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Was #CLOC22 CLM's First and Last Hurrah?
#Legaltech’s Hottest Sector Has Some Challenges Ahead
Is winter coming for contract tech startups? For some, probably so.
A LOT of smart money has poured into contract tech, billions in fact. Sequoia, Softbank, Tiger Global — they’re all in. Never was that on display as much as it was at CLOC’s annual conference in Vegas two weeks ago. But some contract tech companies may be in for a real challenge. Their problem is that they did too well. What follows are some impressions🤔 some observations🙋♂️ and some predictions🔮
As always, if you think I’m wrong, please let me know (extra points for biting insults and clever ad hominem attacks!)
The Exhibit hall at the Bellagio, and CLOC to a certain extent, felt like a maze of CLM companies. I was sitting with a group of friends at the LinkSquares happy hour when CEO Vishal Sunak gave a speech noting how the company had grown from a small booth in the corner to one of the biggest players in the exhibit hall. LinkSquares has been growing really fast and the company announced a mega round earlier this year valuing the company at $800M. As he finished his toast, bottles of Dom Perignon began flowing. Elsewhere, SirionLabs, Ironclad, and Evisort (each of whom raised mega rounds recently) were sponsoring what I can only imagine were similarly lavish parties. Contract tech, once relegated to both the literal and figurative “small booth in the corner,” was now quite literally at the epicenter of CLOC and #legaltech as a whole.
Just so it’s clear: there is every reason to be pumped about contract tech. I previously coauthored a post with Gravity Stack’s Bryon Bratcher about why this vertical is so attractive to investors, corporates, consultants and everyone else.
Killer Whale Strategies Legal Disruption Syndicate recently announced an investment in TermScout (a different kind of contract tech company), so we are every bit as bullish as others. Plus, if I knew how to choose the CLM winners (I do not) I would have begged on to the cap table of such companies (which I did not). But, the secret’s out: improving the CLM process with tech can make a lot of people a lot of money.
So, lots of funding 💵 lots of bottles🍾 and lots of 🦄 unicorn valuations. Great for everyone right? Not so fast.
You see, because while we partied in Vegas on the dime of all these newly financed contract tech companies, the stock market and the greater global economy was falling off a cliff📉 Tech stocks were getting hit especially hard. A friend of mine asked if I was gambling in Vegas and I responded (half jokingly) “If I wanted to lose money quickly, I would just invest in more Tesla stock.” Oh, and p.s. I did. And I did 😭
This is affecting all startups, not just #legaltech. The VC market has reconsidered the private rounds that valued SaaS companies at 80-100x annual recurring revenue. It could be years before those multiples return.
And in case you were wondering, some contract tech companies received valuations at these multiples. Forbes speculated that Ironclad’s revenue was in the $30M range, and yet their valuation was reportedly $3.2B.
Revenue is up 150% year-over-year, Boehmig says; The Information previously reported that the company was on track to make $13 million in the fiscal year that ended in January 2021, which would indicate more than $30 million in sales in the latest year. Boehmig declined to comment on this, except to contend that the numbers in the previous report were out of date.
Let’s say the numbers are off by 100% and Ironclad instead made $60M last year. That’s still a 54x valuation. When I started writing this newsletter public SaaS companies were trading at a 5.6 multiple. Who knows where they are now? I’m trying not to open Robinhood because it’s depressing. To be fair, private companies will always be valued at a higher multiple than public companies because they have greater upside, but will wee see 80x-100x soon? I doubt it. Now, private company valuations are not always made public, but LinkSquares, as an example, raised their $100M round at closer to a 30-40X multiple based on revenues that were “over $20 million” in 2021.
It’s hard to fault companies for getting higher valuations, which is why I said above “The problem is that they did too well.” But here’s the math: both Ironclad and LinkSquares could grow at 150% but, because of the difference in valuation, only one would be able to raise more money from venture capitalists without resorting to a down round.
Customer case studies should always be more persuasive than funding. And before I get accused of being a hater and/or having an agenda, just know that internally at KWS, we use Ironclad’s case study with Loreal as our prime example of how contract tech can make the business move faster. But, at the moment, legal departments need to be factoring in the sustainability of the software that is going to be responsible for the company’s entire contracting process. If you think finances can’t affect a company, just consider the case of Apttus, once the darling CLM of the legal ops world that has fallen out of favor with so many departments.
Belt tightening. The easy prediction is that contract tech companies with 2021 rocket ship valuations will tighten their belts. But can they? I say no. If all of these companies had raised at 80-100x valuations, then maybe. But, not all contract tech companies need to play it safe because they are “default investable.” Can you afford to scale back your sales and marketing or your R&D if your competition does not plan on doing the same? I don’t think so.
Increased M&A: Companies that have not raised mega rounds — and there are several — will be great targets for acquisition by legacy companies. ParleyPro’s acquisition by LexisNexis fits this trend although I have zero inside information on that deal. Companies that were planning to IPO will now consider acquisition by tech giants like Salesforce, ServiceNow and SAP just to name a few. Private equity players that can afford to wait will swoop in and try to take majority stakes in some of these companies.
Legal Departments Scale Back CLM: Will legal departments push pause on contact tech? This is the wild card and could be a challenge for everyone. What we are essentially asking is this: has the pandemic accelerated tech adoption enough to survive the current downturn? Can the cockeyed optimism of 2021 carry companies through the storm that is 2022? I took a poll of a mostly in-house audience at my webinar last week, and more than 80% said strategic initiatives will NOT be paused at their companies as a result of economic opportunities. You can see that webinar here on demand. Plus, all the surveys suggest that contracts is top of mind for legal departments spending on tech. But, and this is not to downplay the value of CLM improvement, it’s not exactly a money saver, especially not year one.
If this seems too simplistic to you, then you are right! I will get into CLM value prop in a future email newsletter. My prediction (and this is going to feel incomplete) is that legaltech will focus on the parts of CLM improvement that specifically reduce costs.
Ultimately, I am excited to watch how contract tech companies deal with challenge in the same way that I enjoy watching Steph Curry down by 10 with 2 minutes remaining. The people behind these companies are exceptionally sharp and, although winter may indeed be coming for contract tech, those who survive the winter — the cockroaches as Paul Graham calls them — will ultimately come out stronger on the other side. We are going to see some serious creativity, so get your popcorn ready 🍿
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