Women-led lawtech startups lag in race for venture.
Legal technology, the use of digital technology in the legal sector, has been in the spotlight since Covid-19 forced us all to work from home for many months. Yet, even as the past year has seen a step change in the adoption of legal technology and innovation, women-led lawtech startups lag in the race for funding.
This is one of our core findings about technology and innovation in legal services that emerges from a wide-ranging study undertaken by a team at University of Oxford for the Solicitors Regulation Authority (SRA). Our research is based on the results from an online survey of nearly 900 SRA-regulated firms, 50 interviews with various stakeholders, and analysis of databases (Burning Glass, Crunchbase, and Legal Technology Hub).
Our team, led by me, Mari Sako, Professor of Management Studies at Oxford University’s Saïd Business School, investigated the dynamics of the emerging lawtech industry in the UK. We took an ecosystem perspective with flows of funding and talent involving startup founders, their clients, angel and venture capital investors, governments, and universities.
Our main findings reveal that women founders are underrepresented in the emerging lawtech industry due to bias from venture capital but also due to decisions made by the women founders themselves to focus on lawtech areas which are less scaleable and therefore less palatable to venture capital.
In more detail, we discovered that:
1. Venture capital is the main funding source for lawtech startups. However, angel funding appears also to be quite important in very early stages. Nonetheless, funding into the UK lawtech industry is a fraction of that in the US. The total funding raised by UK lawtech startups is around USD 850m versus USD 6bn in the US. This contrast is in part due to the difference in relative sizes of the economies, but also because of the high level of funding from Silicon Valley in the US.
2. UK lawtech startups focused on serving corporations stand a far greater chance of attracting venture capital. We found 97 per cent of the total funding in the UK went into so-called 'BigLaw', lawtech startups focused on large corporations. By contrast, we found that only 3.2 per cent of total funding flowed into startups where the main client base was individual consumers and small businesses, a market segment we have dubbed 'PeopleLaw'.
3. PeopleLaw startups are working in areas like will writing, probate, family law and conveyancing while BigLaw startups provide software tools for M&A due diligence and contract analytics. Thus, the business models are quite different. As a consequence, our research found that PeopleLaw startups are addressing market areas where it is difficult to scale, because the core business is one-off purchases by consumers. This is a turn off for venture capital investors who look for businesses with scale up potential. Startup founders can attract investment only if you can prove you have the ambition to scale up. Our findings suggest this business model gap must be addressed.
4. In addition to the above, our findings show that gender balance is skewed in the lawtech startup ecosystem. Our database revealed that only about 15 per cent to 16 per cent of UK lawtech ventures have at least one female founder. In addition, women founders also clustered predominantly in PeopleLaw which also diminished their chances of getting venture capital. While 63 per cent of lawtech startups focused on PeopleLaw had at least one woman founder, that compared with 8 per cent of lawtech startups focused on BigLaw having at least one woman founder. Thus, women founders are clustered in the PeopleLaw market segment where it is already more difficult to attract funding because the business model is considered less scaleable. Women in lawtech startups are therefore hit by a double whammy of difficulty in raising funding.
5. Our findings lead us to suggest ways in which women may be better represented in lawtech. One of the ways one may attempt to increase diversity along gender lines in the lawtech ecosystem would be to attract more female founders with a BigLaw experience in law firms or as in-house counsel. PeopleLaw startup founders who are seeking ways of scaling up faster could look to move to a subscription model, by bundling one-off purchases with selling other services. These women founders could also make attempts to straddle lawtech and fintech (or other sectors), thus seeking to exploit market opportunities behind the confines of the legal industry.
Above all, our findings suggest the lack of diversity and inclusion in the emerging lawtech startup industry in the UK requires careful thought and investment in resources.