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AI is Reinventing the Legal Industry
Morgan Beller&James Currier ·@beller&@jamescurrier
Aug 2023 ·Generative AI

Morgan Beller&James Currier
@beller&@jamescurrier
Aug 2023 ·Generative AI



Table of Contents

Why is legal leading the rollout of AI?
This is Actually the Third Wave of Legal Tech
First Wave Examples: 2000-2011
Second Wave Examples: 2012-2020
The Third Legal Tech Wave is LLM powered by AI, and this is the big one
The results are no longer incremental.
AI will change the legal industry fundamentally


Legal Tech has not been the best sector for founders to spend time in over the
last 20 years. But Legal x AI is different, and software in the legal sector has
taken off.

We started investing in AI-powered Legal Tech several years ago, before the
Generative AI boom. There are bigger patterns behind the explosive growth in
this vertical, and reason to believe there’s much more value yet to come.

When we first invested in EvenUp, Darrow, ZERO Systems/Hercules, and others
still in stealth, we saw three big differences from traditional Legal Tech.

First, AI x Legal helps lawyers make more money. Law firms that bring “AI
inside” experience higher caseloads, more cases won, and faster claim
processing.

Second, AI-powered software immediately and obviously improves the day-to-day
experience of the lawyer using it. AI does tasks that lawyers traditionally find
hard, tedious, or expensive – tasks that feel like eating glass.

Third, there were 10X leaps in workflows to save time, not the 1.5X offered by
traditional Legal Tech. Counterintuitively, saving time is always a double edged
sword with law firms, because their billable hours business model means they
only make money when they take time, not save time.

Nevertheless, the 10X improvement in hours spent breaks them out of that
incremental mindset that has been holding them back from embracing software. It
helps them generate more revenue through more cases at higher value.

These benefits will repeat across many industries, not just legal. But it’s
worth looking deeply at legal because it’s one of the first verticals to really
take off with AI.


WHY IS LEGAL LEADING THE ROLLOUT OF AI?

There are some industries that appear to be natural fits for AI disruption. It’s
a matter of two variables: the percentage of a task that can be accomplished by
AI, and the value of the task it can accomplish.



Now that we have LLMs that are exceptional at reading, writing, and analyzing,
the business areas where they apply most are fields like law, customer service,
software development, marketing, and sales.

The legal profession is built upon language data. The only product of legal is
words. LLMs crack open language-based data the way that other forms of AI have
been predicting patterns from numerical data. LLMs identify patterns in that
language data and can offer up nearly complete products to lawyers and their
clients.

That’s the same thing that great lawyers do. Language inference and generation
based on years of study.

You can ask a great lawyer if a certain privacy policy is compliant, and the
best can give you an answer instantly. At this point, so can an intelligent AI
trained on a corpus of high quality legal data. You can ask a great lawyer to
draft a contract, and they can do so in a matter of hours thanks to their
analytical skills and intuition informed by past experiences. So can an LLM
trained on a dataset of similar contracts.

But it goes beyond just that. AI doesn’t just replicate the skills of great
lawyers. It improves them.

Evyatar Ben Artzi, the CEO of NFX portfolio company Darrow, points out that most
litigators have a wealth of experience and finely trained instincts that allow
them to excel. AI augments that natural talent.

One promise of AI in the legal field is the ability to incorporate a wider
corpus of data, see patterns that human cognitive limitations and biases will
overlook, and create more efficient legal processes.

AI is about to finally deliver on a promise that the legal field has been
waiting for for years.


THIS IS ACTUALLY THE THIRD WAVE OF LEGAL TECH

There have been three waves of Legal Tech since 2000, with many of the companies
trying to implement AI as part of the value proposition. The AI thinking was
right, but the AI was never powerful enough. Now it is.




FIRST WAVE EXAMPLES: 2000-2011

   
 * LegalZoom
   
 * Docusign
   
 * Blackstone Discovery
   
 * Clearwell
   
 * Avvo
   
 * Clio
   
 * Rocket Lawyer
   
 * Icertis
   

The most successful of the first wave Legal Tech companies were traditional SaaS
workflows like Docusign and Clio, or marketplaces like Avvo and LegalZoom. These
companies were not particularly AI-centric.

However, a few companies in this first wave were already beginning to use AI to
tackle legal problems, particularly with the e-discovery companies in the mid
2000s.

E-discovery is a process where electronic data is searched for use in legal
cases. AI is used as a tool to search, rank, and categorize this data. An early
example of this was Clearwell, which was used to search for concepts in
documents rather than just keywords. The idea was to reduce the manpower needed
to wade through troves of legal documents and save time.

A later example was Icertis, founded in 2009, to use early versions of
artificial intelligence to read and analyze contracts. (Today Icertis is leaning
into generative AI).

There were not many of these companies – between 2000 and 2010 there were fewer
than 10 Legal Tech companies founded each year. The biggest winners like
Docusign and LegalZoom weren’t AI companies, but were transformative for the
profession, and democratized access to legal expertise, information, and
documentation. The AI companies were more incremental. AI was seen as a better
way to search, or a way to cut costs by 1.5x. It was a tool, not a way to unlock
latent supply, or scale a business 10x.


SECOND WAVE EXAMPLES: 2012-2020

   
 * ContractPod AI
   
 * DISCO
   
 * Legal Sifter
   
 * Ontra
   
 * IronClad
   
 * Legalist
   
 * Premonition
   
 * Leading Edge: ZEROSystems/Hercules
   

In the second wave, AI began to spread out of e-discovery and into a variety of
other workflows. They started thinking less like tools, and more like platforms.

Disco, for example, combined the tools of e-discovery with case management
software.

Other companies learned more heavily into the contract process. They focused not
just on contract drafting, but contract storage and analytics.

For example, Ontra is an AI-powered legal operating system for private markets.
The company automates contract intake, negotiation and execution. It also can
transform physical contracts into structured data, and compare and analyze
contracts across an entire organization.

This wave was also powered by the emergence of early natural language processing
which helped reduce friction within existing processes.

As The New York Times put it in 2017, LLMs “proved useful in scanning and
predicting what documents will be relative to a case…yet other lawyer’s tasks
like advising clients, writing legal briefs, negotiating and appearing in court
seem beyond the reach of computerization, for a while.”

Many didn’t see what LLMs would eventually become – generative partners across a
variety of specialized writing tasks. But the few companies that did have
powered a transition toward the third wave (which we’re in now).

NFX Portfolio company ZERO Systems/Hercules is one of them. They began by
creating secure email and mobile email products for law firms. Then they
expanded. Now, they have AI applications across an enterprise, not just the
legal departments: policy enforcement, document extraction, time capture, filing
compliance, offboarding, etc., and have transitioned into wave 3: the maturation
of industry-specific LLMs.


THE THIRD LEGAL TECH WAVE IS LLM POWERED BY AI, AND THIS IS THE BIG ONE

   
 * EvenUp
   
 * Darrow
   
 * Harvey
   
 * ZERO Systems/Hercules
   
 * …
   

The internet allowed wave 1’s big Legal Tech winners to see a world where the
law was executed online. The winners in this third wave will see the future
paved by LLMs and emerging generative AI technologies.

Here’s why we think that LLMs enable 3rd wave thinking in the Legal Tech space:

First: the AI technology finally does the work that needs to be done

“Language” is the core product of the legal industry. LLMs trained on corpuses
of legal language now have language skills on par with a well trained lawyer.

Second: learning the new workflow is seamless.

Generative AI’s ability to draft full documents or surface new cases instantly,
solves problems on day 1. There’s no software to learn. It’s instant
gratification and revenue generation.

As we noted in our AI leapfrogging essay, any industry that hasn’t already
adopted a SaaS workflow hasn’t done so due to high switching costs. For law
firms, previous versions of software were too clunky to integrate, and/or didn’t
solve your core problems.

Third: There are 10X gains available.

AI gives the ability to not just cut costs, but scale a law firm 10x.

Fourth: the legal industry is finally culturally ready for another technological
paradigm shift.

If you look at the history of the legal profession, it typically takes about
five years for a new tech paradigm to break through.

In 1986, just 7 percent of attorneys at large firms had a computer at their
desk. By 1991, 69 percent had personal computers. (source: American University
Law Review)

In 1990, 56 percent of law firms used LAN. By 1995, that number was 99 percent.

In 1992 just 5% of top law firms used online legal research services such as
LexisNexis and WestLaw. By 1996, 77% of large law firms used them. (Source:
American University Law Review surveying top 500 law firms in US.)

In 2019, 56 percent of large firms believed AI would become a mainstay of the
industry. Today, 51 percent of lawyers have already used AI.

Even before Generative Tech, a less powerful version of AI was on its way to
crossing the chasm in the legal profession. The fit was already there, and it
just got a lot better. It’s been about four years. We’ve been moving towards
this inflection point.

Generative AI just blew it wide open.


THE RESULTS ARE NO LONGER INCREMENTAL.

Companies like EvenUp, Darrow, ZERO Systems/Hercules, Harvey and CaseText (just
acquired for $650M by Thompson Reuters) are closing the loop on what AI in legal
should have always been.

ZERO Systems/Hercules has made the rollout of enterprise-grade AI simple. The
company’s multi-modal AI engine (Hercules) allows companies with advanced
security requirements to roll out generative AI products fast. It’s providing
the infrastructure needed to usher in the next phase of totally ubiquitous legal
AI.

NFX-Portfolio company EvenUp can generate an entire demand letter – the core
document for the personal injury law process – in a few minutes, rather than 20
hours. Those AI generated, and optimized demand letters lead to higher payouts
for clients and time saved for law firms.

It’s not a 1.5x change in efficiency, it’s a 10x change in efficiency.

NFX-Portfolio company Darrow has proven that AI is capable of unlocking a latent
supply of litigation cases that have previously been hidden in disparate data.
Their specific and hyperlocal AI models in the class-action lawsuit field,
coupled with a platform that allows companies to cut case investigation time in
half, have caused Darrow to have 6x yoy growth. Darrow is not just focused on
efficiency, it’s focused on helping law firms find new high-value cases by
combining legal data, and real world data.

Evyatar from Darrow puts it this way:

“We are trying to redefine the very way that law and technology intersect,” he
says. “We do this by integrating real-world event data with legal data to invent
a new language for how these two domains (often perceived as distinct) interact
with each other. We are trying to go way beyond efficiency tools for lawyers.”

Evayatar calls it “Frictionless Justice: a world where people can trust that
legal violations are swiftly discovered, precisely valued, and efficiently
resolved.”

In both Darrow, ZERO Systems/Hercules, and EvenUp’s cases, the founders have a
vision for the future of their respective fields. The next wave of legal is
completely AI-powered (ZERO Systems/Hercules). It’s hyper-efficient (EvenUp).
It’s allowing new veins of latent supply to be tapped (Darrow)

Taken together, this means the Legal Tech market as a whole is only going to get
bigger.


AI WILL CHANGE THE LEGAL INDUSTRY FUNDAMENTALLY

Traditional Legal Tech added software to the traditional processes. AI will
cause the industry to reinvent itself, like the automobile reinvented
transportation.

The legal space has always been about formalizing human relationships through
precedent and documentation. AI is going to not just make it easier to formalize
those relationships, it’s going to create new types of relationships that will
require new methods of formalization.

AI will dramatically reduce the cost, time, and brainpower required for all
legal functions: drafting, understanding, litigating, and enforcing. As a result
we’re going to see the Legal Tech space, which already generates about $30B in
revenue worldwide – explode.

With less friction, there will simply be more contracts between more people.
Further, the contacts will get more intricate and more dynamic because the costs
will be so reduced. Just as we saw media production explode with digital cameras
and broadband, we saw e-commerce explode with Shopify and Amazon Marketplace, we
will see the legal world expand and change with AI.

We’re going to have more contracts between people for all sorts of things, from
the mundane to things we can’t conceptualize yet.

The traditional American worker used to work one job in one city. Today, we have
workforces distributed throughout the world in different legal ecosystems. We
have the gig economy. We have a fractional ownership revolution in real estate.
We have AI-generated content that begs bigger questions about copyright and
ownership of creative materials.

It’s been clear we will need a cheaper, faster, smarter, contract ecosystem for
decades. For example, in 1996, cryptographer Nick Szabo predicted that the
digital revolution would necessitate the creation of “smart contracts” to
formalize this plethora of new relationships.

Blockchain-enabled smart contracts were our first attempt to build a new
technology to overhaul the contract process. But it wasn’t enough. It turns out
we needed artificial intelligence, specifically, LLMS, to crack open the promise
of smart contracts.

The emergence of LLMs in the legal space removes an enormous portion of friction
from the contract drafting process. The simple contracts everyone needs today:
wills, leases, prenups, can be generated instantly. But in the future, they will
become truly living legal documents – documents that are generated, executed,
and maintained by technology as circumstances change.

This means that the estimated $200B market for legal services could grow much
bigger in the coming decades. That market estimate doesn’t cover the new types
of relationships that will emerge alongside the generative AI revolution.

Think of the relationship between yourself and your AI-generated image. The
relationship between a songwriter and an AI generated song in their style. A
relationship between yourself and an AI generated companion. And there are so
many types of relationships we can’t even begin to conceive of yet.

Living legal documents will become the norm over time.

We can already see a new wave of legal companies that will be fluent in the
intricacies of an AI powered world. They’ll move faster than any law firm can
right now, see patterns humans can’t, and be capable of instantly drafting
unique contracts for each situation.

This is the very beginning of the reinvention of legal.

--------------------------------------------------------------------------------

The NFX Team


As Founders ourselves, we respect your time. That’s why we built BriefLink, a
new software tool that minimizes the upfront time of getting the VC meeting.
Simply tell us about your company in 9 easy questions, and you’ll hear from us
if it’s a fit.

Morgan Beller
General Partner

Tell Morgan About Your Company
James Currier
General Partner

Tell James About Your Company

--------------------------------------------------------------------------------

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