Is 2023 looking to be better than last year?

The overall tech industry saw a drop in investments in 2022 compared to 2021. Data from Nasdaq?indicates venture funding last year in technology declined globally by about 35% from the prior year.?And the legal technology sector was no exception to this trend.?

There isn’t a single clear-cut reason for the dip in funding activity last year. Some experts point to the?prior year’s uptick in activity as the market catching up after a quiet 2020, due to the start and peak of?the COVID-19 pandemic. So, by comparison, 2022 was more about the investment market getting back?to normal. That may be true, but economic uncertainty in the U.S. and around the world, including?volatile interest rates, were also likely contributors to the 2022 investment slowdown.

An article published earlier this year by?Legaltech News?quoted Raymond Blijd, founder of Legalcomplex,?who collected data on legal tech funding rounds in 2022. In the article, Blijd notes that 376 deals?completed in 2022 in legal technology totaled $3.43 billion, both figures a decrease from 2021.?

?And while 2022 saw some growth by acquisition, other companies chose to leverage acquisitions to?expand their offerings. For example, Epiq acquired management consulting firm Fireman &?Company,?increasing its KM and data management expertise and expanding its suite of legal advisory services and?innovative technology solutions. Likewise, some software companies used acquisitions to venture?beyond their primary offerings, as eDiscovery platform provider Relativity did by acquiring Heretik to?enter the contract review space.

?So what will 2023 see in the way of eDiscovery and legal technology M&A and equity investments? Just?one quarter into the year, we’ve already noted some activity:?

• Exterro acquired Zapproved.?
• Thoma Bravo acquired Magnet Forensics.?
• Reveal-Brainspace acquired LIGL.?
• Repario consolidated Teris, Modus, Elijah and Meta-e.?

Given the synergies across eDiscovery, information governance, data analytics and contracts, we expect?this trend to continue. And with the growing acceptance and adoption of AI technology, look for?software companies in any number of areas to continue expanding their offerings as they integrate the?newest tools into their platforms – as providers like?Cimplifi?have already done – offering next-?generation technologies that power contract analytics and life cycle management.?

?Financial experts remain cautious amid concerns about inflation, yet key indicators suggest we may?avoid an economic recession in the coming months. But with the continued uncertainty, it is difficult to?predict what may be ahead in 2023 with respect to investment trends.?

Some potential good news: while total funding and the number of deals were both down last year, as?was the average funding amount per deal, there was an 11% increase in the number of investors. This?contrast – a drop in total funding but a rise in investors – signals an increase in seed funding which?comprised 9% of 2022 investments in legal technology. The rise in seed funding is encouraging, as Blijd?suggests this growth “opens the possibility of that more startups will be able to acquire early-stage?funding in 2023.”?

Anecdotally, one of our observations in attending Legalweek New York last month was the busy exhibit?hall and what certainly appeared to be an increase in newer companies exhibiting at this year’s event.?It’s a welcome development, showing growth in this vibrant and ever-changing industry, and one we?hope continues for the foreseeable future!

Chris Egan?