Table of contents
They say that a bad lawyer might let a case drag on for several years, but a good lawyer can make it last even longer. Nowhere is the threat of a lawsuit more liberally thrown around than in America, where the State of California actually keeps a list of people who sue too much – the Vexatious Litigant List – and prevents them from wasting any more time in the courts. It’s often said that the U.S. is the most litigious country on the planet, but that’s actually false. Turns out it’s zee Germans, a consequence of what happens in a society when nobody has a sense of humor.
With its never-ending list of regulations and mountains of data, the legal world is ripe for some technological disruption, something we discussed recently in our piece on 6 LegalTech Startups Disrupting the Legal Industry. One of those startups, DISCO, just filed for an initial public offering (IPO).
About DISCO Stock
Founded in 2012, Texas startup DISCO took in just over $233 million in disclosed funding to simplify “ediscovery, legal document review, and case management for enterprises, law firms, legal services providers and governments.” To understand “ediscovery,” you first need to understand discovery, the pre-trial process in which both parties in a legal trial can obtain information from the other side.
Many firms don’t know that you can instantly modernize the archaic process of discovery by simply prefixing it with an “e” which makes it sound new and fresh. Your legal department can now participate in the company-wide digital transformation initiative by hereafter always referring to discovery as ediscovery. Or they can do something meaningful and adopt DISCO’s cloud-based AI-powered legal solution that consists of three main components.
- DISCO Ediscovery – automates much of the ediscovery process
- DISCO Review – AI-powered legal document review
- DISCO Case Builder – allows legal professionals to collaborate across teams to build a case
The solution was built “by lawyers, for lawyers,” so there’s every reason to believe they nailed the product-market fit. Evidence of that is a client base that includes 171 of the AmLaw 200 law firms, including 49 out of the largest 50 firms. (The highest-grossing law firms by revenue in the United States are commonly referred to as the “AmLaw 200.”) In total, more than 900 clients have signed up to the DISCO platform which brings in revenues based on customers’ actual usage of the solution. Says the company:
Customers generally do not commit to purchase a specific amount of usage on our solution and their usage can fluctuate based on the number and nature of legal matters they have at any particular time.Credit: DISCO S-1 Filing
While 13% of revenues in 2020 were tied to “committed minimum usage” contracts, the majority of revenue growth will solely be a function of how useful the product is to a client. Aside from a small ‘Rona-induced hiccup, quarterly revenue growth appears on the right trajectory for DISCO.
Most firms won’t adopt a new solution with open arms, but will trial it first, then increase usage based on usefulness. Therefore, a key indicator of success for DISCO becomes “retention rate,” which at the end of 2020 was 127%. That means new clients are spending more over time which means they’re using the platform more over time. Over 95% of DISCO’s revenues are coming from within the United States with no single customer accounting for more than 5% of total revenues. (The U.S. has more lawyers per capita than any other country.) Outside of top law firms most people haven’t heard of, DISCO’s reference clients include names like Accenture, DISH, Lyft, Natera, Peloton, Southwest Airlines, and WeWork.
There’s also a network effect happening here. The more people that use DISCO’s platform, the more likely it is to be adopted by those who aren’t. Customers become “product champions” who encourage other firms to adopt the solution to make life easier for everyone. The more the platform is used, the quicker it will grow. DISCO calls this a “product-led growth engine.”
In 2020, approximately 50% of DISCO’s users were at organizations that were not paying customers, but used their applications in collaboration with one or more existing customers. That’s a great way to collect new leads without having to lift a finger. Once a customer begins storing case files on the platform – there are more than 10 billion stored currently – they’re incented to continue using it as well. That’s all delicious training data for DISCO’s AI algorithms, making them more effective as time goes on.
TAM and the Competition
The worldwide ediscovery software and services total addressable market (TAM) is forecasted to be $14.7 billion in 2021, and that spells plenty of growth ahead for DISCO. But the company thinks the opportunity is much bigger than that. DISCO counted the number of firms globally with more than 100 employees, then segmented them by size. For each size cohort, they then multiplied the number of companies by the revenues they’ve been able to realize today for companies of a similar size. The end result is $42 billion worth of TAM just waiting to be captured. It’s not blue ocean though, as the company notes a number of competitors offering cloud-based ediscovery services including:
- Everlaw – Oakland startup offering a platform for document analysis to law firms, government, and corporations. Raised $96.6 million from investors that include Andreessen Horowitz.
- Logikcull – San Fran startup offering cloud-based solution to solve the challenges associated with eDiscovery. Raised $39 million in disclosed funding so far.
- Relativity – Chicago startup with an ediscovery platform and a tool to proactively detect regulatory misconduct. Has 300,000 users including 198 of the AmLaw 200. Raised $125 million so far and recently acquired AI startup Text IQ.
- Reveal – Another Chicago startup – a “global provider of eDiscovery, compliance and risk technology.” Has taken in $1.1 million in funding and made three acquisitions in past several years.
For whatever reason, legaltech firms have decided now is the time to go public – LegalZoom, Intapp, and now DISCO have all recently announced plans for an IPO. We wouldn’t be surprised to see more legaltech firms take the plunge before the music stops. Lots of smaller players in the market means we should see some consolidation as everyone gets to see what’s under everyone else’s skirts.
To Buy or Not to Buy
We’re currently holding two fintech stocks – DocuSign (DOCU) for a play on legaltech, and Adyen (ADYEN.AS) as a play on payments technology. We’re not actively looking for a second legaltech stock, so the question is simply this. Does DISCO provide a better alternative to holding DocuSign? A big difference between the two is the aspect of legaltech being addressed. DocuSign deals with the lifecycle of contracts, legal documents that are ubiquitous across every industry and job function. DISCO provides a platform that allows lawyers to manage the lifecycle of court cases, something that most firms want to avoid. DocuSign is also a clear leader in what they do, and leaders are where we want to be placing our bets.
As with any planned IPO, investors are best served to wait until the dust settles following the first days of trading. Accumulate shares over time, as opposed to all at once, to minimize market timing risk. It will be interesting to see what weightings popular fintech ETFs will give all these new fintech stocks, should they decide to add them, and we don’t see why they wouldn’t.
Similar to Intapp, the total value to be realized is for existing customers to adopt DISCO’s tools as an indispensable part of any lawyer’s job function. Since law firms do nothing but deal with court cases, it’s immensely useful for them to have an ediscovery solution that saves labor costs while simultaneously bringing them into the age of digital transformation. Litigious countries are where the most use will be realized. Maybe it’s time to start studying German?
Should the IPO go through as planned, shares of DISCO will trade under the ticker LAW.
Become a premium member and get access to hundreds of premium articles, reports and additional content.
Nanalyze Premium is your comprehensive guide to investing in disruptive technologies. Read by the top investment banks, management consultancies, VCs, and research houses. Trusted by over 100,000 institutional and retail investors. Covering disruptive technologies for nearly two decades.