E342 | Tom McGinn, Zach Posner⁠, Shruthi Ajitzaria & Nnamdi Emelifeonwu⁠⁠: Panel discussion on the intersection of Law & Tech - a deep dive into legal innovation

0:00Welcome back everyone to another episode of the European VC podcast. Today, we are talking all about legal tech and it is an episode that has been put together by our good friend Tom at Northzone. And he has put together a panel that just blows my mind. And this conversation is exactly the kind of conversation I've been looking forward to to have for a long time. When we've been hearing all the time about how generative AI would disrupt legal everywhere around the world. But in fact, I think in this episode, as we're talking to some of the real vertical specialists of the field, we will bust some bubbles for some people.

0:36I will not say more than that and just wish you a very hearty welcome to this episode of the European VC podcast.

1:06European response. Europe is a story of new beginnings. New beginnings. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. All right, everyone, welcome to the European BC podcast. You're all new faces except for you, Tom. So I think we should just run around the table here and I'll start with you, Zach, ask you to introduce yourself and particularly, of course, or if you say a few words about how you relate to the topic of legal tech. Awesome. So my name is Zach Posner. I'm a co-founder and managing partner at The Legal Tech Fund.

1:45We are the only dedicated investor across the globe that just focuses on the legal community and companies transforming the world of law. Our portfolio is 60 strong and it's awesome to meet some new friends and spend some time with some old friends today. Beautiful. Thanks, Zach. Sruti, would you please? Sure. Hi. Nice to see you. I'm Sruti Ajit Zarya. I'm a partner at A &O Sherman. I'm a former derivatives lawyer, but about seven years ago, I launched VUZ, which is our legal tech incubator. Beautiful, Sruti. Do you invest as well, or is it purely incubator? No, we don't. We leave all the investing to Zach and Co.

2:20To the likes of Zach. Beautiful. And Nandi? Sure. Great to be on the podcast. I'm Nandi Maifanu. I'm a former lawyer as well. but I'm also the co-founder and CEO of Define Me, which is a legal tech company. We are focused on simplifying contracts for lawyers, and we have a productivity suite that allows lawyers to create, draft, read, and understand their contracts. Our customers are both law firms and in-house teams as well. A &O Sherman, actually one of our customers, and we have a team of about 65 people now. Beautiful. Thanks, Nambi. Just as one would think we couldn't be in better hands, we also have Tom from Northstone with us.

3:02And Tom, you have been the mastermind behind this whole gathering and roundtable conversation. So first of all, thanks a million for putting in the work of putting together such a panel like this and also helping develop the script for it. But Tom, say a few words about yourself and how you relate to the topic. Yeah, sure thing. Well, it's great to be here. I'm Tom. I'm the General Counsel of Northstone. We're a multi-stage fund investing from seed through growth across the US and Europe. And I used to actually work for a legal tech startup. So I pushed off becoming a lawyer after graduating. I worked for an online dispute resolution startup in the US, which was a short-lived experience.

3:40And that was about 15 years ago now. But I've been following kind of legal tech pretty closely ever since. Okay. So then let's start at the very basics of this and ask the question, is legal tech a really helpful word to help you think about this as a category? And Zach, I see you're already pondering, so maybe you'll start us off there. Look, I think it is for us. It's extraordinarily helpful. It's in the middle of our name. And I think it's really helpful for the entrepreneurial community. I think that between the construct of legal tech and over, I think, where everybody else's base, the law tech, it almost gives entrepreneurs a way to identify, even if that's internally, because I would venture to say half of our companies that we consider in the legal or law tech base would kind of identify in some other vertical externally.

4:33But when we talk to them, it kind of feels like they have a home. I think it's an important world, an important designation, an important concept. And otherwise, you'd have people just kind of lost. So it enables community building and things along those lines. Is it correct to think of it as a horizontal for you more than as a vertical? Since you're saying that they don't necessarily recognize themselves as a legal tech company? It's funny. We've always thought of it as a vertical. I've never... I understand your question. Yeah. We think of it as a vertical. The vertical can live within different verticals.

5:10Yeah, maybe it's legal as a function is horizontal. So you're making me rethink everything I've always thought right now in the first 30 seconds of this podcast. Okay, but that makes a ton of sense. And I think the interesting part is, of course, the deliberations that you had coming to your conclusion that, okay, clearly it is a vertical as an investment space, but it is a horizontal in the company. the horizontal is something along the lines of like think of a company like docu sign you know may may have identified in 40 different verticals legal tech may not have been one of them or you know all these cap table companies that are in existence like attorneys used to do that but they would probably find themselves in the fintech vertical and then the loss of crossover yeah yeah and surely when you launched fuse you didn't refer to it as a legal tech incubator um But here you are on this podcast.

6:07So why did you not do that back then? Yeah, just because Zach and I are friends. And the context for the fact that I'm about to come out against him is that Zach was in London recently and blew off a very kind lunch invitation from me for him and his wife to go to Wimbledon. I mean, I personally think I'm more interesting than tennis. But seeing as he made his preferences clear, I don't feel bad at all disagreeing with him now. For clarity, we were there for five days. and every day and every evening was offered to Shruti. And she came back with the one day we said we were going to Wimbledon. But continue, Shruti.

6:43But we didn't because of the fact that I think, and actually I don't disagree with Zach in saying that sometimes people don't classify themselves as legal tech, but when you look at what the core is of what they're doing, it relates to contracts and documents. And so we've had that a lot where, for example, someone who is issuing a blockchain bond that will think of themselves very much as being a fintech. But in reality, 90 % of what they are doing relates to the creation of the contractual underpinning of a bond, which really at its heart is legal and is being done in a different way, and which I would actually very much classify as legal tech.

7:20So I think there are some instances in which legal tech will be treated as a vertical, but actually very many others in which it is a horizontal, which is why I personally don't find the term particularly helpful. So when we first started Fuse, really what we tried to say is if you are doing something that would be interesting to a law firm or else to a lawyer generally, just let us know. And that's kind of how we got around the term. So you were about to say something. He was about to apologize for going to Wimbledon instead of lunch with me. No, far from that. Yeah. I mean, look, if you think about legal, it's intertwined with everything that we do in our lives, from birth certificate to will.

8:01Every single thing that we do is governed by a legal doc. When you think about all of enterprise software, in some capacity, it's trying to track down truth or source data and then make that data more accessible so you can do things with that data. But where does truth or source data come from? It comes from an agreement. But I guess, Andreas, going back to your construct as like a horizontal, there's a lot where that makes sense. And then going back to shoot this concept, the first thing that I said about legal tech is it's a place where if you're an entrepreneur, you know you kind of belong a little bit in that world.

8:39So for us, the word is so important because it can kind of cultivate that community, opposed to entrepreneurs being everywhere. yeah how about you namdi then as a as a founder and when you when you when you started fundraising in the beginning for defiantly would you use the term legal tech startup how did you describe yourself yeah i i think one of the really interesting things is just the evolution of how that term is perceived uh from sort of the from this side of the table as an entrepreneur um because i you know when when i first started sort of defiantly um you know legal tech in terms of like there weren't as many startups you know popping up as you'll see sort of now obviously there's been a massive massive influx of interest in this in the sector given sort of over the last sort of 12 to 18 months particularly following sort of the you know the chat gp3 launch but I think when I first started I actually saw the term as if not neutral but maybe a negative thing because when you're speaking to investors a lot of investors weren't really excited about the legal tech sector you know it just it just wasn't a place where investors you know a lot of investors will tell you that they've had a intro you know they've been looking at it for years and then you ask them how many investments have you made in the sector and they'll tell you zero and it's like you know you're probably not that interested if you're that excited if you've been looking at something for a number of years you're still to make uh an investment so i think that that is changing now i think that's an exciting thing uh because the market is growing for all of us and And that's a very compelling thing.

10:13But I think, yeah, when I first started, it was definitely not as sexy a term as it is probably today. So a lot of entrepreneurs, I would probably argue, would be trying to stay away from classing themselves purely as a legal tech company and trying to see what other verticals they could sort of bring into their business just to make the markets bigger. How about you, Tom? Because North Zone is obviously not a legal tech focused firm. You very much have an affinity for this base, obviously. What's your take? First of all, is legal tech sexy today, as Namdi just said? I mean, I think we've probably reached peak sexiness, peak frothiness.

10:55Maybe it's not the peak, but certainly the peak in terms of what I've seen over the past. Basically, since I started working with that online dispute resolution company in 2011, 2010, And for sure, it's a very sexy word now. I think a lot of the barriers that existed for legal tech, at least barriers to investment, are kind of slowly eroding away. I think that's probably something that we'll focus on later on during the discussion. But yeah, in short, for sure, I think this is a great time to be building a legal tech company. And maybe, Zach, you've created a legal tech landscape map that I'm thinking maybe you could describe.

11:38that a little bit and help everyone think through kind of how can they structure, conceptualize legal tech as a vertical in their mind? Well, there's lots of ways to think about it. I think that we're at the highest level of sexiness that we've seen. And I don't know that it doesn't go a little bit higher, because there's a lot of areas where there's just so much opportunity. So from our end, I think when we think about the map, the first thing we think about is software that sells into law firms versus software that sells into corporates. And then we even think about software that sells to consumers.

12:17In fact, we think about it as like a pyramid. So up top, you have applications that are the business of law, then into the practice of law for the law firm. Then you go into the general counsel's office. Then you go into legal ops office. Then you go into business units office. Then you go into SMBs. Then you go into consumers. And what happens is as you go down that pyramid, we think the markets get much bigger. But also what's interesting is as you go down that market, everything down here, it changes the roles and the responsibilities of everybody upstream. So all of this technology that's coming out, if NAMD's technology is going to help a client do something, well, that changes the way they interact with the law firm.

12:56So we broadly think about the map in the construct of the types of customers that it's serving. So that's kind of how we think about it. And there's tons of sub-sectors within each one of them. And Zach, is there kind of a customer profile that you're particularly, that you think is really kind of driving this kind of peak sexiness of legal tech? Like, is it the corporates? Is it the in-house teams who might have an incentive to cut spend? Is it law firms who are moving away from the billable hour? It's all human capital right now, which is, there's an extraordinary margin behind that. But if tech can do anything, if somebody's charging$1 ,000 an hour or they're priced at$1 ,000 an hour to deliver some sort of service, it's not that hard to identify where there's huge margin opportunities there.

13:47So I think it's just greenfield and it's all of it. And then even down to the consumer stuff where$1 ,000 an hour may outprice a lot of consumers with their legal needs, but technology that can deliver this for pennies may not. And Tom, just I suppose from my perspective, so much of it is around, to Zach's point, really, the interconnectivity. So for us, when we first launched Fuse, nobody was really talking about legal tech. And the question I used to get asked most often is, what is in it for A &O? Because you're basically eroding the billable hour proactively. But I suppose the foresight that our senior partner had at the time was that, well, technology is available to us, but it's also available to everybody else.

14:33It won't be very long before the clients realise that we shouldn't be charging X per hour for Y job. It's just not reasonable and it's not just. And so, yes, it's taken the market a little while to come to that sort of general realisation and understanding. But the pressure now is entirely coming from the clients. So the reason why the law firms are having to adjust their models, adjust what they do, adjust their technology investment is really because they have no choice. because I, if I'm using technology, would always be able to do something cheaper than my counterpart and often more accurately and better and with a better client experience often as well.

15:10So it's about understanding that there is always knock-on effects. And the other one that I just think is human nature is when we first launched Fuse, I remember thinking, well, hang on a minute, you know, I order cabs in this way. I order food in this way you know so much about what I'm doing my day-to-day life has changed it's not possible that those same innovations aren't applicable across the piece to different industries including to law it doesn't take genius to make that connection no jokes nandy I know I'm not genius don't need to hear from you um but but you know it doesn't take a huge leap to figure that out and and as soon as you realize that and just even slightly thoughtful about what you can be doing better, picking up innovations from different industries and verticals, you can move along fairly quickly.

15:59So I think the combination of those two things have just changed what law firms think they can and can't do, really. Oh, and I think there's been an acceleration with large language models, and really primarily because of the fact that people could see this technology in action. And everybody saw it. Everybody said, you know, that started people thinking with a lot of questions. But I think this has been evolving for 10 or 15 years. Like there was a point, you know, in litigation, there's a concept of e-discovery and the law firm or discovery and law firms used to say, you can't trust an outside vendor to make Xeroxes for you.

16:37You know, and now that entire space has been outsourced. More recently in this space, we see a lot of technology and a lot of people that have just built alternative legal service providers around like NDA review. And lawyers say, we don't, we don't, NDA review is fine. We don't want to do that work. Cap tables, you know, lawyers used to do that work and now they're happy to work with some of these companies. You look at outside counsel guidelines on the cost pressure and they say, we're not going to let you bill for a first year associate. put all this stuff together. And I think that it's just like accelerating at a faster pace than it's ever been.

17:11I think this sets you up perfectly, Namdi, I imagine. Because you've seen the adoption, I imagine, from the customer side, how both, if Saga is correct, you've seen with LLMs that everyone all of a sudden was much more open to using a service like yours. Or is that not what has happened? I mean, what we're seeing is that when ChatGP3 and GP3 launched, like there was a lot of excitement and you had a lot of, you know, excitement from like firms and in-house teams, you know, really about the potential of what it could do. And I think you saw a lot of firms sort of racing to get their hands on these LLMs to find out sort of how applicable they were and what sort of use cases they had.

17:57I think what we're finding out now, probably over the last couple of months, is that initial hype is simmering down slightly, and people are being a little bit more realistic, not just about the opportunities of these LLMs, but also the limitations that they have as well. Where initially people thought, okay, they could sort of be a panacea and sort of solve every particular use case that they were trying to solve. I think more people are now being more realistic and realizing that there are actually a lot of limitations. There are a lot of things that they can't do and you have to apply them in the right way.

18:31So whilst we saw a lot of interest from sort of law firms maybe 12, 15 months ago, I think today they're a bit more cautious and measured. And some of them are building their own. Some of them are using external providers. The good thing for us is that it allows companies like mine to really just be focused and not sort of try and go with the hype, essentially. Because it's very easy to just sort of say, hey, this is what everyone's doing. Let's sort of jump in the bandwagon. And one of the things that we decided to do was to take a much more cautious approach. Could you kind of provide a bit of color around that cautiousness?

19:10Is the cautiousness kind of data protection related? Or is it, hey, we need to integrate this with our existing tech stack. That's difficult. or is it just kind of the usual risk aversion that lawyers have of kind of kicking things to technology partly like which how does that cautiousness kind of what does it look like i think for ross um you know i can only speak on behalf and finally our cautious has really been to actually identify proper use cases um there's been a lot of vendors that have come out with and a lot of them do quite similar things um which you know it starts to sort of you start to wonder how do you differentiate between one sort of vendor and the other.

19:51So for us, it was about, yeah, you can do all those sort of similar things that all these other companies are doing. But what are the real, real use cases that goes to the heart of how a lawyer actually works, how I used to work when I was an associate for five years, day to day, and try to identify how we can make that process more efficient and easier for the lawyer. And that takes time. That's not just something you wake up and sort of start trying to solve. It takes time. It takes a lot of investment. It takes the right team. And that whole process takes time to bring to the market. So we're very, very excited about what we're building, what we're trying to bring to the market.

20:25But we're also sort of quite realistic that it's not, you know, it's not going to sort of be an overnight solution. Can I add, Namdi, though, the thing that's interesting about Define is, so we, I think it's fair to say, we're basically the first users of it. when we first started to use it I think we very much saw defined it as an efficiency gain tool because you've just mentioned efficiency and it made me think you know lots of the tools that are coming out now are viewed as efficiency gain tools but not ones which minimize risk so what we're hearing a lot of is okay if you were to use this tool you would have an efficiency gain but it comes with an associated risk I think that the differentiator between lots of the things that are new on the market now and something like Definely is actually over time we've gone from looking at Definely as being just an efficiency gain tool to actually being a risk management tool.

21:18So sometimes when the technology is a bit more tested and not, for example, the sort of the latest, greatest GPT, whatever number we'll get to, is going to hallucinate or do something different or perhaps give us unexpected consequences. is sometimes when the technology is actually slightly more basic, it does actually enable you to look at the use of legal tech from a different lens. So not just that of the efficiency gain lens, but also that of the risk management lens. And for lawyers, really, risk management trumps efficiency gains because at our heart, that is what we're there to do. We're there to manage risk.

21:58It's funny, Shuti. I thought you were going to say the opposite there. I thought you were going to make the point that Zach made around, And hey, Gen.ai is obviously very sophisticated technology. And as a result, you can kind of trust it a lot more. And therefore, lawyers are becoming more comfortable. I mean, we definitely are becoming more comfortable with it. And it is getting better and it is improving. But I suppose it's like the equivalent of saying, would you rather use a calculator or an Excel spreadsheet to adopt lots and lots of numbers today? Probably an Excel spreadsheet, right? you know but but would you rather use an excel spreadsheet or would you rather use i don't know some technology that's not completely tested not totally known and which sometimes will throw out mistakes uh past you know there's a middle ground somewhere and i think we're at the point where law firms can comfortably be in the middle ground because they can see that it can provide some efficiency gains they can see that it also provides some risk management but it's not tipping you into the edge of the completely unknown and i think for some law firms the the generative AI piece is still actually goes into the completely unknown category and the risks I think it's it's it's the quantification of the risks and understanding of the risks which is is the scary bit for lawyers so weirdly I never very rarely come out in support of NAMD and he'll agree as a true fact um but we're weirdly in sort of coming out um to that for the fact that um it is important i think for legal tech companies not just to jump on the generative ai bandwagon regardless of the use case regardless of the anything else just because of the fact that it is in inverted commas sexy you know it's still understanding what are you actually adding here and how is that helpful and how is your customer going to actually respond?

23:47Yeah. And Tom, I don't think we are, we're excited about the technology and kind of the future. By no means do I think we think it's here right now and everybody should be using it 100 % of the time. The strongest uses we see in our portfolio are companies that were been thinking about this for a long time, have some decent distribution and are incrementally adding this in. Maybe it's 5 % of the product. Maybe it's used for summarizations. Maybe it's used for translations. Bill Gates has a quote that we think about a lot. People overestimate what happens in a year. They underestimate what happens in 10 years.

24:24So for us right now, we don't believe the best technology wins as of today. So we believe it's about the best user experience and how you can get people to change their habits. And we think that the underlying technology is going to get orders of magnitude better in the next couple of years. So we're kind of excited for that type of future. We're kind of excited for companies like Nnamdi's that are delivering an amazing experience to their clients today and that start to bake this stuff in and then become just absolute powerhouses in the next couple of years. Let me just understand that correctly.

25:01So that means that all the startups that you might see or surely do see come up now that are building foundationally on Gen.ai, you would say the tech is probably not there yet. Yeah. And the simplest explanation was, I think that the latest version of ChatGPT made something like eight or 9 % of YC companies obsolete that were in their cohort right now. Wow. So the tech is growing at that type of rate where we look at it in two ways. We look at it as saying, hey, incumbents have a huge advantage because they have a lot of data, and it's really hard to compete against them in some ways if you add some LLM functionality to it.

25:46But the earlier stage companies, they have this advantage of redefining the user experience. And we think this has nothing to do with LLMs. User experiences and workflows have just been so neglected and legal that there's so much opportunity there. And then LLMs are just going to be this accelerating factor. So we are definitely seeing the low-hanging fruit stuff. And then we're seeing tons of entrepreneurs enter into this vertical. I think we just did all of our reporting for Q1. Our deal flows up like 245 % year over year. And we see a lot, but those types of numbers, like we're literally seeing that that type of influx of engineers working on these problems but a lot of them that are coming out saying hey i think llms can be used to do something like really like um summarizing depositions that's like a logical one that we've seen no less than like 20 companies going after but we just say well is that a standalone company or is that for the existing companies with tons of distribution to layer on some technology So we don't think, you know, we're really excited on the LLM side if you want to focus on the tech for the companies getting started in the next six months or a year.

27:10We think they're just going to have such a leg up compared to the companies that were started a year ago thinking about this stuff. Or we think about the companies, you know, like non-theater out there day in and day out, have a ton of distribution on the customer side, have extraordinarily happily customers whose habits are baked around the product. and then how does somebody like him use this to kind of improve that experience? I think one thing I would add to that is that people, people for some reason or whatever, they underestimate how difficult it is to build a company. It's not just about trying to use the latest technology.

27:46It's about making sure, as Zach said, that the users within, ultimately we are selling to businesses. We're not selling, this is not a B2C in what we do anyway. you know we're selling to sort of law firms or selling to in-house teams these are other businesses and there are barriers barriers to entries to selling to you know b2b in the b2b category um i think a lot of people just underestimate how difficult that is because yes you could have a law firm or in-house team sort of get really excited about you know what the latest sort of lm you're using and what you know it's a possibility and they've got a budget uh to sort of spend uh to sort of see what you know what what the use cases are and explore that but then it's about retention Can you keep that same customer the next year and the year after and the year after?

28:29And can you grow the users within those customers? Because ultimately, if you don't, then you're not really providing that value and ultimately you become obsolete. So I think all of these things need to really be considered when sort of trying to come into this space. It's not just about, yes, there are a lot of applications. And as Zach said, law has been neglected for a long time. So there are a lot of opportunities, which is super, super exciting. but also people need to be really realistic about how difficult it is to to build a a business especially in this space i guess i have a question for the group following on from that which is i mean would you guys say that the best legal tech entrepreneurs are people like nandy so ex-lawyers no no tom i would never say that what a silly question Absolutely not.

29:14I set that up wrong. You have a deep understanding of the customer because they used to be the customer. Yeah, I was going to say from our end, former attorneys jumping over have the potential to be great entrepreneurs. They also have the potential to build something for a very specific use case that's just them and solving their pain point. And it's not broad. So our dream type of entrepreneur is, or is not dream, I mean, every entrepreneur is different. Entrepreneurs can come from anywhere, come with any sort of background. But the ones that we have found that have been fascinating are the ones that maybe have a legal background, but very specifically work in a product role within, you know, trying to solve some legal background.