#16 Episode - A Fever Pitch for Automation [[🔔]]

Ring the Bell, It's Time to Eat

Dec 18, 2020

A trend has been emerging that touches on a core thesis of this newsletter:

LegalTech—but specifically, Document Automation.

We broached this subject in Law of VC #3: Building A Legal Autopia, but legaltech hasn't been discussed since then.

Since then, I have seen things that have blown me away. It’s a much bigger deal than I thought. As one colleague put it:

“You were thinking of building a Disneyland race track, but the industry is building Teslas.”

As Elon would say: Message received.

Automating the Andreessen Analyst

One can trace the origins of this trend back to this tweet in October 2020 by Jeremy Diamond:
Jeremy Diamond @Jer_Diamond
I’m just a boy standing in front of a VC firm asking it to let me automate a bunch of manual steps and busywork so we can focus on investing and working with portfolio companies
October 13th 2020
38 Retweets620 Likes
Which sparked this article:
halle kaplan-allen @____hka
click to read me drag inst vcs and ruin all future career prospects Automating the Andreessen AnalystHow emerging fund managers can use automation to level the playing field.automatter.substack.com
December 4th 2020
2 Retweets66 Likes
Halle Kaplan-Allen, portfolio fund ops at AngelList, wrote a seminal piece entitled “Automating the Andreessen Analyst,” which is a step-by-step guide on how to automate a VC analyst’s job. Halle concluded her article in a way in which many in the VC industry already know about but haven’t fully embraced yet: Automating the mundane work of venture capital will happen sooner than you think.
Halle and Jeremy joined forces to create a Substack called Automatter, which highlights process automation for the venture capital industry.
Today, Automatter published a toolkit for emerging managers, available here (it seems to be in MVP/beta stage only, but more forms will be added soon):

The Emerging Manager Toolbox

VCs Weigh In

Some VCs and LPs are already far ahead of the curve, including lawyer-turned-VC Minal Hasan, Lindel Eakman and Maren Bannon:

Minal Hasan @minal_hasan

The extent of the venture capital process that’s about to get automated in the next 12 months is mind blowing. 🤯

LD Eakman @LDEakman

If anybody wants to disrupt fund formation with software (a la turbotax), they should call me. I hate this process and the documents are a joke.

Maren Bannon @Maren_Bannon

The automation of early stage VC legal docs/back-end in the US means rounds closed & money wired quickly to founders. In Europe, I see slow diligence and even slower legal. Founders lose weeks, sometimes months. Who is solving this so founders outside the US can move faster??

I now realize where in the LegalTech process I should focus my time and energy:

Chris Harvey @ChrisHarveyEsq

What I am working on this week: Document automation for the emerging fund manager. We're targeting NVCA forms to be in a genome that will be released soon. If there is a form or set of forms you want populated with the click of a button, DM me. Not a solicitation of business.

It’s not on the venture deals side, but on the emerging funds/venture capital side.

Is the Future-of-Work Automated?

In the future-of-work SaaS space, there are thousands of companies building all kinds of automated tools including “No-Code” and “Low Code” solutions.
The fever pitch for automation is ripe. It feels like it’s on the same level that AI was back in 2011 when IBM Watson slapped the smugness off of Ken Jennings' face and took home the $1 million prize on Jeopardy:

This Guy. “I'll Take Swords for $500, Trebak” (RIP, Alex)

The only difference is that this time, unlike obscure edge cases of using IBM Watson, process automation for venture capital actually works.

Trust. The. Process.

Recently, Sam Hinkie was on Invest Like the Best with Patrick O'Shaughnessy. Sam thought this is the future of work:

(Patrick) Q: I know you're going to be a generalist, but what are the market areas that really have your attention?
(Sam) It's going to be APIs all the way down, and that over and over you're going to outsource more and more of your business to some maybe micro-targeted very narrow piece of software.

As Sam noted, the no-code movement will democratise software for those who cannot develop it. Microsoft Excel gave 750 million users the ability to edit spreadsheets that went well beyond the use case of the financial industry. So too will document automation go well beyond the immediate use case of legal.

It’s Turtles All The Way Down

Software automation is all around us. We are entering an API-first world where:

Stripe is automated payments.
AirTable is automated databases.
Zapier is automated workflows.
{AngelList, Carta or the next big platform?} is automated funds.

Emerging managers, Micro-LPs and professional service providers are already embracing automated technologies to gain an edge over their competition.

So Easy a Caveman Lawyer Can Do It

Many people assume that automating legal documents is easy. It's not. Andreessen Horowitz invested $75+ million into Atrium around this exact premise.

Atrium was a dual company—a legaltech startup & a law firm—that was managed by an incredibly smart and driven founder, Justin Kan (of Y Combinator and Twitch). The companies shut down earlier this year before Covid-19 hit. The business model just didn’t not work out in the little time it had.

But one has to wonder, had Atrium stuck through Covid-19 or raised less money in 2019, would that startup be around today, and what could it do in 2021? 🤔

Don’t Hold Your Breath

Of course, with all of this hype, it creates fear, uncertainty and doubt. The FUD is real and as Halle stated in her original article:

“To be very clear, we believe that the onus is on established institutional investors to interrogate, challenge, and dismantle the structural barriers that have long benefitted them. But ... we [will] wait with bated breath for that to happen.”

Whether or not venture capitalists are ready to adapt, competition is coming for them. In 2019, there were 1,162 venture funds focused on Seed and 126 focused on Pre-seed. There may have been a slowing down of venture funds in Q2 of 2020, but with the rollout of rolling funds in Q3, the number of new emerging managers has exploded. I have seen it in my own practice. Big firms are also struggling to keep up with demand.

Fred Wilson, the legendary VC who has seen his fair share of old guard passing the torch of power to the new guard, can certainly appreciate the power dynamic at play here:

“For all of its democratizing power, the Internet, in its current form, has simply replaced the old boss with a new boss. And these new bosses have market power that, in time, will be vastly larger than that of the old boss.”

It brings up the following questions in my mind:

Will challenger funds put a dent in the fight for equality and fund performance?
Will these new GP leaders be leaner, meaner & hungrier than their competition?
Will AngelList and Carta or a new platform leader emerge to automate the fund formation process, back-office operations and reporting for emerging managers?
Will lawyers have a job at the end of all this?

What do you think? What legal forms do you want to see automated? What expectations do you have around process automation? Do you have any suggestions?

Law of VC