VCs Can't Get Enough of AI for Lawyers
Plus, venture investing across the globe slipped in Q3
The Main Item
AI Legal Tech Is Booming
First AI came for software developers. Now, it’s coming for lawyers.
AI purveyors have long considered legal work a big opportunity, given the high cost and repetitive nature of so much of it, and Crunchbase reports that VC investment in the sector is set to reach new highs this year.
It’s already a market with many categories. A few startups, like Harvey, are trying to be all-in-one solutions performing a range of tasks, including contract drafting and fact-finding for legal research. Leya performs similar legal support work for the European market.
We heard about a new stealth AI startup, Cicero, that’s offering a suite of AI tools for Chief Legal Officers at Fortune 500 companies to assist them with casework that historically would be farmed out (expensively) to outside counsel. The startup has raised a previously unreported round of funding, according to two sources with knowledge of the deal.
Many legal startups are aiming for narrow niches. Norm Ai, for example, helps businesses build procedures for regulatory compliance by scanning drafts of documents and contracts to make sure they’re in line with the rules. It’s tedious and time-consuming work for humans, and particularly well-suited for AI.
Another is EvenUp, which targets personal injury lawyers with software that can draft demand letters and help attorneys with negotiations and case prep. This week, the team raised a $135 million Series D led by Bain Capital Ventures.
Battery Ventures kindly shared this market map of AI legal startups:
Lots of legal documents are formulaic and writing-heavy, two types of information that LLMs are especially good at handling, so it’s easy to see how AI could be helpful in streamlining legal paperwork and cutting costs.
But higher-level work performed by lawyers is a different matter.
“In the law, people need certainty—approximate answers are not good enough and can undermine a case, which makes hallucination a real issue. So you need to tune models differently,” BCV partner Aaref Hilaly told me.
When it comes to legal reasoning and arguing cases, legal agents, like many others, have yet to prove they’re ready for prime time. Companies need to be careful about their claims: last month, Joshua Browder’s agent startup DoNotPay, which helps customers dispute parking tickets or cancel subscriptions, was fined by the FTC for advertising false claims about the capabilities of what the company was calling a “robot lawyer.”
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They’ll also have to show that they can best (or perhaps join) the 800-pound gorilla of legal tech, Thomson Reuters’ Westlaw, which has a huge trove of legal data and account relationships with law firms around the world. Last year Thomson Reuters bought AI provider Casetext in one of the first big AI exits, and it has a history of acquiring niche rivals to stay ahead.
Harvey is trying to recreate a Westlaw-style database for its customers, said Hilaly, and EvenUp operates in a sector where it’s not as necessary. In legal tech, going highly specific or becoming the most functional all-in-one tool kit are the best paths to success, VCs told me.
“We see this in verticals a lot, where people really just want one company to do the job for them,” said Battery Ventures’ Brandon Gleklen. “I think everybody’s moving and shaking and trying to be that one.”
Overall, the sector has seen a big boost in 2024. According to PitchBook, this year is on track to match or even surpass the highs of 2021, with $2.4 billion in deal value so far.
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Data Deep-Dive
AI Boosts US Venture Numbers as Rest of World Lags
The global venture capital slump has come with the very large exception of giant rounds for hot AI companies, which has buoyed funding levels in the US but not so much elsewhere. Even though the number of US deals fell in Q3, as we noted last week, a new Crunchbase Q3 report shows dollar volume, though down 10% from the prior quarter, is up 22% year over year, and at about the level it was two years ago.
Other regions are faring much worse. Venture funding to Asia hit a 10-year low in Q3 with only $13.2 billion invested across the region—the smallest total since Q1 of 2015, according to Crunchbase data. It’s also down 44% from the same period last year. The freefall in China’s tech economy, driven by President Xi’s crackdown on private industry and geo-political conflict with the U.S., is clearly a major factor, but not the only one. India’s startup sector is also struggling, shadowed by the problems of Byju and Paytm, once its biggest stars. Israeli investment has been hurt by the nation’s widening war.
Perhaps most ominously for Asia, AI has yet to spark an investment surge: only 16% of venture-backed startups in the region are AI-based.
European VC funding totals also dropped dramatically. There were only $10 billion in deals in Q3, down 36% from the prior quarter and 39% from a year ago, with late-stage funding especially weak. Not all countries were on the same trendline though, which could be worth watching: funding for German startups was up by about one-third year over year to $2.4 billion, according to Crunchbase, while the U.K., traditionally the top market, was down 43% to $3.2 billion.
The only region outside of the US that saw an uptick in VC funding totals was Latin America, with a 14% increase year over year to $884 million. But the modest increase masks the depth of the downturn: the total is less than a quarter of what VCs shelled out in Q1 of 2022, and there were just 71 angel and seed deals, compared with 441 in Q1 of 2022. Still, the recent improvement gives investors some hope, with fintech remaining the region’s dominant startup sector.
