Over the past year, the legal technology (LegalTech) field has been experiencing a significant renaissance of interest in light of generative AI capabilities. Recent technical advances have improved the accuracy of generative AI applications, leading to a surge in AI-first LegalTech startups and substantial venture funding in the sector (~$700 million in startup funding since early 2023). However, the adoption of this technology faces serious challenges, including structural hurdles and incumbents’ strong advantage in accessing legal domain data.

Some key observations and highlights:

5. Emerging technical solutions are addressing the main challenges of using Generative AI in legal applications, such as lack of consistency and accuracy, limited explainability, privacy concerns, and difficulty in obtaining and training models on legal domain data.
6. Structural impediments in the legal industry, such as the billable hour, lack of standardization, vendor dependence, and incumbent control, moderate the success of generative AI startups.
7. Our defined “client-facing” LegalTech market is segmented into three broad lines of work: Research and Analysis, Document Review and Drafting, and Litigation. We view the total LegalTech market in the United States to be estimated at ~$13B in 2023, with litigation being the largest category.
8. LegalTech incumbents play a significant role in the adoption of generative AI technologies, often opting for market consolidation through partnerships or acquisitions rather than building solutions organically.
9. Future evolution in LegalTech may involve specialization in areas such as patent and IP, immigration, insurance, and regulatory compliance. There is also potential for productivity tools and access to legal services, although the latter faces structural challenges related to the Unauthorized Practice of Law (UPL).

Our paper suggests that while there is significant potential for generative AI in the LegalTech market, founders must carefully consider the industry’s specific dynamics and structural hurdles when introducing new AI-driven technologies. Targeting less data-dependent areas, partnering with incumbents, or focusing on horizontal areas within LegalOps and regulatory compliance may provide better initial opportunities for startups. Despite the challenges, the momentum in LegalTech driven by generative AI should not be underestimated, as it has the potential to provide an unprecedented depth and understanding of legal practice.

To read our full paper, see here.