The Pitchbook Report: Betting on a Post-Covid Future

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Welcome to Legal Tech Matters, a Litera podcast dedicated to creating conversations about trends, technology and innovation for modern law firms and companies big and small.

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Bob

Welcome, everybody, to today's webinar, "Betting on a Post-COVID Future." Our topic is the state of the venture capital market, which is enjoying its biggest moment since the dot com days of the 1990s. We'll consider the implications for lawyers and the legal industry. In particular. We'll be talking about a new venture capital report that's been published by Litera, using data and insights from the financial data company Pitchbook.

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Bob

And because I know somebody is going to ask you will all get a copy of this report after the webinar everybody's registered will get access to the full report that we're going to be talking about here today. Let's start by introducing our panelists and I'm going to ask each of them to introduce themselves and tell you all a little bit about themselves.

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Bob

So, Sherry, let's start with you.

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Sherry

Thank you, Bob. I'm Sherry Kappel. I am an evangelist here at Litera. I have been with actually so many of the different formations, been an employee at so many of the different formations of as you said, you know, acquisitions and mergers, etc. It's very wonderful to have a discussion about this topic today and see what's going on behind the scenes.

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Sherry

I have been involved in the technologies that deal with legal and legal documents for about 30 years.

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Bob

Amazing. You started when you're in kindergarten and so personally.

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Alex

Yes.

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Bob

And Alex and introduce yourself.

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Alex

Good morning or good afternoon. My name is Alex land I'm a senior analyst at Pitchbook. I've been here collectively about eight years now, and I cover venture capital, private equity M&A for a variety of institutional clients. We are up in Seattle and yeah, it's a little early, probably earlier for us than it is for everyone else on this.

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Alex

But very happy to be here.

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Bob

Great to have you, Alex. And I am Bob Ambrosi. I will be moderating today. I write a blog called Law Insights where I cover legal technology and I also write for Above the Law. Above the Law is producing today's webinar. Litera is sponsoring it. And as I say, we're going to be talking about a new report that's just been put out by Alex and Pitchbook.

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Bob

And Alex and Pitchbook have been instrumental in preparing and writing that report and analyzing the data and pulling together the data. So the format today is going to be that we're going to hear some presentations from Alex about specific aspects of the data and then Sheri and I as well will offer some comments from our own perspectives on what Alex is presenting.

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Bob

And again, I just want to reiterate that at any point, if you have questions, you and the audience audience, go ahead and drop them in the box and we'll put them to our panel of experts here But Alex, you want to just start by telling us kind of give us an overview of what this report covers and what you've what kind of data you're looking at here.

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Alex

This covers everything that the numbers are on a global basis. So they're a little bit different than some of the US numbers that are commonly cited. But we take a look at VC deal activity itself. We take a look at VC exit activity, which popped quite a bit. We cover valuations and then we also look at the profiles of the investors in 2021.

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Alex

In my opinion, that is one of the more interesting aspects of the last two years is the number of nontraditional investors. I mean the trend goes back quite a quite a ways, but it was really emphasized in 2021 where you had hedge funds and private equity shops, corporate venture capital and the like pouring into the venture market and specifically the late stage venture market.

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Alex

So we it's broken down by a number of metrics and I think the first line that we're going to cover is just an across the board record and things get more interesting from there.

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Bob

All right. Well, let me bring up that first slide and it's been quite a year. 2021. Why don't you tell us about it.

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Alex

There's a whole lot to say about it, but I will leave it at this, that you know, for the first time, 600, 600 billion. (And this is really through November due to a scheduling issue that was the latest data that we can get out.) But what's interesting in that 2021 number is that all four quarters were above $100 billion in venture capital invested.

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Alex

It's only happened five times reaching that threshold and the fifth time was the fourth quarter of 2020. So we've had five straight.

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Bob

Five times ever right, five times?

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Alex

Five times ever. Yeah. That are on a low basis five straight quarters of $100 billion or more. Part of it was due to pent up demand. If you go back to the summer, spring and summer of 2020, a lot of venture investors were a bit handcuffed. You know, no one knew exactly what was going to happen. And also on the side they had their own existing portfolio companies to take care of.

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Alex

So there was quite a pause for a good part of 2020 but as the latter half of 2020 rolled around you really saw this momentum start to build and it just kept on going throughout 2021. Late stage activity was the primary driver particularly at the series D in later stages of one trend that didn't make it into this report but I've noticed it in a number of sectors is that there was a prevalence of you might call it double dipping where startups were raising two rounds within the same year.

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Alex

There is also a number of companies that raise in both 2020 and 2021. So there was quite a bit of familiarity in the market and so when we wrote this report, there was a whole lot of optimism. Things have changed a bit in the past couple months due to, you know, geopolitical macro reasons. But when we put this report together, you know, the venture industry was looking at an inflection point of sorts across dozens of markets.

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Alex

You had investors and startups sort of reimagining what their companies can do and what their industries might look like in a post-COVID world. What's interesting is whether all that momentum can sustain itself with new headwinds. For example, this just happened last week that Instacart voluntarily cut its valuation by almost 40% following its share in the tech market.

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Alex

They didn't have to do that, but they thought that it was a prudent thing to do. So what could happen in the next, I don't know, handful of months is that you could see other startups agree that that might be the prudent thing to do as well. I know that we're going to get to valuations in the next slide and you'll see how much they've popped.

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Alex

The question is whether or not, you know, some of these valuations might be a little bit overblown.

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Bob

You know, when you talk about the impact of geopolitical forces, I mean, I assume you're primarily talking about the you know, the Russian invasion of Ukraine.

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Bob

So we don't know what the impact of that is going to be kind of going forward. But what do you think it was that sort of created this momentum in the first place? To what extent perhaps was the pandemic a factor in in driving this momentum in 2021?

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Alex

Well, I think you know, people were interacting with each other in different ways. People were doing different things. I mean, you had, you know, e-commerce took off, telemedicine took off, these all these technologies were existing, but they weren't being put to use a whole lot of say for e-commerce. But, you know, following COVID, people were forced to change some of their habits and some of their activities.

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Alex

And so I think that you had across consumer services, legal, certainly finance, health care. You had you had so many issues coming up at the very same time that, you know, I think venture investors got excited about that. You know, this is it's an inflection point in the sense that what are things going to look like a year or two from now?

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Alex

And the fact that no one really knew the answers, at least in 2020, meant that there is an opportunity to reimagine and reconfigure some of these markets and also, I think, you know, the underlying technology just continues to get stronger and stronger. pandemics can come at any time. What if this one happened in 1998 instead of 2020.

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Alex

You know I think American society was able to handle this a lot better than it would have been able to do 20 years ago. And a lot of that is due to really strong underlying technology across all kinds of markets. So I think investors recognize that and they continue to recognize that it would be a shame if we have an opportunity to innovate as much as we can right now and have that, you know, stymied by not only the invasion of Ukraine, but also inflation, tech and public tech markets hitting a curve.

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Alex

There's there's all kinds of reasons why this can slow down. And it would be a shame.

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Bob

Sherry, What are your impressions from this slide? I mean, you know, as Alex points out, where would we have been probably without some of the innovation that already occurred as we came into the pandemic or where would we have been without Zoom? But when you look at the activity that happened in 2021, what are your thoughts on that?

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Sherry

I think, you know, I'm going to take it from a couple of perspectives, but one of them is if you all consider just achieving work, achieving collaboration, achieving documents, you know, just doing legal work. If, if you didn't have these technologies, everything would have stopped. Right. And even though I believe that there was so much aversion to it, it was astonishing to me how quickly people picked it up, used it, saw it as an absolutely essential tool, and immediately.

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Sherry

And so I feel like it was such an unleashing of experience. Things that people didn't first think about. Right. They didn't first think about using these kinds of collaboration tools. As a matter of fact, they kind of ran the other direction they wanted to do it all in person. And how that unleashed things once it was a requirement, it's a really fascinating view.

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Sherry

I also think that there's been a lot of investment in making things easier. It's almost like we had this from the technology point of view. We had this opportunity, of maybe it was like a whole decade, of being able to make things easier or more intuitive, more accessible. We worked really hard at it for what felt like no necessary gain right in the end.

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Sherry

But then this hit and all of a sudden, every investment from that point of view, it truly took off. I also think about the fact that technology is always driven by business. Always, it supports a business. And so the agility Bob, that's the thing on the tech side, the agility that everyone attained in this was something honestly, I agree with you, Alex, I wouldn't want from the technology side for any of this to stop either because it's just made such strides after so many years of feeling like we were kind of making you know, just treading water, so to speak.

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Sherry

We weren't we weren't really getting anywhere. So that's kind of my take. And then with that activity elevating, we had more business to support. And the fact that we could scale and achieve supporting that all of that is to me, it's marvelous, really.

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Bob

Yeah. Obviously a market I follow closely as the legal technology market. And I know this report doesn't specifically break out that vertical. But I know, Alex, you talk about sort of the extent to which COVID 19 brought about these inflection points in various vertical markets. Do you have any sense or perspective on whether the legal technology market, which certainly seems to me that legal tech has this has been an inflection point for the legal tech market.

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Bob

And that a dramatically changed interest in the market, activity in the market, and even it drove innovation in the market. But Chery or Alex, do you have thoughts on it?

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Alex

I'll offer some quick thoughts and offer back to Sherry. But, you know, there were still deals getting done in the year of COVID and social distancing requirements required that people do everything online. And there was some speculation, including on my part, that that would be a hindrance to deal activity, that you know, the trust factor within the venture and within all finance, you know, looking people in the eye, having dinner don't trust what it's going to be for by doing everything online.

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Alex

But everything that I've heard is that, you know, migrating everything over to zoom and to data rooms and, you know, probably to legal tech, get a lot of applications and legal tech as well actually helped in some ways. You know, everything was right at your fingertips. And so, you know, I think just the social distancing elements and the fact that people were forced to do this online and find tools that were going to not replicate but actually replace person to person interaction.

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Alex

And it went swimmingly from everything that I can see. So, you know, I think that the legal tech sector and a number of other sectors, you know, stepped up and they put tools out and they they got used to it. And life went on.

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Bob

Yeah, sure.

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Alex

Yeah.

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Sherry

Alex, you know, it's so interesting. I think the online the distance that people feel or a perceived of online communication the reality is that any kind of online presence or medium or media for any of that, it amplifies it either amplifies the distrust or it amplifies the trust. It amplifies the message. And all of those things are things that people didn't quite realize.

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Sherry

I'm not sure that everyone wanted to be a television broadcaster, but we all became that. And so there's a there's a lot of dimensions to it. But in many ways, it just compacted it all and accelerated it all. There was a lot that was a distraction, and it focuses people. So I think for all those reasons, we were all of us able to achieve greater strides and in the end and deliver against it.

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Sherry

Then than we had in the decade before. For sure. For sure.

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Bob

It is interesting how it focused and focused, how it focused us in ways we never have anticipated, I think, especially when it was first starting. But a lot of books written about the last couple of years.

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Sherry

If you will, And movies, I appreciate the movie says.

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Bob

Yeah, yeah. Well, move on to the next slide and talk about valuations a little bit. Alex, I know you want to talk about this.

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Alex

Yeah. And you know, it jumps off the page right to the late stage jump to $84.3 million. That's a median, which is roughly double what it was in 2020. And even when you're looking at 2020 actually you're stuck a little bit even in that market. So, you know, you'll notice in the slide, particularly at the early stage and late stage, that things tend to tend to generally go up, but not to this extent.

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Alex

So you had late stage markets doubling. You had early stage, which were roughly a series in series B, the median valuation jumping from an 18 million pre-money valuation to a $33 million valuation. Even on the angel and seed side, you had a five and a half million, up to 7 million valuations in 2021. So up across the board. But the increase at the late stages is rather striking.

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Alex

And you know, going back to the point about Instacart. There are a number of companies that are going to succeed. And one of the things 2020 and 2021 brought about was a fairly easy and easier identification of winners in certain markets. And so when you identify a winner that is going to either go public or it's going to be attractive to a big corporate, it's a little bit easier to stretch those valuations.

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Alex

And the question is whether or not all of them are going to be winners. So for the companies that aren't going to. One question is did they overreach on their valuation and it's going to hinder them going forward. But, you know, I do think that there is that there is something to be said just for how different it is in 2021.

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Alex

I think that this chart says a lot.

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Bob

And I think one of your findings was, I guess you alluded to this, but was that even the sort of pre-money valuations were at a historic level? What does that tell us about the market or about how VCs are approaching the market?

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Alex

Well, I think there was a lot of optimism before COVID Some of this comes back to the fact that there have been a lot of successful exits over the past four to five years. And that certainly bolsters optimism in the overall market. I do think, though, that COVID, you know, really well, it was an important it's really one of the most important factors when we're looking at these valuation, just because you're again, you're going back in your you know, potentially reinventing the market.

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Alex

And so there is going to be a lot of hype. And so that certainly plays a role. But, you know, the optimism that we have now, it's been around for, you know, five, six years. It just really, you know, hit the wall in 2021.

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Bob

Yeah we are there other than for VCs and for the companies the VCs are investing in. Why do valuations matter? I mean why should people listening to this? You know, what should they take away from the fact that valuations are up? What does it signify?

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Alex

It's a good question. I think that it signifies optimism. You know, when you put a number on a company, you're trying to look ahead, right? You know, finance is a form of time travel. That's one of my favorite things, that if you are confident enough that a particular company is going to succeed, then it's a little bit easier to put a higher mark up on it.

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Alex

Some of it also is a give and take between the startups and the investors. So when you have a founder friendly market, like I would argue that we have right now, then, you know, it's a little bit easier to raise money and then also, you know, throw your weight around and ask for a higher valuation. The other point of it here, especially at the late stage, is that so much of this was driven by nontraditional VC.

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Alex

Investors know they're not even really busy investors or hedge funds or private equity shops. They're mutual funds and they don't care about valuations. I mean, they do a little bit, but not to the degree that early stage in traditional venture investors do. In a lot of cases, they're just trying to get a 5% or 6% stake in a company before it goes public.

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Alex

And whatever the founder asks for a valuation there is going to be, you know, going to be pushing an open door with a lot of late stage investors like hedge funds. And they're going to give you the valuation that they want in exchange for getting the stake that they want. So there is a lot of that baked into this chart as well.

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Bob

Yeah, sure. Do you have any thoughts on this or observations on this.

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Sherry

I couldn't find the unmute. You know, I guess I guess one of the things to go back to Alex is that this optimism you talk about that started before the pandemic. Would you say that it has increased the optimism so say in 2023, as an example? Are we still going to be optimistic or are we going to be a little more conservative?

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Alex

It's a very good question. Not all these companies are going to win on growth. You know, I don't want to draw comparisons to the economy because I don't think that we're living through a redux but there was there were there were stretched valuations 20 years ago because of this sense that the Internet was going to change everything rapidly within the next two or three years.

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Alex

There is also this sense of COVID and post-COVID changing everything rapidly within the next two or three years. So I think that there are some parallels, which makes me a little bit nervous seeing some of these trends that we might be getting a little bit too far ahead and we might be a little bit presumptive. A lot of these companies seem promising now.

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Alex

And, you know, the reality in startup world is that a very high percentage of these companies will not succeed. So you do have to temper it a little bit with history. But, you know, the optimism is well-grounded because the technology is well. And again, it's a very general overarching point because we're talking about lots and lots of different markets and lots of different technologies.

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Alex

But almost no matter who you talk to in the industry and in what sector they cover, they're talking about they're almost saying the same things sometimes, like we're you know, this is so promising, X, Y, Z is so promising, or this technology is really going to make a breakthrough here pretty soon. And it's proving it. So, you know, the optimism is widespread.

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Alex

And I think it's because the technology is so sound.

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Sherry

So. So to that end, you mentioned earlier about innovation. And I just would love to hear a little bit more on your take on that, because, again, from where those of us who are in the tech side. Right. What we're seeing so much of is the puzzle pieces coming together from interesting directions And I hesitate calling it a mash up of technologies, but how are they when they're all put together as a kind of platform where they're put together as a cohesive set of tools for any sector.

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Sherry

I think that innovation is in some ways just the creative thinking of that. But I'm curious to your take.

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Alex

Yeah, I'm working on a project right now on the gaming industry, video games. And, you know, a lot of it is in the venture realm. But 1 person I talked to actually made a very interesting point that NASA, the space program, has long been a source of almost accidental innovation, where things that are designed for the space program end up getting repurposed in some way.

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Alex

And the gaming industry. There are some parallels to that in the gaming industry. And you wouldn't necessarily think it, but virtual reality, for example, is making big strides as a technology. And right now, a lot of it is being put to use in the gaming industry, recreational entertainment. There's a lot of money in that industry. But virtual reality has lots of other different uses, you know, pilot training, a surgeon training, things like that.

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Alex

And so, you know, that's just one example but I think it is indicative of not only the the strength of the underlying technology across all kinds of markets. But also its alternate uses. So I think, you know, gaming becomes top, top of mind. And I have never really looked at it that way before. But a lot of people who are involved in the gaming industry are excited about that as well.

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Sherry

I think we're all eager for innovation and all the interesting places it comes from. So awesome. Wow.

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Bob

What would we have, Tang, if not for NASA? That's the question.

00:28:01:23 - 00:28:24:08

Bob

One of the great innovations that yeah. So why don't we move on to the next slide? Because one of the trends that you've identified here is the extent to which VC activity has been kind of reshaped by the way investment is happening. So, Alex, you mentioned that.

00:28:26:02 - 00:28:55:22

Alex

Yeah. So when when we first looked at the numbers, I put together a sort of a baseline increase. So the overall percentage of capital invested increased by I think 76, 77% somewhere around there. So that was sort of our rough, very rough baseline. When you looked at cross-border VC investment, it was just as high. You can clearly see in the chart is a lot higher than normal.

00:28:56:02 - 00:29:23:11

Alex

So last year, almost 123 billion was invested across borders, which was 73% higher than the previous record in 2019. Interestingly, there were similar trends just here at home in the United States Different project that I worked on. We looked at the number of coastal investors who were investing outside of Silicon Valley and outside of New York City.

00:29:23:26 - 00:30:09:25

Alex

And what happened was that under COVID in Silicon Valley in New York, they not only invested in nearby ecosystems like Los Angeles or Boston or Philadelphia, they went inland. So they went into places like Nashville. They went into Denver, they went into Dallas, Raleigh, Charlotte, Charlotte, all kinds of places. and so you had this migration over Zoom because, you know, it's almost like what difference does it make if you can't have a one on one in-person. And I think that there was an epiphany on the part of a lot of VCs that there are a lot of good companies out there.

00:30:10:06 - 00:30:36:08

Alex

And just because they're in a different state or in a different country, all of a sudden that part of it wasn't wasn't nearly as important because everything is being done over Zoom anyway. And it's interesting because Venture is often thought of in localized terms. The rule of thumb is that, you know, VCs want to be within a 20 or 30 minute drive of each of their portfolio companies in case something goes wrong.

00:30:36:22 - 00:31:05:00

Alex

You know, code, throw all that out the window and I think that the industry itself has gotten really acclimated to investing over zoom online. Whether that changes at all as a society opens up, I think there's going to be a bit of a hybrid structure and it's going to be a new tool for the venture industry going forward that you can do these things over Zoom even when one on one interactions come back.

00:31:05:22 - 00:31:10:22

Alex

I think that this is a signal of some kind of new normal for the venture venture industry itself.

00:31:12:01 - 00:31:39:16

Bob

Yeah, I thought this was really one of the more interesting parts of this report, just because it's not something I had necessarily thought a lot about before. The idea that the VCs tend to invest, as the report suggests, on a geographically local basis, And that, you know, the current environment has changed that Sherry, what what are your thoughts on that?

00:31:40:22 - 00:32:13:17

Sherry

You know, I was surprised as well. I always had an impression that everything was global and was always looked at that way. But then again, I realize now that when what you have is that real estate that plays that chair in an office on the whatever floor, you know, you you probably do keep things closer and end your cadence for meeting with people and for interacting with people and so forth.

00:32:13:25 - 00:32:42:07

Sherry

It just doesn't occur to you that it isn't a global reach. So this was fascinating to me. And again, I feel as if that, Bob, is what's driving innovation is just having the diversity of thought and having the diversity of literally everything, cultures and people. And, you know, these mashups being fueled in this manner, I feel like it is driving so much of the acceleration.

00:32:42:29 - 00:32:51:20

Sherry

Yeah. Because otherwise these things weren't attainable. You know, drive down, can't drive down to, you know, another country across a pond.

00:32:52:07 - 00:33:13:21

Bob

Right. And not only diverse, you raise diversity. It made me wonder whether this is also driving investment in more diverse startups in terms of minority owned or women owned. Companies. Alex, does the data tell us anything about that? Do we know whether there's greater investment in diverse companies?

00:33:16:05 - 00:33:40:22

Alex

Okay. Ask me. I also put together a report, which is based on female founders in the United States and and know the numbers were pretty stagnant. You know, the absolute numbers went up across the board, and that was certainly the case with female founders as well. But when you look at the ratio, it's pretty much stuck where it's always been.

00:33:40:22 - 00:33:46:17

Alex

So, you know, there's a potential for that kind of thing. But we're not seeing the data quite yet.

00:33:47:27 - 00:33:48:21

Bob

Well, that's depressing.

00:33:50:10 - 00:33:52:23

Sherry

Yeah, you could have said it better myself.

00:33:55:02 - 00:34:17:12

Bob

Yeah. I mean, it has been interesting because, you know, again, I tend to be focused in the legal tech world and we don't have a lot of data on that. But there is a woman, Kristen Sonday the founder of Paladin, who puts together a diversity report every so often and on and on founders and diverse founders in legal tech.

00:34:17:12 - 00:34:43:05

Bob

And the last time she did it, which was I think now probably six months ago or so, it was pretty much the same. It did not actually find much gains in terms of diversity of women or people of color in founding companies. And yet certainly in the legal tech market, from what you just visually see, it feels like this industry has gotten a whole lot more diverse than that it was just a few years ago.

00:34:43:06 - 00:34:46:06

Bob

So I don't know. Sheri, what do you see? Any thoughts on that or.

00:34:47:02 - 00:35:11:29

Sherry

You know, I simply hope that it's at the beginning of its long overdue acceleration. That's what I, I hope that's not to say that it's any kind of a prediction. It's just more you know, we have to make things like that more visible. We have to be very intentional about it. And until those things happen, it's a sad set of numbers that's for sure.

00:35:12:17 - 00:35:14:09

Sherry

Yeah, very sad set of numbers.

00:35:15:26 - 00:35:23:20

Bob

All right. Any other thoughts on this investing over Zoom topic before we move on to what's going to be our final slide here?

00:35:24:00 - 00:35:59:07

Alex

Yeah, I wanted to. In my opinion, this was interesting that it sort of blends the international cross-border aspect of it and also the nontraditional aspect of it. When you looked at certain rounds that were raised last year, there was one and one for Flipkart, which is based in India, raising a $3.6 billion round in July of 20,21. That money came from three sovereign wealth funds, a Canadian pension plan, SoftBank, Tencent, out in China, Walmart and the hedge fund Tiger Global Management.

00:36:00:06 - 00:36:28:29

Alex

And then I also found a company called Northvolt. It's based out of Sweden that makes lithium ion batteries. It raised a $2.75 billion series in June, and that was led by four Swedish pension funds Goldman Sachs, Volkswagen, IKEA, and a Canadian pension plan. So there are so many examples of that going around right now that by these late stage rounds, you don't even really see any traditional venture investors.

00:36:29:00 - 00:36:56:18

Alex

It's all these big guys coming in. And what was fascinating is that there is so much cross-cultural lending from Europe, from certain countries in Asia and North America, The one exception to all this was China. China invests in its own companies. And you also you often have, you know, state owned banks and steel entities that are fueling these very massive rounds in China.

00:36:57:00 - 00:37:29:02

Alex

And they're the exception to the rule. Everyone else is enjoying big money from pension funds, from insurance companies, from mutual funds, from corporates. Everyone is getting into the game. And that sort of earns the moniker of tourist capital. And tourist capital can be, you know, finicky. And the first sign that something is amiss, everyone just kind of leads all of a and so it's something to keep an eye on.

00:37:29:04 - 00:37:36:24

Alex

If you see big money, traditional investors all of a sudden slowing down their pace, and that might be a bit short itself.

00:37:37:24 - 00:37:51:09

Bob

Interesting. In that kind of relates to the to the last slide that you prepared here on the exit bonanza in 2021 you want to tell us about the slide.

00:37:52:10 - 00:37:53:01

Alex

Sure.

00:37:55:15 - 00:38:22:11

Alex

There it is, all of the 2021 charts look like skyscrapers compared to previous years. Perhaps no more so than activity at one up to $1.2 trillion globally which is needless to say the first time it's broken the $1 trillion mark it hadn't even crossed the half trillion dollar mark before 2021. So it went well above historical norms.

00:38:22:24 - 00:38:54:05

Alex

And for the first time globally you saw more than 3000 VC exits. We know some of the reasons, venture capital primarily has two offerings and so you can go public or you can be acquired. 2021 was a 2020 to an extent or a very very accommodative exit market so you had a wide open IPO window for VC startups and you know venture investors were taking advantage of that and startups are taking advantage of that.

00:38:55:06 - 00:39:15:07

Alex

The last work that we did, we talked about the M&A side of it and that applies just as much to venture assets where, you know, you had all these companies scrambling trying to figure out, okay, so if our industry is going to look a little bit different over the next two or three years, how are we going to change ourselves?

00:39:15:08 - 00:39:38:16

Alex

Are we going to develop new technologies? Are we going to develop new solutions to everything that's going on or can we just buy it? And you saw a lot of buying in the market last year. So, you know, that same that same factor, you know, rethinking business models due to COVID had a big impact on VC activity.

00:39:38:17 - 00:39:56:14

Alex

This $1.2 trillion is going to go back to LPs and LPs are probably going to reinvest it. So you can take a look at these exit numbers and get a sense of how future fundraising statistics are going to look. But we've never seen a number like this before. $1 trillion exited.

00:39:58:10 - 00:40:21:27

Bob

And one of the interesting points you made in the report is this idea of private equity firms as exit routes for companies and the idea that there seems to be an uptick in you know, private equity firms buying innovative companies in order to, as you put it in the report, I think bolt them on to other platforms that already exist.

00:40:21:27 - 00:40:36:01

Bob

So, you know, for a for a bigger, more established company, it's a way to add innovation without having to develop the innovation internally. Yeah. Is that something you think we're going to continue to see more of or?

00:40:37:25 - 00:41:08:05

Alex

We certainly could. Yeah. Not only are we seeing VC add-ons, to coin a phrase, but you phrase it. But, you know, buyouts of startups themselves are actually going up and historically, that has been just you don't even think about it because startups in years past don't make money. Revenue doesn't come in. If you go back to the dot com area, there were I don't know how many IPOs where the companies were losing money and losing lots of it, but the promise was there.

00:41:09:03 - 00:41:40:10

Alex

Startups today particularly on the software side, are making a lot of money. A lot of industries, VC industries have figured out their revenue models and, you know, it's taken a lot of time. It's taken two decades since the promise of the dot com base for that to really swing into full motion. But that's one reason why you're seeing private equity shops come in right now is that, you know, you can buy a venture backed startup and there's a path to growth there.

00:41:41:08 - 00:42:12:21

Alex

And a lot of private equity firms actually are I don't know if they're better suited, but they're well capable of helping startups achieve really high growth. And also the stigma of private equity, not really knowing what it's doing in the technology space, has really gone away. You have firms who are now entering, the Bravo and Silver Lake and a number of others where they are taking just as seriously as the biggest and most prominent venture capitalists in Silicon Valley.

00:42:12:21 - 00:42:35:24

Alex

When it comes to understanding technology. They can just do it on a bigger platform. So I do think that you're going to see this blend continue to happen, and it will probably happen even more, especially if some of these buyouts become success stories. There are going to be other private equity shops. They're going to say, we need to expand our view.

00:42:36:18 - 00:42:50:24

Alex

It's another huge potential source of deal flow because, you know, there are so many companies coming out of Silicon Valley, Boston and New York that are making money that these private equity firms can combine them and improve them significantly.

00:42:51:23 - 00:43:03:03

Bob

Yeah, there's this trend of larger, more established companies buying up other innovative companies is certainly something we've seen a lot of in the legal tech world. Sherry not mentioning any names, but.

00:43:03:08 - 00:43:23:08

Sherry

Not mentioning any names at all. In fact, as Alex was talking about, I was thinking about this, that that honestly and again, my background is that I started with one of the origin companies when we had four people and I had someone asked me like, How is it that you can handle this now that there's so many more people at Litera.

00:43:23:16 - 00:43:51:04

Sherry

And they said, Are you kidding me? I was there when there were four people. This is so much better. And honestly, what what really it comes down to is the investment, the actual fuel that that causes that engine to be able to run and achieve great things in accelerated amounts of time. And then again, at the core, as Alex said, it's just fundamental technology that makes things better.

00:43:51:10 - 00:44:08:29

Sherry

I guess I would really be interested, Alex, in your thoughts about how does all of this impact so often? How does all of this impact what they need to be preparing for? And, my goodness, it's a whole different world really, with so much activity.

00:44:10:25 - 00:44:42:11

Alex

It's a good I don't have the best perspective on that. I do know some people who are exhausted Yes. And it's the same way on, you know, lawyers working on M&A transactions, private equity deals is that there's so much coming in that it's hard to even get a moment to catch your breath. I've heard so many anecdotes of deals that were stalled in the pipeline because teams of lawyers, also investment bankers, just didn't have time to get to it.

00:44:43:20 - 00:45:03:28

Alex

And that there were also really good opportunities out there that they were passing up because they had even better opportunities in front of them. So, you know, from what I understand with the legal field in an environment like this is that you really have to you have to go quick and it may get a little bit overwhelming.

00:45:04:19 - 00:45:41:05

Alex

I've heard that from a lot of people, particularly on the investment banking side. You said I used to work at Goldman Sachs. I'm still close to a lot of people there, that you're just sort of inundated with these things. And the technology needs to hold up. And from everything that I've heard, it has. So it'll be interesting to see if there are any new habits serving formed or new processes that stick around due to not only COVID and the technology and all that, but just the inundation of the deal activity going on right now, that it might also tweak a few processes for it.

00:45:45:13 - 00:46:17:28

Sherry

I just think it's a very, very good thing because there have been so many manual processes that, you know, take just heroic efforts to get things over the line. And in many ways, technology levels that playing field because there's just so much that can be repeated and so much that can be processed in so much that so much volume that can actually create a process that that actually is sustainable and repeatable.

00:46:18:27 - 00:46:28:14

Sherry

So I'm it's about time as I guess what I want to say I kind of wish Bob, I was really at the beginning of my career because this is getting really exciting.

00:46:31:05 - 00:46:54:25

Bob

I'm not sure I could take it. It's just it's it's just so yeah, it's so exciting and interesting right now that the report actually talks about the report that we've been talking about here today, actually talks a little bit about this and actually interviews some lawyers about how, you know, this this upsurge in this activity has impacted the the the work that they do.

00:46:55:21 - 00:47:20:28

Bob

And that is a whole Q&A section of this report. And as I say, people in the audience, you'll get a copy of this. But for example, one lawyer, an associate at Goodwin says, "The pandemic forced the venture capital world to rethink due diligence with technology driven solutions that brought incredible efficiencies to the process with virtual data rooms, record digitization, Zoom meetings, and digital collaboration tools."

00:47:21:10 - 00:47:43:16

Bob

The due diligence process can be done just as thoroughly as it was prior to 2020, but now with greater speed and smaller cost, I mean, it's kind of reminds me of where like the E-discovery World was a decade ago or something that the whole way that we do e-discovery used to be done with with file boxes in, in warehouse rooms with armies of associates sitting there.

00:47:43:16 - 00:47:50:25

Bob

And now it's all done by technology and the due diligence world. The transaction world is really changing a lot too.

00:47:51:02 - 00:48:14:06

Sherry

And it's interesting because the gentleman you spoke about Andrew Sparks, a partner at Goodwin. He spoke about the fact that it's the whole ecosystem right now, the whole venture capital ecosystem from the investors and the startups to the law firms and other providers. Is incredibly busy and recruiting heavily to take advantage of the abundant opportunities in the market today.

00:48:14:14 - 00:48:24:00

Sherry

So that recruiting thing, we've also seen. Right. Yeah. We all have so many openings for people. So many.

00:48:24:01 - 00:48:24:29

Bob

Right. Right.

00:48:26:01 - 00:48:43:06

Alex

I'm no lawyer but I know lawyers and things are getting done with greater speed and at a smaller cost. I wonder what that does for billable hours for them. So should mine for a lot of lawyers.

00:48:44:00 - 00:48:59:11

Bob

Yeah. No, I think any lawyer who decides they don't want to adopt innovative technology because it may reduce their ability to bill time has got a very misguided perspective on how they're serving their clients.

00:49:02:25 - 00:49:17:15

Bob

Alex, there was actually a question from the audience on slide four or slide five, I guess on the exit Bonanza. Just asking if you know what what was the average return for these in terms of the exit activity for businesses?

00:49:18:20 - 00:49:29:04

Alex

That's a good question. I don't know the answer off the top of my head and I don't have in my notes, I can probably get back to the person who asked that question.

00:49:30:22 - 00:49:31:05

Bob

Okay.

00:49:33:05 - 00:49:55:10

Bob

And people watching the webinar, if you have questions, this is your time to drop them in the Q&A box. You should see it in the lower left hand side of your screen, I believe it is. I'm seeing a different screen. That's why I say I believe and we've got got another 8 minutes or so here, 7 minutes or so here for the webinar.

00:49:56:26 - 00:50:29:07

Bob

One of the things I wanted to point out in terms of the exit activity also, again, in the legal tech world, where my blinders always lead me, is that in 2021 there we had, well prior to 2021, there had not been an IPO in the legal tech world since 2002. And that was and that was one of the few ever in the legal tech world.

00:50:30:00 - 00:50:51:11

Bob

And then in 2021 there were three different legal tech companies that saw how to IPO. So a significant development. I mean not, not a huge number compared to the market at large, but given that there hadn't been any in the legal tech world, at least in the U.S., there was one in Australia I think prior to this.

00:50:51:11 - 00:51:00:25

Bob

But in the U.S. market there were three IPOs in 2021 with LegalZoom, InTapp, and Disco all having public offerings this year.

00:51:00:25 - 00:51:24:24

Alex

So a lot one thing that happens in venture is that there is this I guess you can use the phrase proof of concept for an entire industry where a single transaction, let's say in this case Legal Zoom, it goes public and it does well that's a signal to the rest of the market that this type of company can succeed.

00:51:25:24 - 00:51:57:09

Alex

There was a this is in the Agtech market agriculture technology - that market is it's pretty quirky. It's really fascinating. But it wasn't until a $1 billion acquisition in 2011 I think it was that Climate Corporation was acquired for $1,000,000,000 and that just kind of came out of nowhere. And up until that point there were much smaller exits. It was this niche, niche little market that everyone kind of left alone.

00:51:57:21 - 00:52:24:09

Alex

And then you see a $1 billion position. Everyone says the ag tech market could be significant. And from that moment on, ag tech became a much more prominent sector for venture. And you saw investment pick up over time. So sometimes it takes those watershed moments for people to realize that, hey, this is a new market. It might be a little bit quirky, but it looks pretty profitable.

00:52:24:25 - 00:52:25:04

Alex

So.

00:52:26:08 - 00:52:41:21

Bob

You know, there was a question earlier on back when you were talking about the video game industry from somebody. They actually asked, do you advise investing in video game studios? And I'm going to guess that you're going to tell us you're not an investment advisor and.

00:52:42:01 - 00:53:15:17

Alex

I'm not an investment advisor. And yet it's fascinating, though, looking, looking at that sector. It really is something. And again, you know, COVID really locked people in their homes. And so video game usage went up. But at the same time, the demographics are pretty different. You know, you have people in their twenties, thirties, and even forties playing video games, buying the merchandise and spending good money on this.

00:53:15:17 - 00:53:35:28

Alex

And it's sort of become a social outlet for a lot of people. Whereas when I played video games, I had to quit cold turkey because I was too addicted to them when I was in middle school and junior high. I'm so glad that I quit because I see these video games now and they're just incredible. And I would be out of a job if I was addicted as I was back then.

00:53:37:00 - 00:53:48:20

Bob

And then in a related question was, if virtual is seeing such great advances, why are people so why are a lot of people and experts do not believe in Meta? Or why are people skeptical about meta.

00:53:50:16 - 00:54:32:03

Alex

You'll have to ask them, you know, some of these some of these concepts that are coming out of out of the blue, I think it'll take time for people to fully acclimate to them. Virtual reality, though, I think has very, very practical uses right off the bat. So, you know, if you're training for dangerous situations or if you're training you know, just to be a precision surgeon, the fact that you can incorporate virtual reality into your training and probably expect it quite a bit you know, I think that it's a lot more obvious to people who are watching that type, that technology develop, how it can be put to use in real life right away.

00:54:33:11 - 00:54:43:18

Alex

Things like Meta or web3. I think, you know, conceptually people are not they're hesitant to wrap their minds around them. So I think there is a difference there.

00:54:43:27 - 00:54:58:18

Bob

Yeah. In the legal world, I wrote about a company earlier this year using VR training to provide courtroom training for lawyers who can't go into courtrooms because the courtrooms are all shut down. Oh, interesting. They are using VR to train lawyers on courtroom skills.

00:54:59:10 - 00:55:21:12

Sherry

And Alex, I have one question that I want to come back to, and that is for female founders, for women who are launching startup companies what sort of key advice would you give them to to be a successful in this, to raise those numbers we talked about earlier.

00:55:22:20 - 00:55:47:26

Alex

I just had a discussion a couple of weeks ago with someone from JP Morgan and a woman named Katie Ray, who is the founding partner of The Engine that's out of M.I.T. and one of the one thing that you can look at is specifically talking about Katie is that she is the managing partner of the venture firm.

00:55:48:23 - 00:56:19:28

Alex

She has check writing authority and a number of other women at the engine have Chuck writing authority. When you have female check writers who can actually write those checks, and make investment decisions, you tend to see a ripple effect because there have been studies done that suggest and this is also anecdotally confirmed as well, that a lot of female founders feel more confident and more comfortable talking in soliciting from a female investor and from the female investors'

00:56:19:28 - 00:56:46:23

Alex

Point of view, sometimes things may go over the head of a male investor in there. They're not going to catch something, but the female investor will see it. You know, you're really looking for potential. And is this person the right person to take this company to the next level? And when you have more female investors with check writing authority, I think that you'll see those numbers go up because it will have a compounding impact on female founder activity at large.

00:56:47:15 - 00:56:48:03

Alex

Well, I don't.

00:56:48:03 - 00:56:48:21

Sherry

Know the website.

00:56:48:24 - 00:56:55:16

Bob

I don't know if this is broke down much by verticals, but there was a question as to what your predictions are for the top three verticals in the year ahead.

00:56:56:29 - 00:57:00:22

Alex

Oh, if I was able to predict that, you know.

00:57:03:23 - 00:57:07:24

Bob

Well, what have been the top three verticals in the current year in 2021 say.

00:57:09:11 - 00:57:43:28

Alex

You know, I would think that fintech would be up there with digital health. It's so hard to say because I think that you can make a case for at least ten industries. But you know these industries that we're coming into their own prior to COVID and where COVID had an impact things like fintech or digital health, telemedicine, those types of things I think that you're going to see sustained growth for those types of industries going forward because their technology proved that it worked.

00:57:44:11 - 00:57:59:13

Alex

Telemedicine is interesting because it was around for a long time that neither doctors or patients trusted it. They didn't want to use it. Then they were forced to use and they they said, Oh, this is fantastic. So it's a very hard question, though. I don't know the precise answer.

00:57:59:28 - 00:58:09:09

Bob

Sherry Anyways, we're at the top of the hour here, but any closing thoughts, anything else you'd like to wrap up with before we finish for today?

00:58:09:21 - 00:58:24:09

Sherry

Other than Alex, I say I think your report is something everyone must read, go decode and decipher. And, you know, there's so many lessons in it. So thank you so much for putting it together and for sharing your insights today.

00:58:25:03 - 00:58:25:12

Alex

Thank you.

00:58:26:14 - 00:58:29:04

Bob

Alex, any final words of wisdom from you?

00:58:29:27 - 00:58:54:01

Alex

I think it will be very interesting to see what 2022 brings and whether or not 2021 was a huge outlier. I wouldn't be surprised that five years from now, you know, we put these charts together and maybe it's something of a new normal, or maybe it's just this huge spike in 2021 and things come back to earth and we're going to be looking at, you know, funky charts going forward.

00:58:54:01 - 00:58:56:15

Alex

So it'll be interesting to see what happens there.

00:58:57:21 - 00:59:22:29

Bob

All right. Well, thanks again to our panelists, Sherry Kappel of Litera and Alex of Pitchfork and to Litera for sponsoring today's webinar to Facebook, for contributing the data and analysis and to Above the Law for hosting it. Thanks to everybody in the audience for participating today. Really appreciate it. As I said, you will be getting a follow up email that will give you access to the full report.

00:59:22:29 - 00:59:28:16

Bob

I urge you to go through it and take a good look at it.

00:59:29:21 - 00:59:35:10

Thank you for listening to Legal Tech Matters. Be sure to subscribe wherever you get your podcasts.