Noah Waisman (Photo via Kira Systems)
As we covered in my last column, investment into legal technology companies (“Legaltech”) is growing, but questions remain as to how much substance there is behind the companies taking on all those investor dollars. I decided to turn to someone who’s seen the process from the inside to get their perspective.
I spoke with Noah Waisberg, co-founder and CEO of Kira Systems, an AI-based contract analysis software company. Waisberg started out his career as a corporate transactional associate at one of the biggest of the Biglaw firms. As Waisberg put it, he looked into his potential future as a partner, and didn’t like his options. “Junior corporate lawyers spent lots of time doing work they hated, and that they weren’t good at.” If all went perfectly, after a decade or more of work he disliked, he might be able to make $6-8M a year as a partner. But things rarely go as planned. Waisberg wanted a career path that he could control himself, one that didn’t require him being unhappy for a decade in the hopes that everything else would pan out just so.
Waisberg saw his opportunity in the inefficiencies he observed in Biglaw contract review. So much money got thrown at reviewing contracts by hand, but even the best lawyers would occasionally make mistakes when repeating endless, mindless contract reviews. If Waisberg could find a way to automate some of the human time required to review those contracts, while also reducing the error rate, he stood to change the industry — and make a pretty penny in the process.
Waisberg and his partner, Dr. Alexander Hudak, put their idea into practice in 2011 by founding Kira Systems. Originally they planned to have a state-of-the-art software solution in place within four months, and then start raising VC money and attracting clients within six. But as Waisberg had already identified, things rarely go as planned. It took not four months, but two years before the software was working reasonably well.
By 2013, Kira had made strides. Contract review time was cut anywhere from 20-90 percent, depending on the contract in question. So the good news was that Kira finally had a product. The bad news was they had little runway and no clients. Waisberg’s wife, herself a Biglaw associate, was funding the company and their growing family off her salary. Waisberg watched as their savings dwindled with each passing month, with the funds going to paying developers rather than keeping food on his own table.
The gamble paid off in 2014, however, when revenue started coming in, first as a trickle, and soon a torrent. The company grew from four employees to eight in 2014. Within another year they were up to 20. Today they’re at 190 employees. Kira currently services most of the top law firms in the US and UK. In August 2018, Kira took on $50M in venture capital funding for a minority stake in the growing company.
A Segmented Market
Waisberg sees the Legaltech VC market as basically split into two baskets. The first basket is the target of what he refers to as companies targeted by growth equity investors. Growth equity investors look to put their money behind companies that have proven the fundamentals of their business model. “If you’re over $10M in annual revenue, you’ll deal with growth equity investors, who are sophisticated.” Growth equity investors aren’t necessarily hunting for the next unicorn, or even seeking a 10X return. Growth equity investing is about shooting for a more relatively modest (for the VC world) 3-5X return, essentially trading lower return targets for more certainty that their investment is going into a viable business that gives their equity value.
Kira, with its organic growth and proven profitability, fit nicely into this category by the time it started seriously looking for outside funding. Other examples Waisberg gave in the Legaltech space would be Clio and LegalZoom, companies with name recognition in their industry and proven recurring revenue streams. Waisberg sees companies like that, which simply need cash to polish their product and potentially scale it up and take their proven model to a bigger market, as a fundamentally sound business investment. Whether in the legal space or elsewhere, financing the continued growth of a proven company will likely always be worth considering.
Waisberg contrasted his company with the other basket, the traditional startup looking for VC backing. These are the companies that have a solid idea, a working solution, but that haven’t proven themselves in the market yet. If they have revenue at all, it’s likely dwarfed by their ongoing expenses. These are the kinds of investments that lead to the stories of $1,000 in stock turning into billions of dollars a few years down the line. But they’re also the kinds of investments most likely to turn that same $1,000 into a goose egg.
If there’s a bubble in the Legaltech VC market, this is where Waisberg sees it. “When interest rates are low, money flows into alternative investments. Legal startup funding is an alternative investment.” Investors are excited to park their money in companies that give them that shot at the billionaire lifestyle, and they are often willing to overlook a lack of sound financial fundamentals in the hopes that problematic business models will sort themselves out with time.
What’s A VC To Do?
One of the most interesting things Waisberg mentioned during our conversation was that, while Kira took on $50M in venture capital last year, the company didn’t need it. Kira has been growing rapidly on its own. The infusion obviously made sense strategically, but it’s worth remembering that relatively young companies can still be grown the old-fashioned way: Good sales, excellent customer relations, and a quality product. Even in the dawning 2020s, when high finance seemingly has its fingers in everything, good ideas and good execution can sometimes make their way to the top without resorting to other people’s money.
Waisberg’s story also gives me confidence that, even if the overall VC market may be experiencing a bubble of overinvestment in the aggregate, the Legaltech segment is seeing real maturation that will stick around for the long haul. Automated contract review and management was a pipe dream at the dawn of the decade. It’s a nine-figure business at the decade’s close. Some lawyers are starting to understand that we have to change the way we do business, and they’re building the tools to do it with.
It may take our industry longer to get there than most, but we are beginning to embrace the future. Whether Biglaw gets to partake in the bounty, or whether it just sees its best and brightest leave to found their own companies, that remains to be seen. After all, things rarely go as planned.
James Goodnow
James Goodnow is an attorney, commentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of NLJ 250 firm Fennemore Craig. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. As a practitioner, he and his colleagues created a tech-based plaintiffs’ practice and business model. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.