Israel - a Rising Star in the Global Legal Tech Scene
Israel, otherwise known as the "Startup Nation", is home to many influential startups, such as Waze, Wix, Mobileye, Fiverr, Moovit and more. The country has well established its ability to raise capital and dominate many high-tech fields in just a few years, and with a population just short of 10 million people.
Though Israel is new to the legal tech market, it is clear that the country is determined to keep up the pace with the rest of the world, as law firms and in-house departments are slowly but surely adopting legal tech products. The real revolution, however, is heralding from the legal-tech companies that are showing capabilities and potential that rival international companies and are already piquing the interest of the world.
Why is the Startup Nation such an interesting target for capital funding?
Israel is a startup powerhouse: It is impossible to talk about Israel without mentioning its technological and innovation prowess: The country has close to 100 companies traded on NASDAQ, with $70 billion in market cap; 11 IPO's in 2017 alone; exits and M&A deals valued at $23.8 billion in 2017 and an average deal value increase of 66% year-over-year. Furthermore, it possesses the largest number of startups per capita, with more researchers per capita working in R&D than any other country.
It pays to invest in the Startup Nation: According to a recent survey published by the strategic consulting division of BakerTilly accounting firm, Israelis have founded more unicorns (companies with a valuation of $1B and north) per capita than any other country in the world. The survey included 183 companies valued at over a billion dollars, each attributed to its own country of origin. Following this logic, Israelis have the highest probability of creating a company of high value, thus making it a highly rewarding funding attraction.
The Israeli mentality: At the early age of 18, the majority of Israelis serve 3 years of mandatory military service. This long period trains their body and mind, turning them into resilient and highly dependable individuals. They undergo incredible lengths of training at one of the techiest environments in the world, including within the well-known intelligence-technological-cyber unit '8200', making them extraordinarily young, exceptionally skilled and experienced programmers with the most advanced technology in the world at their fingertips. What's more, Israelis are often categorized as having "Chutzpa" –roughly translated as cheek, or audacity. The Israeli mentality is one of the main reasons Israelis make such good entrepreneurs: they are less averse to risk and more prone to inventing new ways to solve problems.
Innovative infrastructure: Israel has all the infrastructure you need to get a startup up and running. Startup Genome's 2017 Global Startup Ecosystem Report ranked Tel-Aviv as the 6th best startup ecosystem in the world. In absolute terms, Israel’s 3,000 startups are the second-largest concentration of startups worldwide (after Silicon Valley), awarding it the nickname ‘Silicon Wadi’. In addition, The Israeli government is renowned for promoting innovation – The Israeli Innovation Authority (formerly the Office of the Chief Scientist) offers generous non-diluted funds to handpicked Israeli-based companies. With a budget of over $430 million, the Israeli Innovation Authority represents one public accelerator, out of over 90 accelerators currently residing in Israel, geared to assisting startups in finding starting capital, experience and understanding of its target markets. Furthermore, co-working spaces in Israel are very common, with over 200 such spaces available. They are extremely helpful for the entrepreneur who only recently raised her pre-seed round and needs to 'get out of the nest' so to speak.
What are some of the challenges inherent in raising capital for Israeli Legal Tech startups?
As mentioned, Israel is a hotspot for raising capital: With an overwhelming number of unicorns for such a small country it is evident that investors from all over the world have much faith in Israeli startups – so much so, that they are willing to put their own money on the line. Still, when compared to countries like the US and the UK, the amount of capital raised in the Israeli legal tech market is lagging behind both in absolute quantity of deals and amount of money raised.
One example for this behavior can be shown from the upcoming yearly statistics. 2018 was, in many ways, the unofficial year of legal tech: the global hype for legal tech investments has been booming, peaking at $1.2B on the first half of 2018 – a sum which exceeds the last three years combined.
Of course, the Startup Nation has seen its fair share of capital as well, with LawGeex raising $12M and other Israeli legal tech companies raising pre-seed rounds of up to $350K, showing its not-so-hidden-potential. Although there is no argument that when compared to the whole cake, Israel represents only a small piece and has a way to go until it can lead the international market, still it’s evident that investors are already interested.
Since the Israeli legal tech market is not yet known worldwide for its legal capabilities, it has become a difficult task for legal tech entrepreneurs to find a VC/Angel that is looking to invest specifically in an Israeli legal tech company.
Harder still when you realize that most Israeli VC / Angels do not have the experience of working with legal tech companies and still don’t know enough about legal tech to support entrepreneurs in their path to become influential on the global scale, unlike in other fields.
However, despite the excess of accelerators and governmental programs assisting promising startups, we have yet to see Israeli legal tech accelerators geared to help legal tech startups with their unique challenges.
Despite the many similarities between the various high tech companies, there are numerous issues that are unique to the legal tech world, such as specific regulations from the Israel Bar Association against legal tech programs perceived to be replacing lawyers; a dual world for techies and lawyers who don’t always get along or understand one another; or even the way that Israeli legal tech companies should be marketed in a way that is both appealing and credible to lawyers and citizens alike - These are all issues that could be handled in an accelerator. Law firms are obviously in the best position to offer such services and although some valiant efforts have been made, none of them were close to the work of a real legal tech accelerator as seen worldwide.
Fortunately, it is not the first time that an Israel high tech sector is facing these sorts of challenges. For the most part, these are all issues that ventures from early tech sectors in the Startup Nation have also experienced. It was the case with cyber security and it was the the same with FinTech. Both sectors started slow and were viewed with suspicion, but both eventually become leaders in the global market.
As long as the hype for legal tech solutions in the world will keep rising it is expected that more technology enthusiasts, VC's and entrepreneurs will enter the market in order to collect their share, bringing with them more and more of the collective knowledge, connections and wealth the Startup Nation needs. Those who spot the opportunity first and take action - will reap the benefits.
What are the characteristics of the Israeli Legal tech scene?
The Law firms:
Israel has the highest number of lawyers-per-capita in the world, ahead of countries such as the U.S., Canada and Germany with a figure of almost 600 lawyers per 100,000 people. Although the Israeli legal market is very competitive and Israeli law firms are constantly seeking ways to improve their service offerings, many law firms in Israel have yet to embrace the latest wave of legal tech. Most of the law firms still use simple solutions such as Microsoft Word extensions and anachronistic software that manages their practice.
There are a couple of reasons for this:
Language – despite the fact that some Israeli law firms (mainly the largest) work in English, the majority of the local legal sector prefers to work entirely in Hebrew. They therefore need Hebrew-supported solutions which are not very common, as there are less than 60K lawyers practicing in the language.
Costs – Israeli law firms charge lower legal fees than their European and American counterparts, ultimately leaving less margin for investment in legal tech products.
Importing new trends takes time – the Israeli legal tech scene is still young and while Israeli law firms are now willing to accept certain aspects of innovative technology in their offices, many are still clueless as to the notion of legal technology and believe it unreliable at worst, risky at best.
Of course, when explained properly what value technological solutions can add to the firm, most of them realize the importance of implementing legal tech products. This is, however, still work in progress.
Legal Tech Startups:
Israelis and Israeli lawyers - are much less risk averse than other cultures and are far more likely to be straightforward about what they want and how they expect things to be done. When young Israeli lawyers enter the legal work force and experience the technological gap between the programs being used in the world and what is being used in their firm - they demand a drastic change.
These tech-savvy lawyers are already taking their places in high positions at their law firms and either influence their firm to use more legal tech products in order to make their job more practical and their life more convenient or find a CTO to help them start their own venture in order to make the changes they wish to see.
For the reasons mentioned, it is easy to understand why the majority of Israeli legal tech ventures are founded or at least co-founded by lawyers. Fortunately, lawyers are also considered the best-suited people for the job as they have the inside knowledge and connections to the legal market which they can put to good use.
The portfolio of the Israeli legal tech startups varies in size, capital and product readiness. From a list of 30 Israeli legal tech companies reviewed by the Israeli Tech&Law department, the majority were estimated to be in their early stages, either looking to raise a pre-seed/seed round, or more rarely - a Level A round.
The companies mostly target a B2B crowd, although B2C initiatives make up around 40% of the market. Another interesting fact is that female entrepreneurs do not shy away from the legal tech market, and although they do not constitute a majority among Israeli legal tech entrepreneurs, they do have a strong presence among Israeli legal tech companies leading the sector. Several have recently received their own headlines in Israeli business magazines.
Israeli legal tech startups are also very internationally wired. With the understanding that with slightly over 60K active lawyers the Israeli market is too small to make a major impact, Israeli legal tech startups view their country mostly as a testing ground for proof of concept of their products before marketing them internationally. This is also the reason why Israeli legal tech companies are looking for international investors who could help them expand abroad.
Legal Tech Organizations
Tech&Law (Israel) department is Israel’s first legal-tech platform, bringing together and connecting the different players in the Israeli legal-tech market (including lawyers, technologist, regulators etc.) and is considered the gateway to Israel in this fascinating field.
The department helps legal tech startups connect with international and local bodies that are interested in investing in Israeli legal tech companies, assists assists legal tech startups in understanding how to operate within the Israeli legal tech market, how to penetrate the international market and helps organizing roadshows for startups abroad, making connection with social media and brand building for legal tech companies, and hosting Israel’s legal tech annual conference - hosting 350 participants from around the world, in addition to the world’s first legal tech hackathon Israeli representation.
Legal Tech Trends
The Startup Nation's legal tech market is fragmented and includes startups who offer a variety of solutions to both challenges presented in the legal market (Law firms / in-house departments) or as a disrupting force targeting the markets most-often missed by lawyers and law firms: helping those who are not necessarily familiar with the law but must confront it occasionally nonetheless.
Although the most prominent legal trend in Israel at the moment is without a doubt the legal documents review and automation field – more than likely following the success of Israel's most successful legal tech company today "LawGeex" who leads the market in this area – we can still see that the Israeli legal tech market is highly diverse, reaching out to many fields such as: legal analysis, ODR, small claims, contract review, contract automation, spam, parking, real-estate and more. There are roughly 40 Israeli legal tech companies, covering more fields than those discussed in this paper.
Another interesting trend that has been catching on in the Startup Nation's legal tech scene is a B2B2C model. Several Israeli legal tech companies have realized the added value of working hand-in-hand with major law firms. This realization has brought forth a collaboration between legal tech companies and major law firms in Israel, using the legal tech company's technology and the prestige, clientele and credibility of the Israeli law firm, thus maximizing the relative advantage of both sides.
Who are the major startups running the Israeli legal tech scene
There are several legal tech start-ups located in Israel. The most successful one to date is LawGeex, offering a machine-learning and AI-based product for contract review. Similar to most other Israeli legal tech start-ups, its product is English language-based, and a number of its clients are overseas. LawGeex’s product is a world competitor in the field of contract review and is able to review legal contracts with extreme speed and precision, in comparison to human lawyers, as was proven in a study conducted in February 2018, where the company's AI was put to the test against 20 experienced US lawyers in examining 5 NDAs. The results were that LawGeex AI has taken 25 seconds to review all 5 NDA's with an accuracy rate of 94%, while the lawyers took an average of 92 minutes to review the NDAs with an average accuracy rate of 85%, rendering LawGeex's AI as the clear 'winner' of the study.
Another startup that in recent years has been successfully disrupting the legal market and reaching international levels is Lawflex. With over 250 highly skilled, flexible lawyers, who are certified in 24 jurisdictions and are proficient in 18 languages, Lawflex has become Israel's first and leading outsourcing legal service operating online via a pool of skilled lawyers. The company provides law firms, financial institutions and other corporations with top lawyers on a flexible basis and at competitive rates.
The Israeli legal tech scene may still be young, but it is clear that by using the incredible infrastructure laid by thousands of entrepreneurs rooted in Israel and their combined years of experience, it is more than likely that the Startup Nation will do the same thing it did for Fin Tech and Cyber to the legal tech scene sooner rather than later. It is not long before the Israeli legal tech scene will become a force to be reckoned with in the global market. The only question is who will catch this rising opportunity and make smart use of it.
About the Author
Mr. Or Bakai is the head of the Israeli legal Tech platform Tech&Law, part of the Robus consulting group. He deals with Israeli and international legal tech startups and companies, providing them with one-stop-shop solutions with regard to business development, capital raising, entering Israeli and foreign markets and marketing solutions, while connecting them with position holders in the Israeli legal tech scene. Mr. Bakai aspires to change the way Israeli lawyers think about their profession.