Law firms are investing in innovation through venture capital services
Ari Kaplan.
Ari Kaplan spoke with Alex Nwaka, a principal with Touchdown Ventures, which provides venture capital services on behalf of leading corporations.
Ari Kaplan: Tell us about your background and your role at Touchdown Ventures.
Alex Nwaka: I started my career as an investment banker at Morgan Stanley and UBS in New York City covering the energy industry, went to Columbia Business School and then spent some time at Virgin Management, Richard Branson’s family office, performing a combination of venture capital, private equity and corporate development work. After Virgin, I worked as a private equity consultant at Estee Lauder Cos. on their new business development team, helping to reorganize their M&A strategy. I joined Touchdown four and a half years ago as the first full-time hire. In the last year and a half to two years, I have focused on enterprise software and the future of professional services. Legal tech is among the categories on which I spend my time.
Ari Kaplan: How does the company’s model of providing venture capital as a service work?
Alex Nwaka: We believe in strong collaboration with our corporate partners, where each party brings a valuable perspective. Touchdown brings the venture capital expertise, which includes sourcing, diligence, deal execution, deal management, including board representation and commercial relationships, through an exit. We also handle some of the reporting and monitoring of the portfolio as well. Our corporate partners bring deep industry expertise from their vertical or the category in which they operate. Together, we make a complete team combining the VC and operating knowledge.
Ari Kaplan: What are the advantages?
Alex Nwaka: We collectively can bring significant strategic value to our portfolio companies either as customers, channel partners or as a general sounding board for go-to-market strategy and even product development in the broadest sense. We are more than just a check to the founders and entrepreneurs that we invest in. We really try to bring strategic value.
Ari Kaplan: What types of organizations are investing in legal tech?
Alex Nwaka: We are finding most often that law firms are one of the key constituencies investing in legal tech. Corporate legal departments and GCs within Fortune 500 corporations are also investing in legal tech. And, to a much lesser extent, institutional venture funds are playing around in the ecosystem as well.
Ari Kaplan: Why are law firms investing in venture capital?
Alex Nwaka: First, most are investing in venture capital to enhance the value to their clients through technology. Second, technology is increasingly being viewed as a competitive advantage and differentiator among firms as they sell their services to clients. Third, legal services as an industry is undergoing a good amount of change both in terms of client expectations, as well pursuing results that are better, faster and more efficient by combining technology with a lawyer’s know-how.
Ari Kaplan: Does the law firm partnership model impact the way that they can invest?
Alex Nwaka. Photo from Touchdown Ventures.
Alex Nwaka: In most circumstances, there’s a departure between how law firms are structured in terms of how they distribute profits at the end of the year and the way that they invest in long-term initiatives like technology. Often, law firms would like to keep as much of their profits for distribution as possible, which usually means that any dollars that are invested in long-term initiatives like technology are not being given to the partners. Generally speaking, there’s some dissonance between investing in technology and the overall business model of law firms, but we see that changing as firms take a longer-term view of their individual industry.
Ari Kaplan: Where are law firms typically deploying their capital?
Alex Nwaka: There are three areas that we see as fundamental to law firms as they look at investing. The first area is contracts. If you think very broadly about what contracts represent, they are the lifeblood of any organization, and law firms spend a lot of time drafting and reviewing them. At a very high level, we view contracts as a treasure-trove of unstructured data that has value if you can structure and analyze it. Contracts is one area that we’re very bullish on. The second area is workflow management and collaboration solutions, which allow attorneys at firms to work better on their individual matters and share best practices. It gets them away from email and into more collaborative environments. The third area is knowledge management. Companies are focused on taking the collective knowledge within a law firm and figuring out how to capture and institutionalize it across the entire firm. We think that is a very interesting technological play because it takes advantage of the largest and most important asset of law firms, which is their people.
Ari Kaplan: What are the challenges associated with supporting legal tech companies in this way?
Alex Nwaka: Legal tech companies have distinct challenges when it comes to how they operate, create value and grow over time. The first issue is the difficulty associated with settling on a go-to-market strategy that works well and is repeatable. There is a significant number of subsegments within legal tech, where each constituency buys a little bit differently and has a unique set of criteria. The most successful legal tech companies that we have seen are those that really figure out which segment they’re targeting, nail it and then move on to maybe one other subcategory and are able to nail that as well. The second issue is that the competitive landscape within legal tech is constantly shifting. If you just take the contract landscape as an example, you have companies that focus on contract lifecycle management, which really covers the field soup to nuts, i.e., everything that happens with the contract, from the time it is created to the time that it is actually signed. You have other companies that focus on individual portions of that process and do it at a very high level. Fundamentally, there is competition left, righ and center for every company in certain categories within legal tech. Understanding the differences, what companies offer and what they would consider their competitive set versus complements and frenemies is very important. The third issue is that legal tech has a very unique DNA in that the buyer more often than not has to sync a process and its infrastructure with implementing the technology. We find that this is often a very complicated process for many legal tech companies to resolve, whether it is the challenge of working well with other pieces of infrastructure or with just generally changing a workflow.
Ari Kaplan: How do you see investing in the legal tech sector evolving?
Alex Nwaka: I think we will continue to see an increase in the amount of investing both in dollar terms and velocity among law firms within the space. Many law firms view this as a strategic imperative going forward into the next decade so I think more firms that have the means to invest in legal technology will do so under that premise. I also think we will see financial VCs taking an increased interest in this category. While the amount of investment over the last five to 10 years within legal tech from the financial VC community has been relatively small, we have seen over the last 18 to 24 months quite a bit of activity with a number of deals that would be considered legal tech getting a lot of capital and attention. My suspicion is that we will see that continue because the legal tech category has been somewhat underinvested in for quite some time.
Listen to the complete interview at Reinventing Professionals.
Ari Kaplan regularly interviews leaders in the legal industry and in the broader professional services community to share perspective, highlight transformative change and introduce new technology at his blog and on iTunes. He will be speaking about practical innovation in New York City on June 25.
