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Law Firms, Disunited Europe, Venture Capital
European Straits | Friday Reads
Hi, it’s Nicolas from The Family. Here’s the first Friday Reads edition, with a focus on law firms, insights about Europe, and a reading list on venture capital.
This is the very first edition of my newsletter European Straits that’s accessible only to paid subscribers. This series is called Friday Reads, and it’s focused on tech-related topics that I think are relevant over the longer term, also providing ample reading for your weekend. The goal is to furnish ammunition that will let you dig deeper on whatever topics pique your interest.
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Atrium, a startup that was also a law firm, closed down earlier this week, as reported in detail by Techcrunch. There were early warnings in January, when the company let go of all the lawyers on its payroll and announced it would concentrate on developing software products for law firms. But that apparently created turmoil among clients, and Justin Kan, Atrium’s founder, decided to call it quits.
The whole story has resonated a lot in the tech world for at least two reasons:
Kan himself is a prominent personality in Silicon Valley as the founder of Twitch (formerly Justin.tv), which was acquired by Amazon for $970M. Listen to this podcast to learn more.
Atrium was part of a larger movement of tech startups trying to enter a legacy industry by implementing a “full stack” strategy, and its failure calls the whole approach into question.
What exactly was Atrium up to? The idea of a “full stack” strategy was first articulated by Andreessen Horowitz’s Chris Dixon back in 2014:
The old approach was to sell or license your technology to the existing companies in that industry. The new approach is to build a complete, end-to-end product or service that bypasses existing companies. Prominent examples of this "full stack" approach include Tesla, Warby Parker, Uber, Harry's, Nest, Buzzfeed, and Netflix. Most of these companies had "partial stack" antecedents that either failed or ended up being relatively small businesses.
“Full stack” became all the rage. Balaji S. Srinivasan, also a GP at Andreessen Horowitz at the time, elaborated on the concept in a Twitter thread (now deleted—but I have the archive): “The reason to do full stack is that it's hard to replace just one layer of an outdated legacy stack.” I remember how my cofounder Oussama Ammar and I were excited by the idea that maybe this was the approach that would let startups succeed in Europe, where incumbents in legacy industries put up so much resistance to change.
So, does Atrium’s failure means that full stack is doomed to fail as well? And if not, what circumstances explain its failure? I tend to approach these kinds of questions by looking at the industry’s value chain, which you can always divide into three layers:
The top of the value chain is about extracting the essential resource that makes it possible for the industry to exist. In this case, that resource is the law, and it’s produced by the government.
The law is then transformed into legal documents produced and distributed by publishing giants such as LexisNexis, West Publishing, and Lefebvre Sarrut in France.
At the bottom of the chain, law firms employ lawyers who use those legal documents so as to serve their clients on a day-to-day basis.
Now it’s fair to say that the legal industry is bound for big tech-driven upheaval (see the reading list below for details). But here’s the most important thing to keep in mind about the legal industry: it serves clients, not customers. The difference is subtle, and doesn’t even exist in many languages—for instance, in French we only have one word (client). Here’s how Seth Godin puts it:
Customers hear you say, "here, I made this," and they buy or they don't buy.
Clients say to you, "I need this," and if you want to get paid, you make it.
The key distinction is who goes first, who gets to decide when it's done.
Whether you serve clients or customers has an impact on both prices and margins:
If it’s about a client, you can make them pay a lot provided you deliver exactly what they want. Alas that usually means employing more people and having them work so much that you need to pay them very high salaries (like at an investment bank). Thus you have room to increase the price (if you serve your client well), but it will be very difficult to increase your margin.
If it’s about a customer, the price sensitivity will be higher, but once you’ve found the right price point, you can bring down your costs and defend yourself by way of strategic positioning, retaining your margin and using it as you like (which must have been Atrium’s plan all along). Unlike a client, the customer will never force you to add more people to your payroll to justify the price.
Atrium’s problem is that it tried to treat clients as customers. The goal was to make lawyers more efficient thanks to technology, using the resulting surplus either to lower the price or to increase the margins and differentiate by adding more services. But as is often the case in the presence of innovation, the clients didn’t play along: they kept demanding more (that’s what clients do), making it difficult to retain that surplus and use it to improve the business. And there was probably always a competitor ready to add more lawyers so as to better comply with the client’s demands, sending the bill along later.
Atrium tried to avoid that trap by targeting the niche market of tech startups. Maybe, they figured, those early-stage startups have so little money that they’re ready to behave like customers rather than clients, thus enabling Atrium to generate increasing returns to scale. That could definitely be the case in Europe (our friends at Bold in Paris are focusing precisely on that segment and treat their clients as valued customers).
But in the US, a country ridden with rules, lawsuits, and disputes of all sorts, lawyers are everywhere. They’re too critical, even at the early stage, for any startup to put its fate in the hands of a weird experiment: behaving like a customer rather than a client when it comes to the law. Put simply, there is no such thing as an underserved segment on the US market for corporate law.
There’s probably a longer story to be told in future editions, but here are the key takeaways for now:
The “full stack” strategy works best in an industry serving customers because you won’t face resistance from your users when it comes to innovating.
If you want to turn clients into customers, focus on a market segment that’s underserved, and then grow from there. (The typical Clay Christensen playbook.)
If your business is that of a corporate law firm, like in Atrium’s case, just avoid the US, because there’s no such thing as underserved clients in the legal world there.
Regarding other approaches to legal tech, don’t forget to check out our fast-growing portfolio company Doctrine (here’s an article in Techcrunch). And here are more readings about law firms and the legal industry in general:
What Threatens Law Firms (Frank H. Wu, The Huffington Post, February 2013)
How to Fix Law School: A Symposium (The New Republic, July 2013)
Big Law Firms in Trouble: When the Money Dries Up (Noam Scheiber, The New Republic, July 2013)
Death of Big Law Firms Can't Be Ignored (Noam Scheiber, The New Republic, July 2013)
Collapse of Big Law Firms Continues (Noam Scheiber, The New Republic, August 2013)
Why the Law Firm of the Future Will Be a Software Company (Aaron George, Lexicata, May 2015)
Disruptive technologies: A Canadian lawyer’s perspective on the evolution of law-practice technology (Lou Milrad, Itbusiness.ca, June 2015)
Tech and the Law: An Interview with American Bar Association President William Hubbard (Colleen M. Sullivan, Monkey Paw Robot Arm, July 2015)
Biglaw Firms Must Conduct More Layoffs, Before It’s Too Late (Staci Zaretsky, Above the Law, May 2016)
Why law firms must change how they work (The Financial Times, June 2019)
Being a Law Firm Partner Was Once a Job for Life. That Culture Is All but Dead. (Sara Randazzo, The Wall Street Journal, August 2019)
I just started reading Peter Zeihan’s Disunited Nations: The Scramble for Power in an Ungoverned World. I discovered Zeihan’s work just a few months ago through Erik Torenberg, a cofounder & partner of the VC firm Village Global. Along with Martin Gurri, author of The Revolt of the Public, Zeihan is one of those authors whose ideas have been vindicated by Trump’s election and its aftermath and who have since become superstars. I’ll share more in the future because I think Zeihan presents a compelling framework to reflect on how to deploy capital in European tech, but here’s a first round of observations:
We all tend to think that the global order and the free flow of goods, services, and information that come with it is a given, mostly because we’ve grown up with it. But here’s the thing: since the collapse of the Soviet Union, the US has no incentive to maintain this global alliance and commit so many resources to a world order they don’t really need themselves. Contrary to what you may believe, the US is one of the most insulated national economies in the world. They don’t export much (except for Hollywood movies) and what they import (like Japanese and German cars) is to please their allies. In particular, they don’t import energy anymore.
Now the Americans have realized that they don’t need their allies anymore—they don’t depend on them economically and they don’t have the Soviet Union to fight anymore. Thus they’re effectively letting go of the international order they put in place after World War II and going back to concentrating on themselves. Trump is an extreme manifestation of that, but it really started with Bill Clinton in the 1990s, accelerated with George W. Bush and Barack Obama, and now it’s becoming clear to everyone: the US is retreating into itself, and we (the rest of the world) need to learn to live without them—from both security and economic standpoints.
Germany, according to Peter Zeihan, is the country which has the most to lose. Its economy is so dependent on exporting industrial products that it can only prosper if the free flow of goods is guaranteed and secured by the US-sponsored alliance worldwide. It takes a navy, many treaties, and a lot of goodwill to deliver that kind of security. Once those start to crumble, countries like Germany must expect their standard of living to collapse and political trouble to return. It doesn’t help that they have weak demographics and don’t particularly excel at entrepreneurship. Germany doesn’t seem like the place to bet on at the moment in Europe.
The UK might be in better shape, but it also must be prepared to lose ground. To make it short: Brexit is another manifestation of the collapse of the world order, but it makes the UK weak as it launches trade negotiations with the US. The fact that the US doesn’t care about the world doesn’t mean that some US parties are not interested in international expansion. According to Zeihan, Brexit will debase the pound, which will provide US buyers with an opportunity to buy many British assets at a cheap price. I would say it is time to deploy capital (pounds) in British startups because large US tech companies are about to take over, and they’ll do it through a buying spree. Then they will use the UK as their base to try and expand on the continent.
Finally, France is one of the countries that has the most to gain from the current transition, according to Zeihan. It has the geographical positioning that makes it immune to most threats from the outside, demographics that are slightly more dynamic than its neighbors, and doesn’t depend on foreign oil thanks to its nuclear plants. It only helps that Paris is booming these days when it comes to growing tech companies. Still, the future will be about fragmentation, each country for itself. And so investors need to be prepared to back French companies that are able to make the most of their domestic market rather than looking for global expansion.
I’ll let you ponder all that and will make sure to dig deeper in future issues. In the meantime, have a look at or a listen to the following:
And here’s my initial reaction to discovering his thinking, in a recent edition of European Straits: Big Tech in a Fragmented World.
This Wednesday, the free weekly edition of European Straits was dedicated to answering the simplest question: What Is Venture Capital? Here’s a reading list if you want to go further:
Low Risk, High Reward: Why Venture Capital Thrives in the Digital World (me, The Family Papers, October 2015)
A Brief History of the World (of Venture Capital) (me, The Family Papers, May 2016)
11 Notes on Goldman Sachs (me, The Family Papers, May 2017)
Financing Businesses in the 21st Century (me, European Straits, November 2017)
The Unicorn Hunters (Kim-Mai Cutler, Logic Magazine, April 2018)
Upending The Investment Value Chain (me, European Straits, April 2018)
Unpacking Alpha in Venture Capital (Ahmad M. Butt, Medium, November 2018)
The Future of Financing Businesses (me, European Straits, January 2019)
Reinventing Financial Services (me, European Straits, May 2019)
VC: An American History (Book Review) (Ian Hathaway, July 2019)
Give Capitalism a Chance (me, European Straits, October 2019)
Capitalism and the Future of Nation States (me, European Straits, December 2019)
The fragmentation of venture capital (me, Sifted, January 2020)
The Making of the Digital Revolution (William H. Janeway, Project Syndicate, February 2020)
The Venture Capital Math Problem Revisited (aka How Could You Be So Wrong?) (Fred Wilson, AVC, February 2020)
VCs should play bridge (Alex Danco, Two Truths and a Take, March 2020)
One more thing: If you’ve been forwarded this paying edition of European Straits, you should subscribe so as not to miss the next ones.
From London, UK 🇬🇧