Angel Investing in UK Legal Tech
Technology is coming for the legal sector...is this the next 'fin-tech like' investment opportunity?
Angel investing is all about backing entrepreneurs who are building the (hopefully!) most disruptive startups in their sector. The UK is justly famous for leading the disruption of the financial sector, with companies like Monzo, Revolut and Checkout.com being amongst the most well-known and valuable fintech startups.
In the last 12-18 months, there has been a lot written about legal tech being the next fintech opportunity. But is it?
In mid November, HERmesa Angel Syndicate with Cataclysm Ventures co-hosted an angel education event “Angel Investing in Legal Tech” to dig deeper into this question and to learn more about the emerging sector.
The event (full recording here) started out with an absolutely fantastic overview of the opportunities in UK Legal Tech, presented by Jenifer Swallow, who recently stepped down as the director of LawTech UK. A few key take-aways…
The UK Legal Tech Sector
What is “Legal Tech”? If you are like me, your first thought is that legal tech is contract digitisation and docusign. Yes…but it is much, much more! In fact, Jenifer made the point that legal services are ubiquitous and that legal tech encompasses any technology that supports, delivers or replaces any legal or court service. So yes, contracts and documents, but also SME legal services, regulatory tech, remote courts, consumer legal services, etc.
A £1 trillion+ addressable market. Existing legal services are worth ~£1 trillion. But there is sufficient scope for growing the overall pie. For example this figure excludes an estimated further £11bn in annual consumer and SME unmet demand.
The pace of investment into legal tech startups is accelerating. With a large, legacy market, entrepreneurs are attacking all segments of the legal space and early stage capital has followed. Lawtech sector investment has grown by 101% over the past 3 years, to a total of ~£700mm in 2020. It is estimated that annual investment in legal tech will be £2.2bn by 2026. Source here.
The UK law tech sector is tracking to growth comparable to that of fintech in 2018.
So, legal tech IS the next fintech!?! TL;DR = maybe.
The comparison between legal tech & fintech is exciting…but the comparison is more nuanced once you go beyond headline figures. As part of Jenifer’s landscape review, she compared and contrasted the two sectors…including the not-insignificant point that finance deals with numbers, which are easily structured vs. law which deals with unstructured text! Add to that the importance of the law and legal services to society and the economy and you have something pertinent here.
Below we hear from two startups that are disrupting the legal services markets and the angel investor who has backed them both.
Consumer & SME Legal Tech Startups: Valla & Farillio
As previously noted, there is £11bn annual unmet legal demand from consumers and SMEs. These companies or individuals have NO access to legal support & justice. Why?
The key reason is that the existing way of delivering legal services are too expensive for both the lawyers and the potential customers.
At the “Angel Investing in Legal Tech” event, we heard from two fantastic founders that are tackling this problem head on and creating platforms to deliver legal services cheaper, faster and at scale.
Farillio
Farillio is a B2B2C platform for delivering legal support and business advice to SMEs.
CEO, Merlie Calvert refers to her model as “FAAS” - Farillio as a Service. The company partners with large, well-known suppliers of services to SMEs - insurance, banking, telcos - and bundles its extensive digital toolkit of expert demo videos, workflow tools, templates, checklists and guidance alongside insurance policies, bank accounts, etc. The Farillio platform - which is provided for free to the SME end customer - contains all of the legal (and other) templates and bite sized professional advice that an SME needs to run its business. And with these B2B distribution relationships, Farillio has slashed the cost of reaching multiple small companies.
“It’s time we democratised, decentralised and demystified law and business knowhow so thousands more businesses succeed and grow each year. No longer the domain of the wealthy enterprise, the privileged and/or the connected, we’ve made it so that any and every person in business has FREE access to the expert-endorsed, essential tools they need to start, to expand, to adjust, to thrive. And our smart, sustainable model makes us millions in revenue, while keeping costs exceptionally low.” CEO Merlie Calvert
Valla is also addressing the prohibitive cost of access to legal services, but for individuals. The dirty secret in consumer law is that you have to be fairly well off to bring a lawsuit against a dodgy employer or landlord, due to the fees most solicitors charge.
Valla’s insight is that much of the money that goes towards paying lawyers is for non-legal work…including a huge amount of administration around gathering evidence, sending form letters, etc.
Valla’s consumer law platform allows the individual to do much of this work themselves & pay legal professionals only for limited, highly targeted advice.
The status quo in the legal industry left millions of consumers with zero options and no access to justice. To change that, we had to re-invent the entire legal delivery model. Luckily, the Valla team knew how — we came from the online accounting industry, and knew how to simplify complex concepts so a taxi driver could file their tax return from their phone. Think of Valla as the Xero for law - a new way for millions of consumers to run their own case and get affordable support.
To learn more about how Farillio and Valla are disrupting the SME & consumer legal markets:
Farillio CEO, Merlie Calvert at merlie@farill.io
Valla CEO, Danae Shell at danae@valla.uk
Angel Investing in Legal Tech
HERmesa member, Jami Jenkins, is a very experienced angel investor who has invested in both Farillio (directly, in 2017) and in Valla (via the HERmesa syndicate, in 2021).
We asked Jami a few questions about her investment decisions and her view on what it takes for a legal tech startup to succeed.
Q: Why did you invest in Farillio and Valla?
A: Mainly because I wanted these legal products to exist and empower people beyond the traditional, expensive legal routes. Both Valla and Farillio are set up to support and empower their customers.
I invested years ago in Farillio because I believed Merlie was exactly the right person to get the job done. She has a fantastic route to market which she executes on with stealth, hustle and the gravitas of long-term partnerships alongside a tremendous cap table. Farillio was an investment in the right person and team, the right product and the right business model.
Valla, with Danae at the helm, is an opportunity for me to do it all over again - the right combination of leadership and unstoppable force, strategic partnerships and an amazing cap table - while this time supporting a different customer segment.
Q: Beyond great founders - key to all startup success! - what do you think it takes to succeed in building new platforms to deliver legal services?
A: I really like how Danae and Valla are spending these burgeoning days deeply getting to know their customers, their needs and their journeys. Merlie has done that in Farillio's early days and has meanwhile developed a very scalable route to market, which serves the business, their customers, and all partners well as preparing Farillio for hyper growth.
I see both Valla and Farillio providing clear-cut, DIY solutions, an empathetic platform and content, a focus on leveraging new technology to their customers' benefits (AI, for one...), while not totally leaving out the lawyers they are totally disrupting either. I also like how they are thinking about capitalizing on adjacent sectors - like FinTech, InsurTech, etc. - to optimize the platform and offering, but, also the extent of disruption!
Q: Challenges for legal tech going forward?
A: It is still very early days for the legal tech sector and significant barriers to widespread adoption exist. Key amongst these is the role of lawyers themselves: this is an entire class of professionals who exist to minimise risk! It is no surprise that the early legal tech successes were around contract digitisation and workflow issues…rather than how legal advice is given. And, as Jenifer Swallow noted, consumers themselves are also risk adverse, behaving more like health-tech consumers, than fintech consumers. I do believe technology will win out…but the change will take a long time.
Q: Do you think Legal Tech is the ‘next FinTech’ investment opportunity in the UK?
A: I actually think LegalTech is MUCH better. I have quite a few FinTech businesses in my portfolio which have very high customer acquisition costs, tough financial rules and regulations and fierce competition with incumbent banks or other startups. They also have to deal with legacy systems and technology, which can impede their own ability to grow. To me, it feels like FinTech is the ability to take a taxi instead of the bus, whereas LegalTech can be the ability to chug water in a desert.
Disclaimer: The newsletter is for information only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments.