We start the newsletter off in 2021 on the day of Super Bowl and with a quiz:
What industry is this?
An Industry Ripe for Disr…
…arding any Signs It’s Broken
If you guessed the legal industry, you are correct!
The interesting part of the above legal bill is not the $1,250 per hour law partner. It’s the $800 per hour associate attorney.
That associate, who is likely billing between 2,000-2,500 hours per year minimum, is the human workhorse driving this firm to the Am Law 100. Just like the Midas List, the Am Law 100 tracks the largest law firms in the world. And by “largest,” we mean the 100 law firms that generate the most amount of money each year.
In 2019, the top 100 firms billed a total of $104 billion. The average revenue per lawyer was $1 million. The average partner raked in $2 million of profit (1 year). Meanwhile, associate attorneys receive about a third or less of their billables.
To compare this with the VC industry, here’s the average salaries of venture capitalists:
That’s pretty good, but is it BigLaw good?
Paraphrasing Peter Drucker:
“We measure what we value.”
The corollary to Drucker’s famous phrase is Goodhart's Law:
“When a measure becomes a target, it ceases to be a good measure.”
Law firms link attorney compensation to hours billed.
One can see where incentives might be misaligned with clients when associate bonuses, job security, recruiting, and brand are all tied to money.
But lawyers have a different measuring stick. Lawyers would give up fame and money for one thing. They value money, of course—but above all, lawyers value status.
Status is your social ranking. In the legal world, status is your reputation or prestige. It’s the gold standard for how lawyers stack up against their competition.
Every year, to prepare young legal minds for this worldview, they get their first taste of legal status: The Best Law School Rankings, by U.S. News & World Report.
Law School Rankings
When I entered law school, this list consumed my life. Every year, the top 14 schools more or less stay the same, but the schools in the middle are the battleground. Students pay close attention to these rankings because good rankings attract employer attention. Increased employer attention means better jobs. And better jobs mean schools can be more selective. A virtuous cycle.
Except that’s not how the system actually works. Instead, the real weight of these rankings is based on more qualitative measures such as 40% for “quality assessment” (measured by law school deans, judges & lawyers) and 25% for “selectivity” (grades/LSAT scores). Diversity gets 0%. Most of these rankings are based on status.
These rankings can be massaged or even gamed. For example, Washington University in St. Louis offered me a scholarship to beef up their selectivity stats, but when I declined to deposit money to accept their offer, I received a rejection letter. It turns out, rejections matter too in the rankings—acceptance rates are weighted 2.5%.
Employment rates after 10 months earn 14% weight and bar passage rates earn 2%, criteria that seems more important than selectivity, quality assessment or acceptance rates.
The next status check that law students face are Grades.
For all the good grades I received in college, and for doing well on the LSAT, I just assumed that law school would be easy for me. It wasn’t. Law school was a gut check. My grades were average “Bs”, which is fine if you’re in medical school, but in law school, grades are everything.
Students know where you are on the pecking order by the number of Big Law firm interviews you receive after your first year’s grades are posted. My number of Big Law interviews was 0. And if you miss out on early recruiting you're out.
Law Firm Rankings
The next status marker is Law Firm Rankings.
Similar to Law School Rankings, Law Firm Rankings are judged by their peer group. This is where status is ratcheted-up to 100%.
The Am Law 100 also measures firm size, lifestyle, diversity, number of deals and quality of client service. But the one list that lawyers care about tracks only prestige.
Vault 100 is the industry recognized leader of tracking prestige. They track data like:
Are you hiring top-tier talent from elite institutions?
How does your peer group rate you?
How much do you pay your associates and what do they think of you?
In 2020, for the first time in the history of law firm rankings, one law firm cracked the second spot on the coveted Vault 100. Skadden moved from the number three position, to the number two position, jumping over Wachtell and spiking the proverbial football. Cravath still reigns supreme at #1 most prestigious law firm, and for good reason—over 200 years old, the firm strives for perfection and attains it.
Q: Why hasn’t law been disrupted like other industries?
Just like the law school rankings list, the top firms of the Vault 100 don’t change much, but the middle and bottom are battlegrounds.
For example, Gunderson Dettmer just cracked the Vault 100 this year—going from a “no name” in the eyes of big law lawyers, to #90 on the list and on the bottom of the pecking order. Gunderson has consistently received high marks from VCs, lawyers, bankers and their clients. In my mind, they rank up there with Cooley (which is where Messrs. Gunderson & Dettmer cut their teeth before starting their own firm).
Here are the top 5 law firms ranked by prestige in 2006 vs. 2021:
There was one new entrant in the top 5 of Vault 100 - Latham & Watkins, which moved from spot #7 in 2006 to spot #5 in 2021.
By comparison, if you look at the reputation of the best global brands, there has been a sea change over the last 15 years:
There were 4 new entrants in the top global brands. Notice a pattern?
Q: Why haven’t VCs disrupted legal?
It’s not for lack of trying. Atrium was a $75 million VC-backed legaltech company & law firm backed by one of the best Silicon Valley’s venture firms. But they shut down last year. The firm’s co-founder, Justin Kan, wrote up a thoughtful post-mortem:
Atrium and Justin Kan challenged the pecking order of lawyers. Anytime a social primate is challenged for status, you will get predictable responses like this one:
Some people love pointing out other people’s flaws and failures because it makes them feel like they have more prestige.
This is the See-Saw principle: a status game played by raising your own status and simultaneously lowering the status of others. Comedy works on the See-Saw principle. A comedian is someone paid to lower one’s own status or other people’s status.
For all their faults, venture capitalists know better than to speak ill of fallen founders, who failed simply by daring to step into the arena. It’s hubris to laugh at others while not understanding the challenges and pain of experiencing failure.
The Writing is On the Wall
Q: So what will eventually disrupt law and this endless loop of prestige?
Any sufficiently advanced technology is indistinguishable from magic. —Arthur C. Clarke
Technology follows the same arrow of progress:
First, it’s magical. Then, it’s a status symbol. Then mass distribution. Eventually it becomes invisible.
The one thing that can break the spell of prestige in law is a status symbol as equally or more powerful than the status quo.
AI is not that status symbol today, primarily because it’s too nascent. That may change but there are other legaltech products that have the potential to reach status symbol and mass adoption.
Ironclad is one company with the potential to disrupt the legal industry. On January 14th, 2021, the company raised over $100 million at unicorn value, with magical valuations supposedly at 50x ARR. Ironclad is a contract lifecycle management company, meaning it houses the data and forms that are generated from contracts.
"Contracts and metadata, all in one place"
Ironclad brings contract lifecycle management into the modern era of intelligent, intuitive, zero-training-required enterprise software. With a blend of power and simplicity, Ironclad helps teams unlock the most underutilized source of business intelligence: contract data.
If that sounds like boring stuff, here’s who is on their cap table:
Contract lifecycle management will be a $20 billion market over the next five years (Correction: it is a $20 billion industry today, ed. 2/7/21).
But to truly disrupt the legal industry, one needs to disrupt the lawyers.
Ted hired Jason because of his technical acumen. Together, along with the assistance of an innovation attorney named Khang Tran, they created the Series Seed dot com documents in 2010. Next to the NVCA standard legal forms, Series Seed dot com documents are a standard form when it comes to equity Seed rounds—Cooley adopted the base form and made some minor edits to improve readability.
Q: But has the legal industry been disrupted because of it?
None of these improvements came with a comprehensive technology package. There is no disruption of legal when you have “good forms.” To understand the difference is to understand what this quote means:
Content is king, but context is the kingdom.
Here's the whole legal tech / future of law game in 4 words:
Lawyers are the bottleneck*
There are only 3 strategies to get around this:
(1) Make work go through lawyers faster
(2) Make work avoid lawyers when possible
(3) Make the work going through lawyers more valuable
*Source: Ryan Juliano.
Play Stupid Games, Win Stupid Prizes
If you ask for who are the best service providers from the service providers, you will get a Vault 100 or Am 100 response. But if you pay attention to where credibility matters, which is clients, you can see who is on top of the game and who is not.
Here is a great Twitter thread from Samir Kaji about who fund managers are using:
There were some surprising answers in that thread, but the most surprising was the number of positive responses of people who wrote ‘AngelList’ for legal.
AngelList is not a law firm, of course. But they have a platform with happy clients.
My theory is that in the near future it will matter less about the prestige of the law firm and more about credibility of your client base. In other words, how satisfied are your clients with your service? How quickly and accurately can you resolve your client’s issues? Can your clients get answers to their questions in a timely manner?
In Law of VC - Episode #10, we looked at the soft power (or empathy) of venture capitalists, which matters to founders. To quote that article:
At its core, venture capital is a relationship-driven, people-first business. That makes human psychology and human behavior important parts of the craft.
More relevantly, “personal relationship and chemistry” is the #1 most important factor for both selecting a VC by founders and for VCs partnering with other VCs.
Founders want venture capitalists they can rely on, which makes VCs a people-first provider with status (not unlike lawyers, except VCs don’t need a license to practice).
If you look at this chart, you can see that it mirrors what’s happening in the legal world (replace Founders with Clients and VCs with Lawyers):
My own status has put me in a unique position where the industry cares only about one thing (prestige, then money) but my interests align with another:
Client reputation, and leveraging technology to keep it up.
We’ll see if that bet plays out, but that’s where I’m putting all of my time and resources.
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