By Kevin O'Keefe

Some Venture Capital Backed Legal Tech Companies Need to Brace for Economic Downturn

I hit Seattle in 1999 when venture capital, assuming you had a good idea, was fairly easy to get.

By the next year, the economy started to slide and by 2001, most venture capital backed companies – including legal tech companies (called dot-com companies then) – closed their doors or were sold to established buyers.

Though VC’s, like now, pledged large sums then, they withheld tranches of monies, forcing companies to go out of business or sell. The VC’s were cutting their losses.

Reading the WSJ’s story this morning, ‘Silicon Valley Investors Give Startups Survival Advice,’ I couldn’t help but feel we’re hitting 2000 and 2001, all over again.

In recent online slide presentations, blog posts and social-media threads, venture-capital doyens including Lightspeed Venture Partners, Craft Ventures, Sequoia Capital and Y Combinator are telling the founders that they need to take emergency action for what could be the sharpest turn in more than a decade. Their advice includes cutting costs, preserving cash and jettisoning hopes that hedge funds or other investors will swoop in with big checks.

Benchmark Capital’s Bill Gurley warns, “The cost of capital has changed materially, and if you think things are like they were, then you are headed off a cliff like “Thelma and Louise.”

Sequoia warned today’s situation is like 2000 and 2008 and that venture backed companies should be hoarding cash. Fred Wilson of Union Square ventures advised preserving cash for at least eighteen months.

Established legal tech companies with an established customer base, a revenue stream exceeding expenses and cash in the bank will be okay.

For other VC backed legal tech companies, my guess is things are going to get real tough. Tougher than they’ve ever seen it.

Startup investors have sounded alarm bells in previous moments of financial and economic tumult, including the start of the Covid-19 pandemic. But partners at venture funds say the current situation is different. In past downturns, the Federal Reserve cut rates and pumped money into markets to support the economy, providing liquidity and cheap capital. This time, the central bank has been raising rates and taking money out of the system in a bid to tame inflation.

Today’s situation is more similar to the 2008 financial crisis or the dot-com market crash in 2000, said Sequoia.

We’ve grown accustomed to reading about legal tech startups landing large sums in venture capital.

As tier one venture capital funds start turning off the flow of capital, lower tier VC’s and private equity companies, the ones more likely to be funding legal tech companies, are going to do the same.

Though we’re not likely to have a total collapse ala 2001, tough times could well come to legal tech.

Kevin O'Keefe
About the Author

Trial lawyer turned legal tech entrepreneur, I am the founder and CEO of LexBlog, a legal blog community of over 30,000 blog publishers, worldwide. LexBlog’s publishing platform is used on a subscription basis by over 18,000 legal professionals, including the largest law firm in each India, China and the United States.

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