Do venture capital (VC) and legal services have a problem? Do large heaps of cash – handed over on the basis of rapid and increasing growth – just cause issues for a legal business?

For example, was the $75.5m of VC cash the central problem for Atrium, the dual business that linked a law firm with a legal tech development unit, and that largely collapsed earlier this month? Artificial Lawyer asked Augie Rakow, the Co-Founder, Managing Partner and Chairman of Atrium, who left back in April 2019 after two years helping to lead the business, his views.

When asked what he thought about the reasons behind the closing of Atrium’s tech group and the loss of the majority of the lawyers, he told this site: ‘It’s hard to combine venture capital with professional services. Not impossible, but challenging. Atrium tried doing it one way, and parts of it worked astonishingly well.’ And of course, other aspects didn’t.

He added that this is not the end of his and others’ efforts in this field, even if that particular model didn’t work out.

‘Many of us involved are already trying new ways to use what we learned through Atrium. 2021 won’t look like 2019,’ Rakow added, who currently runs advisory business, Palo Alto Legal Support. So, watch this space for the next new venture.

And, in true tech company fashion, many of the people who put Atrium together are, it therefore seems, going to try new things, likely focused on solving what they see as the fundamental problems of today’s law firms.

But, what are those problems? Back in December 2018, when Atrium was riding high, it had hired dozens of lawyers – many from leading law firms, created a new management team, and its equally new tech group was busy creating a suite of tech products to help the lawyers and their clients, and it had served by then over 280 clients.

As Rakow wrote in a company blog post back then: ‘I’ve had first-hand experience with everything that makes high-end legal practice exciting and gratifying, but also the inefficiencies of law firms that grind down the attorneys and paralegals.‘

I.e. inefficiencies that take lawyers away from being lawyers are a central problem – and that really was the key problem that they wanted to solve. Or, at least lawyers like Rakow wanted to solve. Perhaps the VC money was not so focused on this particular problem that lawyers faced.

And here is a small, but possible clue to the central problem. Rakow sees the tech as helping to make lawyers be lawyers again, i.e. be great professionals. But, much of the buzz about Atrium was that it was a ‘new’ way of delivering legal services, as if that might not still totally depend on great lawyers.

After all, as Rakow added in his December 2018 post, he loves the law and the legal profession. It was not the tech and the money that was the big lure of Atrium, rather it was making the legal profession better. Or, as he put it back then:

‘As a lawyer, I’ve always loved this profession and wanted to free the wonderful parts of it from the painful parts, for both clients and practitioners alike.‘

But, that was not the only challenge.

Scaling The Law

As Rakow notes on his LinkedIn page, he helped Atrium get to a point where it was making $1.5m per month from a standing start 18 months before. On that pro rata basis Atrium was making $18m per year, at that point, if you use that figure.

That sounds super healthy for a very small law firm with very low costs. But, this was a rapidly expanding operation with a lot of people. This was not a Main Street firm with a handful of staff and relatively easy to cover overheads.

(For example, while it’s not totally clear how many people worked within the two Atrium businesses at the end of last month, its still operational LinkedIn company page shows that there were at least a couple of hundred people there when things were still in high-growth mode. Now consider the total salary and office space bill for that many people. Note: Silicon Valley is not known for its super cheap real estate, nor for offering low salaries either.)

As Atrium the law firm could not and still cannot (as the nub of the legal part is still going) accept outside equity investment, it presumably was supported by loans from the tech division, which had imbibed the $75m in VC cash.

In the US a law firm can ask its partners to borrow money from the bank and contribute it to the firm, and it can also take loans from a bank as an entity itself, but it cannot take cash from ‘non-lawyers’ in exchange for equity.

Now, we could get into the nitty gritty of all of the ins and outs of Atrium, but you can see the central challenge: scaling up a law firm from scratch is hard as it generates a lot of costs as it goes.

Moreover, Atrium had served 280 clients over an 18 month period (up to December 2018). I.e. that’s about 15 per month, pro rata. If the law firm was generating $1.5m per month, that means the business, on a very general average, was bagging about $100,000 per client, which is healthy, but again – when you look at the cost base, this was not going to be the kind of money that would support a large top tier law firm, not unless they could scale up the volume. I.e. bring in a lot more clients in a market where they were competing against a mass of incumbents.

And, even though the tech they developed – around doc creation, sharing and storage – did help, it couldn’t make things change that much.

Which leads to the conclusion, injecting cash into a legal business and expecting rapid growth is reasonable, but expecting it to become super-profitable in a short time as well is a big challenge.

I.e. with cash you can open an office and hire lots of lawyers, who backed by efficiency-supporting tech can do more value-added work for the clients. That will drive revenue and you can try and scale that. But……and this is the critical aspect, you cannot expect that kind of operation not to be weighed down with costs of its own.

After all, this was not meant to be an ALSP/LPO, primarily doing tonnes of lower value process work using paralegals, often in lower cost locations. Nor was it like Rocket Lawyer, just selling easy to complete DIY legal forms and basic documents. Both of which are far more scaleable in the short term. This was first and foremost a law firm advising startup clients on the complex area of venture investment.

You can overcome the cost base challenge with either very high legal bills that give you a huge margin – and that takes a very long time to grow, just ask some of the AmLaw 100 firms, or you have low margins and very high volume. And professional services that advise clients on a one-to-one basis don’t easily gain massive scale in a couple of years because trusted relationships take time to grow.

It looks like Atrium got stuck somewhere between these two poles.

But, it also sounds like this is not over yet. Rakow and others have plans for new approaches to solving the law firm inefficiency challenge.