In a chilly funding market, a VC explains why legal tech is 'as hot as you can humanly imagine'

It's a legal-tech boom, and investors are making their closing arguments in cash.

Funding to companies in the legal and legal-tech industries has tipped $999 million so far this year, new Crunchbase data provided to Business Insider shows. Investment rose to just over $2 billion in 2024, a record haul for the category.

In contrast, the global venture market has slowed over the prospect of tariffs and falling stocks, with April posting one of the lowest funding totals of the past year, according to Crunchbase data.

"In a VC market that's really sleepy for the rest of the world," said Zach Posner, cofounder and managing partner of The Legal Tech Fund, "this has been as hot as you can humanly imagine."

Posner said he's seen scores of traditional software investors poking around legal-tech deals, eager to claim a piece of the legal industry's digital transformation.

In April, Sapphire Ventures led a $60 million round for Supio, a software platform for law firms in personal injury and mass tort. Meanwhile, Bessemer, Masha Bucher's Day One Ventures, and others went in together on a seed round for Marveri, which says it's creating faster and more accurate corporate diligence. Theo Ai, a startup using artificial intelligence to predict case outcomes, tells BI it closed a $4 million seed round this month.

The first-rate investors on their cap tables show the extent to which venture capitalists are warming to legal tech.

Not long ago, selling software to law firms looked like a losing battle for startups. Lawyers worked mostly out of documents that were hard for software to read. They stored those files on physical servers on location for higher security and control over their data.

Then came ChatGPT.

"It was the best demo that has ever existed in the history of software, the internet, et cetera," said Posner, "and that's why it took 60 days to reach a hundred million users when it took Facebook five years. And I think that happened from that point forward is every attorney said, 'Wow, I could see how this could transform us.'"

A short while later, Goldman Sachs dropped a report that said artificial intelligence could automate up to 44% of legal tasks. This forecast "was a shot in the arm to Silicon Valley," Posner said.

Legal tech used to be built by former lawyers solving problems they knew. It became a hotbed for talent, said Posner, attracting engineers eager to apply machine learning to legal work.

Meanwhile, clients started knocking on the doors of law firms, asking how they were using the tech. They'd seen how AI was transforming operations inside their own companies, and they wanted assurance they were getting the best service, at the best rate, from their outside counsel. That pressure has pushed law firms to try to buy more advanced software, providing early and crucial revenue to legal-tech startups.

But with the surge in funding has come a surge in sameness: startups built on slightly different combinations of the same foundation models, chasing the same broad promises. The technical moat is razor-thin, if it exists at all.

The next phase of the boom, said Posner, will reward those who go deeper.

Posner said he's most excited by startups building highly specialized tools aimed at narrow legal use cases. "The moats are all the way down," Posner said, referring to startups tackling precise pain points like commercial real estate lease review or contract drafting for niche industries.

While Microsoft is already deeply embedded in how lawyers work, it's largely stayed horizontal, leaving room for vertical-specific players to thrive. Some startups have even built nine-figure businesses by selling what are essentially souped-up Word plug-ins.

"The only thing that can be good right now," Posner said, "is vertical-specific tech that goes deep — tools that say, 'This is for residential real estate leases, we've seen it all, and we're 100% accurate.'"

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