Founder Mode: Jake Heller, Founder & CEO, Casetext

0:00Carolyn, today I'm so excited because we are here in person with Jake Heller, the founder and CEO of Case Text at the Y Combinator Founder Mode Retreat. Hi, Jake. Welcome, Jake. Nice to see you. Nice to see you too. So, Case Text got bought a couple years ago by Thomson Reuters. That's right. But you guys, I met you when you went through the Summer 13 program at Y Combinator. 12 years ago. 12 years ago. 12 years ago. Man, it's been a long time. Yes, yes. So, tell us about Case Text and and what the company was and a little bit about that before we get into founder mode things. So before starting Case Text, I was a lawyer.

0:44And I felt when I was practicing that the technology I was using would often not even not help, it would get in the way. And I thought, we got to be able to apply modern technology to do things like search for information, sift through documents, et cetera, to make legal work easier, faster, more efficient. I felt at the time, for example, that if I wanted to find a great restaurant that was open or movie times, I'd find that instantly. But if I wanted to find precedent in case law that could make an innocent person not go to jail or protect my client, I might be up to 5 a.m. 10 days in a row to find that one precedent.

1:27And Carolyn's nodding in agreement. Yes. Yeah. You've been there, done that. Yes. Yeah. And so we founded the company with the idea that we can use technology to make legal work effective and efficient. And the mission became almost like being an MRI machine, but for law, like technology that enables lawyers to do more and do better for their clients. And the hoped for outcome would be justice for those clients, better justice for those clients and better representation. Okay. And how far along were you when you went through YC? We were very early. I think I just coded a almost demo website. Could you program?

2:02I was just going to say, how'd you learn to code? So I grew up in Silicon Valley. You did? Yeah. Where? Sunnyvale. Yeah. Oh, my gosh. Sunnyvale. The cradle. Yes, the cradle. Of course. Homestead High. That's right. We were talking about it. We were talking about this last night. Yes. Okay. And my dad actually started an internet business in our garage in the early 90s. Like the first ever company in Delaware registered with the name Internet in it. Oh, my God. Are you serious? What? That's a great story. So like 92 or 93. And he's a high school dropout, by the way. He's not like, that company is not Google.

2:32A high school dropout? Yeah. Oh, yeah. Wow. A high school dropout. But he figured out really early that this technology is going somewhere exciting. And to be clear, the company, it paid for my way through college and my sister went through college. It was immensely, it took our family to a new kind of like, you know, from the lower middle class to the upper middle class is life changing. But it wasn't Google. You know what I mean? But it was so impactful for my life. And I think a lot of kids with their dads, maybe they play catch or fix cars or what have you. I coded websites with my dad, right?

3:04So that was our thing, right? Every summer, I was working at internet business systems. And so that's how I learned how to code. And even though I fell in love with law and policy, went to law school, became a lawyer, I couldn't stop myself. I was always coding. That's great. Wow. I did not know that about you. Just starting a business in a garage. Everything about your story is very iconic. Yeah, it's very California, right? It's like, yes, yes. So Silicon Valley. Yeah, yeah. Especially Homestead High is where Jobs and Was started Apple. Yeah, that's right. That was also in a garage, no? Yes.

3:36Yes, yes, yes, yes. Wow. Okay. So you said this is a real broken problem here in law. I was feeling it every day as a lawyer. Yes. Yeah. And so did you decide I'm going to leave my cushy law firm? Were you at a big law? I was a big law firm at the time. Yeah. Yeah. Ropes and Gray. Oh, yeah. Of course. And so did you program something up and see if it could work? So I made an initial mistake, actually, which is I started coding stuff for myself at the law firm. And then I told them about it. And they said - I already know where this is going. We own it. Yeah. Of course they said that. Yeah. And so I halted immediately.

4:15Jake, you're a lawyer. You should have known that. How did you make that mistake? I'm a lawyer, but I'm kind of naive. You know, I thought they'd be excited and interested. They asked me, well, Jake, if you're doing all this programming, you're clearly not billing enough hours. Yeah. First of all, you're not meeting your billable. The thing is, I was way over my billable. I'm just a workaholic, I guess. But that was the moment I knew I had to leave because I couldn't pursue that passion of building stuff and also do my law firm job, either or. And so I left. And it's funny. At the time, I left and I told myself, oh, either I'll start a company that will be super successful in a few years, or it will totally burn out and I'll go back to being a lawyer.

4:55That was what I thought the two options were. And of course, what really happened is I fought to build my company piece by piece over 10 years and like four pivots to finally a successful exit, but it was not a quick in and out adventure. And I think you'll have to come on the social radars for a full episode of your story, but there is one aspect of it that I want to ask you about in our time today, which is, I think you were one of the first companies to leverage the chat GPT for. Yeah. Is that right? Can you tell Carolyn and I a little bit about that? And that's definitely, I'd say, our founder mode moment as well.

5:28Okay. Perfect segue. This is a perfect segue. Yeah. So we initially thought we should apply modern technology to help solve legal problems. And we had, honestly, a bunch of different iterations of that, different approaches to that. But the one that really started working for us way early, like 2016, 2017, wasn't even called artificial intelligence at the time. It was called natural language processing and machine learning. And we found all kinds of exciting ways that we could make searching for information better and all kinds of ways you can summarize information better even before the modern wave of artificial intelligence.

6:02And in part because we were so invested as like we're the legal guys doing AI stuff. and it's a pretty small community at the time of people doing anything AI stuff. And so I think we got on the radar of OpenAI and they're on our radar. We shared notes and we eventually became part of like an early tester program. Because you had a lot of data. Yeah, we had data and we had people, I think importantly to OpenAI, which was at the time, you know, it was a research lab first and foremost. And what they wanted is they wanted feedback. Like, we're making stuff that's useful for medicine, for law, for finance.

6:41And I think they came to us as like the law guys. And we also, you know, we are bet the whole company that AI is going to transform law. And so we were very excited about the stuff that they were doing. And yeah. Well, I was going to say, Sam, you were, since you were 2013, was Sam at YC at that point? He was, yeah. So you guys knew each other from that era. So he would have had you in his brain. Yeah. Although we barely overlapped. Like, yeah, at the time. So, but yeah, he was there. This is right before I think he became president of YC, but he was definitely involved, definitely a partner, and gave us some pretty direct feedback during the YC process.

7:17Like, that's not fast enough. He was right. So fast forward to 2020, 2021, we're seeing early versions of GPT-3 before it comes out and GPT 3.5. And each time we were like, this is interesting and shows promise, but it is not useful for legal work. It would do things, it would just make, at the time, plausible sounding sentences that sounded legalese, but they were nonsense. But they weren't, yes. And so we were actually pretty harsh with our feedback back to OpenAI about the usefulness of their products at the time. And it almost had written off that path. At the time, we were developing our own models in that same genre, but we're trying to do it just based on legal information.

8:02And we thought that had potentially a better approach. It didn't, it turns out. But in mid-ish 2022, I don't remember exactly when, they approached us and said, finally, we have something we think will actually work for you. And they didn't call it this at the time, but that was one of the first versions of GPT-4. And to put this in historical context, this is three, four months before chat GPT came out and seven or eight months, maybe nine months before GPT-4 came out. And we're seeing this thing. And one of the earliest indications for us is we ran their earlier models against the bar examination as just a test to see how it would do.

8:40Earlier model scores in the 10th percentile of test takers. So better than some lawyers, but you know, the ones that show up drunk basically. And then later on, we get access to this new model, 90th percentile of test takers, better than nine. And this was a span of like four or five months. Yes. Yes. And it's this unreleased model that we were under super NDA. And I'm walking around chatting with this thing. And I'm like, this is going to be before we even chat GPT. And I'm like, oh my god i'm talking to a a god this is this informational god and i can't tell anybody about it oh my gosh where founder mode comes in is so they show us this model and i think that they show us a demo of it on a friday and they give just my just my co-founder and i with three co-founders at the time they give us just two co-founders access and we're the ones that can't even tell a third co-founder.

9:37Okay. And because they want to be so tight lipped about it. And I respect that. And we spent the entire weekend sleeplessly just testing out this model, right? Just the two of us, we had all these problems. Our customers come in saying, oh, we were doing with this AI stuff is kind of interesting, but if you do this, you can do this. And we're like, no, that's a whole company to do, you know, document review as well as legal research, as well as contract drafting, as well as that's what our customers want. We want everything. And we can only give them a sliver of that because that's all we can do with like a hundred people at the company.

10:09And, but over the course of like a weekend, we were like, oh wait, this model can do all of it. Not perfectly, but you know what? Humans aren't perfect, right? It's, it's doing all this stuff so incredibly well. And so incredibly quickly, we came up over the course of a weekend with like a dozen different use cases for it. And by Monday, I knew that I had to take all hundred people at the company who were focused on other stuff. And we had to pivot the business to focus on this instead, to change everything we were doing for the last nine and a half years. Oh, Jake. That's a pretty serious founder moment.

10:41That is serious. It was, I mean, it's funny because to me it was obvious. And, you know, when I tell the story to other people, I thought, honestly, there are a few other companies that got access to this technology at the same time as we did. I was like, obviously everybody else would be doing this. And as soon as GBD4 API comes out, you know, everybody in the world will be doing this. I was wrong. Most companies are like, oh, this is kind of a neat add-on to our current existing tech stack, and we'll have a tiger team attack this or whatever. To me, the most obvious thing to do was to drop everything we were doing before this moment and focus on this instead, because this is the future.

11:16And that was the bet we made. This is founder mode is grinder mode. Yes. That's what it is. This is, wow. So did you and your co-founder, the only two that were in the loop. Did you both have this epiphany together? Oh, yeah. We were on Slack, you know, and also in person, just like talking ferociously about this. And we're like, you know, at 2am, 4am. It's like, I tried this thing, and it totally worked. We got to, we just got to do this. And I don't remember exactly the day by day, but it's something like crazy. Like maybe that next week or the week after, there was an executive offsite where we're gonna talk, you know, quarter three, how did our sales go, you know, like all the normal stuff.

11:53And by that point, I think it was clear that we, you know, Pablo and I, the two that really access, we're just like sleepless. And like, people talk about stuff. We're like, yeah, it doesn't really matter. Trust us. Like, we can't tell you why, but it doesn't really matter. A little bit for a tiny bit. And then we show up at this executive offsite and I had personally built a number of different demo products that we should be building and said, oh, okay, folks, I know we had this whole agenda for this offsite. I need to push this to the side. This is what we're going to be focusing on. Did you hear people stirring in their seats and perumphing?

12:29Yeah. And then did you show them demos and they were like, oh my God. You know, it was really interesting because the room at first was divided. Oh. The first half of the room, part of the room was like, oh yeah, obviously this is fucking cool. Yeah. Sorry for swearing. That's okay. We can drop an occasional F-bomb on this show. We're okay with that. Okay, good, because that's how I am anyways. So they were like, this is it. And I think for some of the people in the room, they're like, I cannot believe we're looking at this amazing alien technology. And for the other half of the people in the room, they were like, oh my, Jake, we just pivoted like two years ago and we just did this other new thing and now it's a whole new, like, you know, and they had to take some time to wrap their heads.

13:09These are smart, hardworking, good people, but they had to take their time to wrap their heads around this whole new thing that I was showing them. And it took a little bit of time to kind of warm them up. I was like, my goal for this executive offsite for this week is going to be, because they allowed us, at opening, I extend the NDA to our executive team at this point, but not the rest of the company at the time. I was like, we need to get all together on the same page this week, because next Monday at the All Hands, we're going to announce this as what we're doing with the company. And we all got there.

13:39And again, it's one of those things in law, It's been a long time. I may mess this up. You may be able to correct me. I think res ipsa loquitur, the thing speaks for itself. And that's how I felt about this technology. It is so evident and so obvious that this stuff is so powerful that I didn't even have to do that much selling at the end of the day. They just had to work with it a little bit and see exactly how powerful this would be for our users. And what was really interesting is that when we announced it on Monday, same kind of reaction, split. Some people were very excited. some people, and to maybe go a level deeper into the people who were a little skeptical.

14:20After running a business for a decade, and there are many businesses that take off immediately, and that's amazing to watch, like Facebook and Stripe. There's businesses that a few years in, and they're already on the cover of Forbes and raising. We were never that. We had always struggled, and we'd always like, okay, we'll try this thing. It didn't quite work, but it worked a little bit. Over the course of 10 years, we had grown well, and we had survived, and we had fought to be at that moment. But we were, by no stretch of the imagination at that point, a super takeoff. Not a rocket ship. Yeah, not a rocket ship yet.

14:56And you only have so much credibility as a CEO, I think. Yeah, that's right. Because you said, that's going to work. And then it only worked a little bit. Because you're selling it every time really hard. Exactly. Yeah. And so I had to come to the company again. This is going to work. And some people have been with me for nine years. I would say, well, Jake, I trusted you that time and that time and that time. And it kind of worked. But I felt like I had to go out of my way to really make sure that everybody was on board with this. And I took it upon myself to be like, this is defined. This is the vision.

15:30This is what we're building. This is what it's going to look like. Here's how it's going to work. And also, by the way, everybody's doing something right now, and you just stop doing that and work on this right now. I felt like in this, especially a moment of extreme technological change, you can't expect every one of your employees to be visionary. You can't expect every one of them to know exactly how all the pieces are going to fit together. They are not thinking about the big picture like you are. They aren't having all the same conversations with customers like you are. And they need that direction in that moment.

16:03I think there are other times where you can trust them to take on more on their own. But in this moment, and to go back to kind of the founder mode conversation, I think part of what looks like is being in moments where you need to be very, very clear about what needs to get done, what time it needs to get done on, what good looks like. And to be in some ways kind of micromanaging, I was coding stuff. I was a big contributor to the code base, and that was something that was not true for many years before that. We were inventing ways of prompt engineering before that was even talked about because the GPT-4 API was not available.

16:38Oh, my gosh. We were getting really, really, really deep into it. And personally, me, my co-founders, very deep into it. And I think had we not done that, it would not have been as successful as it was. Were your investors similarly divided? Yes, yes. Our board, some of them got it immediately. For one of my investors to fly out to see them where they were and sit down with them and spend the day trying to convince them, yes, we're going to hit our target of 20 million ARR or whatever if we go the old way. But this is the opportunity that we've been waiting a decade for. This is our thesis around AI applied to law.

17:16Here's how it's going to change the world. And they were skeptical at first but came around. Yeah. If we can talk about this really quick. You then, probably a couple years later, got up in front of the company and said, guess what? We're selling. And it was a big number, if I remember. So how did that feel with all of this history, 10 years of pivoting and doing this stuff? It wasn't a couple of years later. It was a few months later. Months later. Wow. What? I guess I kind of screwed up the timeline there because it hasn't been around that long. Yeah. Yes. That's right. That's right. Again, we had been fighting for 10 years to be where we were.

17:56And finally, we were taking off. We were doing the rocket ship thing. Yeah. Right? And it's this classic - Like immediately. Yeah. Immediately. We had so many things in our favor, but one of the things in our favor was that because chat GPT came out in November of 2022, the whole world was talking about AI. And we, from before that working on GPT-4, we were only allowed to launch our product after GPT-4 also went live in March of 2023. So the market was so hungry, so hungry to apply AI to finance and accounting and legal. Legal is maybe one of the top ones, still is the top ones of where, okay, large language models.

18:38Like text is like the job. And, and so the market was really, really excited about like the law firms and the DOJ and the innocence project and public defenders and companies all wanted to talk to us about, can, can they use this technology to make their lives better and to help their clients ultimately. And so we, we just came out like a, like a, just, just rocketed straight up. And the amount of money we made for the first nine years, We basically doubled that in a few months, right? Oh my God. That's crazy statistic. Whoa. And so we started to fundraise. And I'll tell you, every single fundraise for nine years was one of those fundraisers where you go out and anybody will talk to you.

19:21You just take that meeting because you say to yourself as a founder, all it takes is one. Yep, yep. So we talked to everybody. One of those people we talked to was Thomson Reuters Ventures. And I'll never forget, I almost didn't take the meeting because we already had some term sheets. And this is incredible. I was like, wow, we have term sheets already. That's crazy. Yeah, coming to us. Yeah, because people are calling us. They're like bidding up each other. This is new. We're so pretty. Yeah, exactly. This is what it feels like. Yeah, exactly. Exactly. This is what it's supposed to feel like.

19:46Oh, wow, this is amazing. And so we almost didn't take the meeting. I went to the meeting and they were quasi-competitive in a sense. And I was like, I don't know. I was going to say. Yeah. They definitely. We were almost going to take the meeting. And in that 30-minute meeting, which I think is late to, the chief product officer shows up. The chief strategy officer shows up. I was like, okay, this is a different meeting than I thought it was. And that night they called and they said, Jake, we know you have other term sheets. We know you told them you get back to them by tomorrow. We know what the valuation is.

20:09They did their research. We're not going to offer you an investment, but we would like to make an offer for you to buy the business. And just please give us until Monday to put together that offer. We think you'll be pleased. And like you said, ultimately we sold for$650 million. You go to the all hands, you tell everybody this is what we're doing. and everyone must have been like, aha, now I see the vision. This is an amazing result. I mean, even that within the board and the company is controversial. Some people want you to ride the wave longer. Yeah, that makes sense. Of course they did. Yeah.

20:42And honestly, we probably could have sold for even more how we held on. At the time when we made the decision to sell, it was like, maybe we can triple this in a few months. Maybe we're talking about five years from now how we wish we took that offer you know because maybe the the gbd5 would come out because we had no idea at the 20 23 maybe gbd5 would come out in a month yeah and and make everything obsolete we had no idea do you ever think like maybe we'll be a public company and i'm going to be a public company ceo yeah that that was you know a possibility for us for the first time felt real you know after nine years of struggling to build a relatively small private company in the 15 to 20 million dollar kind of arr range yeah now it's it's it's like, wow, this really could take off.

21:25And to be honest, I think there are other companies in this space who will probably become public companies. And the truth is, I don't regret it for a second. Money in the bank, baby. It's not just that, although that's great. I mean, part of it was, I looked at the list of my employees. And the hard part about this decision is you have to make it without consulting them, usually. And for us, we didn't want to distract the rest of the company. We needed to do a process. I handle this conversation. Everybody else, build, build, build, because if we do not do this acquisition, then everybody else needs to...

22:00We need to prepare for our future. We need to keep up growing. We need to be ahead of the competitors, et cetera. But I printed out a list of the Excel spreadsheet of every employee, how much money they'd be making. And I saw people like, that life-changing amount of money for this engineer has been with us for four years. This is life-changing amount of money for this person, the office manager who was here for us for seven years. They just can't say no to that. my age. It's such a responsibility for your employees. You've changed their lives. Yeah. And I hope I made the right call. I mean, one thing that we also felt strongly about the time is there is no better place, we felt, to take what we were doing and make it really big than Thomson Reuters.

22:37Most people only know them for Reuters, which is the new service. Yeah. But they also have the biggest used legal products, Westlaw and practical law, but also in accounting and finance and risk, like across the board. And one thing that is like mind blowing to me, that product that we have is called co-counsel. And if you go to like thompsonreuters.com, this like mega company, it's like Thompson Reuters, small print, co-counsel. You know, it is wild. It is wild and humbling to, you know, have that kind of impact now for tens of thousands of professionals, hundreds of thousands of professionals across the world.

23:11I love that you just said like, no regrets. I have no regrets about this. That's a great feeling. Yeah. I know. I love it. And thank God you were in founder mode. Yeah. And you listened to your gut over that weekend with Pablo. Yeah. Yeah. That's amazing. Well done. Well done. I am so psyched to hear the story. This was so fascinating. So thanks for coming on our show today. Thank you, Jake. It was great. Bye, Jake. Bye. Bye.