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Are the AI legal tech product markets mature?

Over the weekend, I was chatting with the CEO of another legal tech company, around the same stage as PointOne. This one was competing with some of the more established legal tech startups and was arguing that the battle has barely begun for the largest markets in legal tech, which will be decided during the current cycle. 

We’re a couple of years into the current Legal AI boom. At least one company from this wave has achieved a $5 billion valuation (Harvey), with several more having achieved $1 billion (e.g., Eve), and dozens having achieved valuations of $100 million or more.

Looking at these valuations, it is hard to believe that the battle has barely begun. However, are these mature product-markets?

The most prominent legal tech startups are certainly well-capitalized. Still, it’s a separate question to ask how mature their markets are.

A framework for gauging market maturity

Here’s a common framework: for any new product, the first concern of customers will be functionality. As that concern is satisfied, stability will be increasingly important. Then convenience. Then price.

We can reframe our question to: on what dimension are legal tech startups currently competing with each other?

Where we are today

Most legal tech startups are not competing with each other on price

The first dimension to look at is price competition, which is the clearest indicator of a mature competitive market. Let’s use arguably the most mature legal tech startup from this current wave: Harvey. Harvey is not generally competing on price. I’ve yet to talk to any firm innovation leader who said they chose (or didn’t choose) Harvey because the other solutions were more or less expensive. That doesn’t mean it isn’t a factor, but it certainly isn’t the primary factor.

Convenience does not appear to be a dominant factor yet

Are legal tech companies winning these new markets on the basis of convenience? That is, are solutions being selected primarily because they are “easier” to adopt? This seems more plausible than price, with law firms choosing vendors like Thomson Reuters with whom they already have agreements in place for other products. But is this because Thomson Reuters is more convenient to purchase from than Harvey? Not quite. While buying Co-counsel from TR or Copilot from Microsoft might be easier than going through procurement with a new vendor, these solutions are not nearly commoditized enough for convenience to be the deciding factor.

Whether the competition is based on stability or functionality depends on the specific market

That leaves stability and functionality. There isn’t one answer for every new product market in legal tech right now, but they almost all seem to fall into these two buckets, especially when view stability for AI products as including characteristics such as accuracy and reliability. There are substantial functionality that both Harvey and Co-counsel advertise, which was nearly impossible in 2021. Many of these products now compete on accuracy rather than qualitatively new functionality.

So how mature is the current legal tech wave?

Until convenience (e.g., all-in-one solutions) and price become the primary decision factors in vendor selection for product categories that hardly existed in 2021, it is too early to declare winners. At the same time, it also seems fair to say that we’re past the initial “wow” moments of 2022, during which new tools entered the market with functionality qualitatively different from everything in the market.

We’re not at the starting line anymore, but by at least these measures, the new product markets are not yet mature.

Legal bytes

Here are the latest updates in legal tech and AI:

NY Court System Restricts AI Use by Judges & Staff — New York’s courts issued an interim policy: only approved private AI systems may be used, judges must undergo training, and input of confidential or court-filed documents into public AI models is banned. (Reuters)

California Enacts “You Are Speaking to an AI” Disclosure Law — Gov. Newsom signed SB 243, requiring AI chatbots to clearly identify themselves as non-human and, for certain systems, report annual mental health safety metrics. (The Verge)

Senators Durbin & Hawley Push AI LEAD Act for Liability — The bipartisan AI LEAD Act would allow individuals, state AGs, or the U.S. AG to sue AI developers or deployers for harms due to defective design or misuse. (Jacksonville Journel-Courier)

Events

We’ll be speaking on the keynote panel for LegalTech Connect: Innovators & Investors tomorrow as part of the two-day event happening Wednesday and Thursday in New York at the beautiful space at Ease 605 (located at 605 3rd Avenue). If you’re interested in attending, check out the agenda here. Here’s who you should expect to see:

• AI-native LegalTech founders ready to scale

• Law firm buyers sharing real adoption signals

• Industry insiders mapping the future of legal innovation

• VCs and angels looking for investable momentum

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Until next week,

Katon