Start-Ups Are Cash Poor, Legal Tech Is Not Alone
By Kevin on
December 18, 2020
Victoria Hudgins penned a piece at Law.com earlier this week that the hard truth behind the ROSS shutdown is that legal tech is cash poor.
Investors and software providers informed Hudgins that other legal tech companies were equally cash poor and could easily meet a similar fate.
There’s nothing particularly newsworthy or unique about any tech startup being cash poor, let alone legal tech startups.
Cash is king in any startup, even in a venture capital funded one. You’re watching cash more closely than growing revenue.
In many cases a valuation driven venture capitalist will want you spending the cash quickly – to increase the valuation for another funding round or for an acquisition.
A startup, especially a venture capital funded one, is not a company saving for a rainy day.
Nor is it a company for the faint of art. How to spend the cash and where to cutback can change in a minute. And when you don’t control the board, which VC funded founders do not, these decisions may not be all yours.
You may may be told on a Tuesday afternoon that a 20% reduction in overhead is required rather than getting the next traunch of funding, as previously promised.
Knowing that sort of reduction requires massive layoffs of friends, you ask by when. You’re told, “Friday.”
When it comes time for bridge funding before a sale or the next round of funding, the founders are taken off the payroll. That’s assuming founders were even on the payroll to start with.
Taken off the payroll means putting every expense for a family with five kids on a credit card.
You’ve never lived until you’re hoping against hope that your credit card still has something on it when you’re at the check out line at the grocery store with a cart filled for a family of seven – or you’ve called your wife and asked her to move the car down to the ferry parking lot so it wouldn’t be repossessed by GMAC Financing. (God Bless you, Jill)
Cash is tight in most every tech startup, including legal tech startups. That’s okay, the living on the edge drives innovation and attracts more innovators to your company – even customers who, believe it or not, like a little of the “Wild Wild West.”
ROSS got thrown a big curveball. They got sued by the largest legal publisher in the world.
I can’t imagine too many venture capitalists, current ROSS funders or new ones, who would be willing to fund the defense of a law suit by a Goliath, possibly trying to turn legal tech innovation back in time.
The suit could put the company at risk and certainly use up a ton of cash needed for development, marketing and sales. Enough said for VC’s.
Legal tech startups are going to continue to blossom. Innovation, technology, access to legal services, efficiencies, and improved flow of legal information are much more likely to come from startups than larger companies.
Some legal tech startups will succeed, some will struggle, some will sell to large companies and private equity concerns and some will flourish for years on their own.
No matter the case, legal tech startups, especially in the early years, are going to be cash poor.
Bottom line, a big kudos to legal tech founders who got outside their comfort zone to do what others would not.