LegalTech – Space to Watch or Time to Invest?

The LegalTech sector is undergoing one of its most significant transformations in decades. Traditionally viewed as slow to adopt technology, the legal industry has reached a turning point driven by artificial intelligence, regulatory pressure, rising operation costs, and the global shift toward digital workflows. As a result, LegalTech has evolved from a niche corner of enterprise software into a rapidly growing investment category increasingly attractive to both venture capital and private equity investors.

Global venture funding into LegalTech has historically been modest—especially when compared with FinTech, HealthTech, or Cybersecurity—largely due to conservative buying behavior and fragmented market structures. But the landscape has shifted dramatically since 2022 with the emergence of generative AI. Tasks that previously resisted automation—contract drafting, legal research, compliance review, due diligence—are now being digitized at unprecedented speed. Adoption is being led not only by law firms but also by corporate legal departments, insurance companies, and financial institutions.

Investors are drawn to LegalTech for several reasons. First, many legal processes are recurring and data-intensive, making them ideal candidates for SaaS monetization with high gross margins. Second, the market is fragmented, offering strong opportunities for roll-ups and consolidation plays. Third, AI-native startups can differentiate quickly, creating defensible moats through proprietary datasets, user engagement, and workflow integration.

Meanwhile, exits—once rare—have increased in frequency, with major strategic acquirers such as Thomson Reuters, LexisNexis, DocuSign, Litera, and Clio actively buying innovative startups. Private equity firms have also begun placing platform bets, anticipating strong compound growth as legal services continue their digitalization journey.

In short, LegalTech today resembles FinTech a decade ago: an industry transitioning from analog processes to AI-enhanced digital workflows, with a long runway for growth, consolidation, and value creation. Early investors stand to benefit from the structural shift as LegalTech becomes a core component of modern business operations.

Westland Finance is pleased to tap the knowledge about the sector from Lev Loukhton and Oleg Loukhton (the co-founders of GrayHair Venture Partners) who invest exclusively in early-stage LegalTech startups.

WF: What brought you to LegalTech?

Lev: I spent more than two decades practising law, spent a decade as an M&A partner at Linklaters.  And – with my background in economics and finance – I knew that a significant portion of what we were doing as lawyers was not efficient. Even while I was practising, I played around with technology – we tried document automation, some basic data analytics, but the technology we had before AI was simply not suitable for legal tasks. 

And yet you could tell that the demand for a change was enormous.  The example of DocuSign is telling – in the old days, a signing would take hours, even days.  Lawyers would populate folders with agreements to be signed, flag signature pages, ensure the availability of signatories, align schedules, check the identity of the person signing the document, all of that.  Now all that hassle can be avoided for the vast majority of agreements – a person can sign remotely, at a time that is convenient, and the process of execution has become essentially effortless.

When I saw the capabilities of AI, I immediately knew that this technology would change the practice and business of law.  It is excellent at recognizing patterns, drafting, comparing – these are the things we do as lawyers.  I spent months learning about the technology, the sector and its potential, and last year, I resigned from my partnership and convinced Oleg that LegalTech investing is the future.  

Oleg: It took Lev a while to convince me, too – like most investment professionals, I had been under the impression that LegalTech was a fringe sector.  It was under the radar for a very long time, and traditional venture capital firms tended to be somewhat sceptical.  But the more I learned about the space, the more it became apparent that LegalTech now, we call it “LegalTech 2.0”, is completely different from LegalTech as it was three or four years ago.  And our vision for the sector is proving to be correct – in 2025, year to date, the capital inflows are over $4 billion, with $2 billion of that coming just in the past two months.  

WF: What is your fund’s core investment thesis in LegalTech over the next 5–7 years?

Oleg: We believe that the growth potential for the right solutions is staggering.  Two years ago, it was estimated that under 10% of legal tasks were digitized and automated.  Everything else was done manually.  Somehow, the legal profession managed to stay impervious to the onset of technology that revolutionized such conservative sectors as finance and healthcare.  The tide has turned – we are seeing adoption growing every day, with some sources claiming that the majority of law firms now using multiple legal AI solutions.  The valuations of companies like Harvey and Legora – companies that were only started 3-4 years ago and raised rounds at valuations of $8 billion and $2 billion this year – demonstrate how much potential there is in the space.    

Lev: I would add that the legal profession is extremely client-driven.  Clients used to be content with the slow pace because there was simply no alternative.  When we were instructed on a new matter, we would often need a couple of weeks to even prepare the first draft of the key documents.  But with legal technology that is being built right now, you are going to get these first drafts in a matter of hours.  And clients will demand, and they are already demanding, that law firms use this technology – to save time, to reduce costs, and, frankly, to improve the product.  In many cases, clients are themselves adopting technology to reduce outside legal spend. 

Why would you pay your law firm $500k for a due diligence exercise if you can use a legal AI platform that does a perfectly adequate job of reviewing 95% of the documents in the data room?  You only want to pay for the 5% that you actually need.  And if a law firm is reluctant to change, clients will be doing more work in-house - or find another law firm that is more receptive to technology.

WF:  What characteristics distinguish a fundable LegalTech founder at seed stage?

Oleg: Deep domain expertise is essential.  The expertise can be either directly embedded in the founder team - if one of the founders is a lawyer, or “borrowed” – some startups work with law firms as design partners, but there needs to be a clear understanding of what lawyers do, and why they do it. That having been said, domain expertise by itself is not sufficient.  We have met with hundreds of founders, and many of them were lawyers.  Unfortunately, simply having a lawyer as a founder will not cut it.  Entrepreneurial drive and experience, operational excellence and business acumen are important as well. 

We have seen products built by real experts in their practice area – with not the faintest idea of GTM.  We call it the “if we build it, they will come” mentality.   Lawyers tend to be perfectionists, and we have been in conversations where someone has been building a product for two years, without ever showing it to a prospective customer.  It is probably not surprising that, when they finally face reality, they are often in for a rude awakening – their product may well work for them, but not for the market.

WF: What metrics or validation signals do you look for before investing, given that many startups are pre-revenue?

Oleg: Actually, at seed stage, we have a strong preference for startups that have revenue, even if it comes from paid pilots or trials.  I would not say that there is a particular revenue threshold, however – we need to be convinced that the problem exists, the founder team is the right team to solve the problem, their tech stack is solid and up to the task, and there is validation from the market that the solution will be used.  Lev obviously reviews these solutions himself, as an experienced lawyer, and assesses both the substance and the form – that is, the quality of the output and the UX/UI – to see if these will be satisfactory for lawyers. 

Importantly, we also have an extensive advisory network – literally hundreds of very senior lawyers all over the world – and we do ask them to test solutions that fit their area of expertise to get an unbiased view.  Market validation is the most reliable indicator of product-market fit.  But there are some instances where the idea is truly novel and seeks to establish a new category, so we are keeping an open mind.

WF: Which business models do you find most promising in LegalTech—SaaS, per-document pricing, transactional fees, or platform models?

Lev: That depends on the solution.  SaaS works well with the enterprise, smaller businesses may prefer not to be tied into a subscription (and may not need the full functionality of a certain platform), so for them a per-document pricing or a transactional pricing might work better. The revenue model is important, but we spend a lot of time thinking about margins and unit economics – some companies, for instance, offer an “all-you-can-eat” kind of service for a fixed amount, and we are concerned that this may not be sustainable in the long run.  Due diligence solutions can be priced on a per-transaction basis (i.e., cost per data room reviewed), and that provides a great deal of cost certainty for customers, making these solutions extremely appealing (especially as compared with the traditional alternative).

WF: What is the most challenging aspect of LegalTech investing?

Lev: The sheer number of startups in the space.  The opportunity to disrupt legal is appealing to so many that the space has literally exploded in the two years that we have been looking at it.  There are now thousands and thousands of startups, many building in the same space or adjacent spaces, and comparing them is probably the most time-consuming part of what we do, but it is a blessing disguised as a curse, really.  There are many good founders in the space, and while we regret not being able to back all of them, we are confident that, when we make an investment decision, we truly have a good understanding of what is being built in this sub-vertical. I know that a lot of lawyers are now investing directly in this space while continuing to practice law – I applaud their courage. 

I have no idea how it would be possible to even get a sense of the competitive landscape without it being a full-time job, constantly speaking to founders and experts in this sector.  To an untrained eye, many of these solutions would look very similar, but the difference can truly be drastic – yes, Company A offers a chat bot, and Company B has a chat bot, but the quality of output of one is many times better than that of the other one.  And that is why Company A is growing 70% month-on-month organically, thanks to rave reviews by customers and experts, and Company B is trying to raise yet another extension round to hire some magical salesperson who will get lawyers to use their product. 

We have seen Companies A… but also many Companies B.  That is one of the reasons that some forward-thinking law firms – which stand to gain a lot from LegalTech – are now investing in funds rather than directly in legal tech startups; that allows them to have exposure to the upside in the sector, while ensuring appropriate diversification.

WF: What factors make LegalTech investments more resilient (or more fragile) compared to other tech verticals?

Lev:  There are a few, but I will mention just one, which goes to the heart of why this is such an interesting space.  The legal profession has always been non-transparent.  The real secrets of the legal trade are not written down – traditionally, there has been a lot of “learning by osmosis,” observing other skilled practitioners, etc.  You hear a lot about the importance of the data set that is used to train the models – that data set can only be created where, as is happening now, senior legal practitioners leave the profession to build LegalTech solutions and imbue them, as it were, with the way that law is truly practiced.  There is a chasm between textbooks (black letter law) and the actual world of practice, and that gap is being closed right now by real domain experts.  

WF: How do you judge whether a product has a durable competitive advantage?

Oleg: One might argue that “durable” competitive advantage does not exist.  In the long run, we are all dead.  Nokia, Blackberry, Kodak all had dominated their respective markets, only to fade to irrelevance when they stopped innovating.  A decent software developer, armed with Replit, Cursor or Lovable, can create a working prototype of virtually any solution over a weekend.  So, the only truly durable competitive advantage is in the team itself and its ability to anticipate changes in the market and adapt fast.  Temporary moats include the data moat and the UX/UI moat, but there is nothing that can insulate a disruptor from future disruptors.  

WF: How do you assess a startup’s ability to sell into law firms, which historically have long sales cycles?

Oleg: We look at actual data.  A founder that tells us that he has been speaking to 10 law firms for the past 6 months and still does not have a single pilot is a red flag.  Someone who has managed to land several trials with top-tier names in a few weeks must be doing something right.  That said, we are alive to the fact that a trial (even a paid trial) does not necessarily mean that the product-market fit has been achieved.  This is particularly true in the legal tech market, where many founders are lawyers and have multiple connections to law firms.  We have seen situations where a solution was in trial with the law firm where the founder used to work, but nowhere else, and those kinds of situations obviously make us wary. 

Lev: As a former Magic Circle partner, I know a little bit about how law firms make these decisions.  And we ask a lot of probing questions to ensure that the GTM strategy is firmly grounded in reality.  Plainly speaking, we want to make sure that people understand how the process works, who the decision makers are likely to be, what is important for them, and so on. 

WF:  What valuation multiples are you seeing at seed vs. Series A in the LegalTech market?

Oleg: There is a spectrum, especially since the lines of demarcation between rounds are becoming increasingly more dynamic.  The multiples have increased over the past year or so, with more proof that the legal profession is opening up to the adoption of technology, and, consequently, higher growth rates.  I would say that anywhere from 10x to 20x ARR is where most of the early-stage US LegalTech startups tend to be.   

WF: What are the main risks you see in early-stage LegalTech investing?

Lev: Lawyers love issue-spotting and talking about risk.  Some of the most commonly cited risks are: regulatory, data leaks, hallucinations, and foundational models making the app layer irrelevant. 

All valid points, but: the regulatory attitude towards LegalTech appears to be a lot more favorable than it could have been at this point, with judges and bar associations acknowledging that the technology has a place in the profession (and some going as far as proposing that an understanding of AI tools should be part of the professional duty of competence); the concern about data leaks is mitigated by anonymisation and encryption, as well as robust cybersecurity measures (including prompt injection detection and prevention) that legal tech companies are actively implementing; specialist legal AI tools have managed to reduce hallucinations by making workflows more transparent, requiring source citation, etc.; and the systemic risk of foundational models is obviously there, but for their output to be even remotely comparable to that of specialist tools, OpenAI and Anthropic would need to incorporate a lot of domain expertise.     

WF: Which exit routes do you expect to dominate—strategic M&A, PE acquisition, secondary sales, or IPOs?

Oleg: Strategic M&A and PE acquisitions will play a very big role.  The former is already happening (and there are numerous ongoing negotiations, at all stages).  We see some very early-stage startups being acquired in the space (Dioptra was acquired by Icertis right after Dioptra’s pre-seed round; Libra was acquired by Thompson Reuters for EUR 90 million at about the same stage), but there are bigger consolidation plays as well – as an example,  vLex was acquired by Clio for $1 billion.  Private equity has been dreaming about getting its hands on the legal market for a decade, but the regulatory restrictions were in the way – now they are already making bets on AI-native law firms (which are essentially tech companies with a captive law firm for compliance reasons), and there are serious discussions about PE investments in law firms coming soon. 

Without a doubt, there will be some IPOs, but the general trend in the capital markets has been “private for longer,” and it is hard to imagine why LegalTech would be materially different.  The legal profession is fabulously profitable – most law firms operate on 40 to 50% margins without significant tech – and tech-enabled workflows have the potential of pushing that profitability to 80% or 90%.  These are tremendous amounts – aggregate law firm revenues are in hundreds of billions, so there is a lot to play for.  And we are not even talking about the TAM expansion that can be brought about by this technology – that is a whole different discussion.

WF: Many thanks for the interview, gentlemen, and we wish you success in your investments.

Lev: thank you for speaking to us, Oleg.