Bootstrap or Funding Strap: Options for Legal-Tech
Legal practice is known to be paper-intensive and practitioners are always on the lookout for ways to minimise the carbon footprint while reducing manual and redundant efforts. The 2021 Wolters Kluwer report shows that 47% of the legal companies that are more ‘technology leading’ saw higher profitability after the pandemic.
The adoption of legal technologies has proved to be beneficial in achieving carbon neutrality and reducing effort. The Asia 2020: A Report on the Business of Legal-Tech indicated 82% of Asia’s legal-tech companies plan to expand overseas. The report indicated that apart from the pandemic, the key challenges faced by Asia’s legal-tech include a long sales cycle, staffing, funding, and international expansion.
According to Thomson Reuters, the number of legal-tech patents filed globally with the World Intellectual Property Organisation (WIPO) reached a record high of 1,369 in 2019, a growth of 34% over last year. The growth indicates that the legal industry is inclined towards tech-driven methodologies and to change for the good.
Legal-Tech companies have seen more than 1 billion US$1 billion in Venture Capital investments according to Crunchbase, until September 2021. Legal-tech companies are booming, particularly because not everybody can afford the time and the money in traditional legal proceedings.
There is undoubtedly a big boom in store for the legal-tech sector. This is evident from the recent win of HelloPrenup a prenuptial legal agreement start-up, receiving the funding for US$150,000 in the US reality show – Shark Tank (aired on ABC) also indicates strong potential in the sector. Additionally, the move from the Singapore government to release SG$2.8 million Tech Start for Law scheme to offer legal-tech funding indicates the arrival of strong wind to disrupt the legal industry.
Legal-techs have several benefits to go out to financial institutions, venture capitalists, or crowdfunding platforms for funding, and ‘unstrap’ the ‘bootstrap’ but with a fair share of risks too. We will delve right into the details of the benefits and disadvantages of staying bootstrapped or going to an open platform or venture capitalists to seek funding and the related implications on the business.
Sides of the coin
Avoiding outside funding gives entrepreneurs more control over the business as well as its operations. A typical bootstrapped firm runs with personal funds and retains or reinvests the profits earned over time. The owners bring in the personal capital retaining the complete share of the equity. They can take decisions with their own free will without any external control. For example, to set the company’s achievement milestones or push a project forward.
However, it also means a slower growth rate due to the limitation of funds and difficulty to survive in a highly competitive market.
Another option available to tech ventures is debt funding. It offers an incremental runway for the current business needs. The business has to pay back the debt amount with interest, which you can always write off from the profits. In a cash-crunch situation, a bootstrapped firm will have to secure a debt to meet the cash flow requirements.
Prepare to sacrifice
Don’t forget that it’s hard to convince strangers. Hence, the sales pitch is an integral part of the process since that will convey the goal of your business to the investors.
Depending on the requirements, the fundraising cycle can be a time-consuming affair – month to several years. Do not forget that equity funding requires sacrificing a share of equity in return. The process starts with boardroom meetings, pitch presentations, preparing offer documents, undergoing rigorous due diligence, and closing the funding with money in your account if all goes well.
Equity investors do add to enterprises’ selling proposition like an introduction to other businesses. The introduction is not a favour rather they have an interest in your business’ growth and profitability. The interest drives introduction to different business leaders who can help you succeed.
The bottom line
The decision of whether to Bootstrap or go through the ordeal of funding at seed rounds or reality shows such as Shark Tank ultimately lies with the business owner. The business owners should know their investors well, considering they have a bond to share for the next 5-10 years at least.
Going for the bootstrap now doesn’t stop the funding road for the future – the Atlanta-based – Calendly – productivity application, founded in 2013 has been one such example that was bootstrapped and made itself to profitability. In February 2021, the company raised US$350m in Series B financing led by OpenView Ventures.
Legal-Tech firm owners should first analyse their practices and run them as a business to live up to the expectations of the investors.
Also read top viewed Ai Legal article: The Role of AI in Legal Research.
