Kenneth Adams over at Koncision wrote a blog post recently that caught my attention: The Perils of Innovation, about the challenges of true innovation in the corporate law field.  Take-home point:

Bringing innovation to the transactional world is like competing against a giant cartel. It’s like competing against faith. That’s what makes it so bracing, but it’s also why most people offering technology solutions to the transactional world will fail.

I started commenting on his post until I realized I was writing a mini-essay and that, given the relevance to other topics I cover, it made more sense to post here.  Ken talks about the recent shut-down of Ridacto, a little contract analysis tool that I came across – wait, now that I think about it, Ken was the one who introduced me to it, via Twitter – and found interesting, but a bit shy on execution. You uploaded a contract (more on that later), it ran an analysis, and then produced a proofing report that pointed out issues with defined terms, section references, etc. Much like a simpler version of Deal Proof, which my firm licenses but for some reason no-one used until I discovered it.  It’s highly imperfect, but has honestly saved my life as a junior associate, and has saved the clients I’ve worked with probably about 5-figures so far.

Here’s my comment to Ken’s post:

I’m pretty optimistic about the future of transactional legal tech, but I think that any startup trying to enter the space has to be incredibly strategic about how they build momentum.  I tried Ridacto – it seemed interesting, though the UI was a bit confusing.  But I think the real issue was that their approach to how they analyzed contracts would simply be a non-starter at a law firm of almost any size – hey, upload this contract for a private transaction that hasn’t occurred or been announced yet, we’ll analyze it for you, but we promise we’ll delete it afterwards!  Umm, yeah, good luck with that one.  I got my hand slapped by my IT overlords because Box, not Dropbox, but crazy-secure used by like the CIA Box, wasn’t secure enough for them.  Just suggesting Ridacto would get me laughed at.

Lesson: If you’re a legal startup, your customers, or at least those controlling their buying/use decisions, are pathologically paranoid about security and credibility.  You simply can’t be a $100K, bootstrapped, “lean startup” and expect to get any momentum in this space.  In some ways, you never get to truly enjoy the Early Adopter phases of most tech startups. You start out right in the middle of Geoff Moore’s famous “Chasm” – all the problems of a startup – burning cash, an un-proven business model or product + all the problems of a scaling tech co. that usually has revenue to rely on, like gaining credibility and convincing conservative customers.

• Price – low up-front cost, subscription based. If it doesn’t work out, we make a clean break, little money lost.
• Trial Period/Demo – don’t expect any firm to consider your product unless you offer a trial, or at least a demo that they can play with.  Demos can be helpful where the firm would need to build in a bunch of of its own information to truly get a feel for the product.
• Security – I’d have every single aspect of our firm in the cloud if I could, but I have to answer to IT people who get panic attacks at hearing the word “dropbox.”  If you’re handling anything with sensitive information, you need security credentials, and that isn’t cheap.
• Credibility –  Hire ex-corporate lawyers that can sell – good luck finding them.  Network and get in contact with a single firm that (i) is an industry leader, (ii) has people who are willing to trial software – most likely tech-focused lawyers, and (iii) would allow you to mention their name in marketing materials.  Lavish them with attention.  Most law firms are sheep. Nothing perks the ears of a corporate partner better than “Well, X and X LLP are using it.”  That’s how legal language gets adopted. Same with legal tech.

Low up-front costs for customers and trial periods/demos, so not much revenue to rely on up-front – classic startup.  Security and credibility to convince conservative decision-makers that you’re legit, will make it past their IT people, and truly understand their problems – that’s the Chasm, and it costs money.  Usually a tech co. has some revenue from early adopters to rely on when its dealing with the Chasm, but not a legal startup.  You start out right in the middle of it.

Good luck being a true “lean startup” in this space.  Frankly, I think that an intrapraneur – operating with the brand and budget of a large Co., but with the freedom to innovate – has much better odds than a true entrepreneur running a legal startup. I know many VCs aren’t (yet?) pouring money into the legal space, but we’ll see.  We desperately need innovation, but it’ll take serious, well-funded risk-takers with a strong understanding of corporate law practice (not an easy combination to find) to make it happen.