, much better comes naturally to the younger generations. Thirdly, the traditional way of practicing law is coming under threat from competition. One company I work with (ShiftCentral) tracks developments in the legal market for a number of leading law firms and amongst others through this I see the rise of alternative legal service providers as the biggest threat to traditional law firms. Maybe for the top 20 law firms the competitive environment will remain unchanged for a little while, but all others are increasingly seeing competition through legal process outsources, Axiom et al and (for now everywhere outside of the US) the Big 4. One way to defend against this new competition is to leverage technology hence the rise of startup activity.
What’s your top advice for someone thinking about starting a new legal tech or legal start-up?
- Find a problem worth enough solving. Make sure you don’t scratch your own itch. Make sure you don’t have a solution in search of a problem (hammer looking for a nail).
- Think go-to market first. How will you sell the product? Some of the best commercial successes weren’t great products but the teams could sell it. A great product doesn’t automatically sell well but with great sales capability you can sell a decent product.
- Find funding that comes with expertise. People who can actually help you with the tough parts of starting a legal (tech) company: sales, operations and connections in the legal industry.
- Be careful about hiring from the big players: There are many talented people at the big legal publishers and legal tech companies but building from scratch is different from “inheriting an established structure and do well there”.
- Talk to me. I love hearing about your idea and point you in the right direction if I can.
Jeroen – thanks very much for your thoughts.
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