The failure of legal innovation

Okay, I admit: that was a pure linkbait headline. Not quite as bad as 17 Heartwarming Photos That Will Restore Your Faith In Humanity, but still, I couldn’t pass up the opportunity to draw in people who might be thinking (hoping?) that I’d given up on innovation in the legal market.

But the headline isn’t a complete fraud. In fact, you could consider this post as a necessary companion to An incomplete inventory of NewLaw, which generated a great deal of interest and enthusiasm last week. Scores of new law firms, businesses, and technologies are emerging in this dynamic market, generating justifiable excitement. Ron Friedmann led a discussion this week on Twitter that estimated the percentage of the corporate legal market that NewLaw is carving off — it may be quite small, but it still translates into a whole lot of money in a very short period of time.

Nonetheless, it’s precisely now, when legal innovation seems to be really taking off, that we need to remind ourselves how fragile and fraught the startup environment really is. A thousand flowers may well be planted in the legal marketplace; but hundreds will never bloom.

An excellent illustration of this idea can be found in a recent James Suroweicki column in The New Yorker. “Epic Fails of the Startup World” is a sober pail of cold water dumped onto the frenzied fires of innovation. “We live in the age of the startup,” Suroweicki writes, but this Cambrian explosion of innovative new businesses is occurring contemporaneously with a mass extinction: failed startups overwhelmingly outnumber successful ones.

The reasons behind these astonishingly high failure rates should give legal entrepreneurs pause: it appears that most startups suffer from a massive overabundance of misplaced confidence, made worse by a startup culture that has come to lionize failure as the noble condition precedent to success. There’s no question that failure is indeed a condition precedent to success in the startup world. But far more frequently, failure is just a condition precedent to more and bigger failures. Serial entrepreneurs, according to a German study, are actually more failure-prone than first-time innovators.  [do_widget id=”text-7″ title=false]

The upside of this phenomenon is that the extremely few successes that emerge from the startup world deliver disproportionate benefits in economic and social terms: one LinkedIn or Uber is worth many Pets.coms. “We’ve built a whole system on unrealistic expectations,” says Suroweicki. “Because we don’t know how to identify good companies in advance, investors end up funding lots of them in the hope that a few will hit it big. … In the delusions of entrepreneurs are the seeds of technological progress.”

Remember that line you were given on your first day of law school? “Look to your left, look to your right, only one of you will be here in five years”? Imagine you’re in an auditorium with 100 other students and the speaker says, “Only one of you in this room will make it.” That’s a decent approximation of the odds facing startups. It’s only the bullheaded optimism of the entrepreneurial spirit, as well as the outsized rewards awaiting the rare winners, that keeps the system going, to everyone’s benefit.

We should expect the same thing to happen to NewLaw. In fact, it’s already happening. England & Wales has been described as the world’s legal laboratory; well, some of that lab’s experiments have already fizzled out. Conveyancing ABS In-Deed Online gave up the ghost last summer, sold for a mere one pound after arguably hitting the markets too early. Stobarts Barristers went the way of all flesh last month, perhaps confirming that a trucking company might not have been the best platform upon which to launch a law firm. And Co-Op Legal Services, the early heavyweight contender of consumer law ABS (and my personal rooting favourite) might not be dead, but there’s reason to worry that it might simply be nailed to its perch.

More failures and disappointments will follow. Some innovations will fail because they were based on a bad idea, some will fail because of bad execution, and some will fail because of bad luck; but they’ll all come to the same end. This is not a jab against NewLaw and legal startups, or a red flag on any specific entity; it’s simply the natural outcome of a marketplace law. There are nearly 100 entries on my NewLaw list, and probably scores of others I haven’t yet come across; they can’t all be lucky exceptions to the rule against startups.

If anything, the recent tsunami of cash investments in NewLaw might be just as much a sign of concern as of confidence. Josh Kubicki, the clear thought leader in the legal startup world, reported $458 million invested in legal tech startups in 2013, adding that 2014 is ahead of last year’s pace. Funding round announcements in the tens of millions of dollars aren’t routine quite yet, but we’re getting there. Is this a sign of the tremendous promise and potential of legal startups? Almost certainly. But it might also be a sign of vast amounts of money burning holes in the pockets of angel investors and searching for the next shiny thing. It might be, in the famous words of Alan Greenspan, a certain degree of irrational exuberance.

I wanted to note these ideas for a couple of reasons. One is to slightly temper the commendable enthusiasm inside and around the legal startup world, to remind participants in this genuinely exciting market that the risks rival or outnumber the rewards — it’s a narrow path to glory, and the drop on either side is steep. But the other reason, and I think the more important one, is to counter the inevitable arguments of the skeptics and cynics that will issue, in a few months’ or a few years’ time, standing over the corpse of some high-profile NewLaw entity and proclaiming that there was never anything here but hype and snake oil. That’s simply not the case.

Failure is built into innovation. It’s a feature, not a bug. You can choose, if you like, to glorify failure as a critical rite of passage on the path of enlightenment; like any heady drink, that’s fine in moderation, though it’s fatal in stronger doses. But you can also choose to revile failure, to loathe it and shun it and attach shame to those who experience it. This is the lawyer’s approach to failure, and it’s a leading reason why so little change has occurred in the traditional business model. We’re not just risk-averse as lawyers, we’re embarrassment-averse: we fear the self-inflicted humiliation of falling short. That’s why the schadenfreude felt by many lawyers when a legal innovation fails is palpable: we believe the innovator’s fall confirms the wisdom of our own reticence.

Rather than glorifying or reviling failure, however, I suggest we simply accept it as a perfectly natural part of doing business in a turbulent market. As the legal profession is pulled deeper into that turbulence, failures will mount, and they’ll be far more common among those who tried than among those who shied away. But the rewards will also be much larger and more numerous among the innovators than among the laggards. You don’t have to love failure. But I do recommend you get a lot more comfortable around it.

Jordan Furlong is a lawyer, consultant, and legal industry analyst who forecasts the impact of the changing legal market on lawyers, clients, and legal organizations. He has delivered dozens of addresses to law firms, state bars, law societies, law schools, judges, and many others throughout the United States and Canada on the evolution of the legal services marketplace.



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