Legal tech start-ups put AI disruption in a risky new wrapper

Boosters of AI claim it will create jobs. It is at least creating new business models. Offerings are springing up that package AI models into labour-saving, industry-specific products. One of them, legal tech specialist Legora, is gunning for a $10bn valuation. It looks like a wager that there are niches AI giants are too big, or busy, to conquer.

Legora is one of many intermediaries who have spied an opportunity in verticals like legal, financial or real estate. They typically take a so-called foundation model, courtesy of OpenAI or Anthropic, say, and build a wrapper around it tailored to a given industry, seasoned heavily with relevant training and a user-friendly interface.

Their clients have little cause to quibble. Lawyers can hand over vast swaths of quotidian tasks to Legora such as drafting reports, researching and reviewing documents. Depending on usage, it can be a lot cheaper: start-ups pursuing the “AI wrapper” model generally subsidise the cost of tokens — the basic unit into which AI tasks are broken — by offer customers monthly subscriptions.

Winning clients drives stonking growth. Legora has notched up seven straight quarters of 50-plus per cent annual recurring revenue growth and splashed out on a string of acquisitions; most recently, London-based Wexler, which specialises in litigation tech.

Hence the eye-watering valuations. Assume Legora’s growth in the next two quarters drops modestly to 40 per cent and this year’s recurring revenue of about $300mn would, at the minimum valuation, imply a 33 times multiple. By way of comparison, Clio, which focuses more on small law firms, was valued at 10 times ARR at last year’s fundraising.

One risk is that revenue may dry up as their clients — law firms and corporates — opt to build proprietary models. Kirkland & Ellis is ponying up $500mn for its AI efforts. Profit may prove eternally elusive too, especially if wrapper companies shield clients from the real cost of tokens. A couple of months ago Legora launched consumption-based pricing for its latest agentic system. It remains to be seen how such pricing shifts will impact customer usage.

The other risk comes from the top. Both Anthropic and OpenAI are moving into legal tech, hiring AI legal honchos ahead of upcoming IPOs, where investors will want evidence of real revenue. Legora has expertise in the law; its existential challenge is mastering the law of the jungle.

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