Other than a catastrophic drop of the pound, the Brexit vote saw an unexpected surge in economical experts. We thought we could join their ranks. So, can something meaningful be said on the effects of Brexit on the Law Tech scene?
First of all, it depends very much on the route UK decide to pursue – but we will look at the broad issues relating to restricted free movement and single market.
What are the consequences?
Lack of skilled workforce
Everyone in the startup world knows how difficult is to find a good tech co-founder or a good developer. If the UK chose to exit the EU, and decided to give up free movement of people, then finding skilled, highly educated workforce could become a struggle and a cost, even with a points based system.
A research carried out last year by Wayra found that around 34% of the UK tech startup workers comes from outside the country and almost 21% from a EU country – we are making an educated guess that proportion are likely to be the same for the law tech niche.
“We have a startup first approach and the global market for skilled web developers is highly competitive, much of this skilled labour is based in Eastern Europe, Russia and the US” says Jimmy Vestbirk, founder of Legal Geek.
In case of a full-fledged Brexit, hiring a skilled worker from the EU would probably cost the price of a visa, ranging in between £1000/£5000 per person. Quite a sum for a newborn, struggling startup, already juggling high burn and lack of funding.
The alternative would be relying on the existing UK workforce, but this also would come at a price: a decrease in the workforce is likely to drive salaries higher. So either you pay good employees more, or you accept to hire employees that are less skilled, or you outsource the work to cheaper countries.
The thing is, we all know what investors look at when putting money on your startup: product, market and team. Having a suboptimal team or outsourced workers make the investment substantially riskier. All this in turn, may cause investors to pull back and look at other tech hubs.
“We need to create a Lawtech hub similar to the Fintech one. That requires us to bring the largest amount of talent that we can together in one place. Curbs on freedom of movement and rights to work make this much harder” said James Moore, founder of F-LEX, a law tech startup providing on demand paralegal services.
In case of a Brexit, differences in regulation becomes detrimental factor for law tech startups.
For example in Privacy laws. The new EU personal data protection rules, enacted this year, will come into force in 2018. By then, the UK should have completed Brexit: will we have adopted the new EU rules anyway, or kept the old ones, or adopted ones totally different? “There is the danger that EU privacy regulators will block companies from storing personal information about Europeans in the U.K.—complicating life for any U.K. company serving Europe”. And this of course would make life more complicated to UK law tech startups too.
But there’s another issue, which has to do with increased complexity in cross border deals. Contracts are already complicated enough under the EU legal framework. An EU investor willing to put money into a UK startup will have to face overwhelmingly complicated legal deals (and legal costs), they will choose to invest within the EU area rather than feeding UK lawyers (more on lawyers soon).
No EU funds
Of course, being out of the EU means no money from Brussels anymore. In total, the British private sector received £1.4 billion in funding from the EU in 2013. Although, to be fair, this was not the common funding route for UK law tech startups. Out of the UK, BY Wass , an Austrian legal tech company, received a grant by the EU commission for developing OpenLaws, an open legal database, with the help of the LSE and the University of Sussex, among the others. In case of Brexit, a similar option would be closed to UK companies that want to follow the same path.
On the other hand, some advocates that EU funding may be replaced by UK funding, once the UK stopped sending money to Brussels. But “may” means uncertainty: which is never good.
Legal market crisis
Here it comes the most peculiar effect for law tech. We are bound to legal services aren’t we? So how is Brexit going to affect lawyers?
The common idea seems to be that lawyers will benefit on the short term but suffer on the medium term. ‘Short term opportunity, long term peril’ as Reuters elegantly put it.
Brexit would lead to a surge in legal work in the first few years: wipe away 40 years of EU legislation and you will create legal uncertainty, where lawyers thrive. But things could get complicated in the medium term: according to a report commissioned to Oxford University by The Law Society, the legal sector will lose between £225m and £1.7bn yearly. Why?
First, if it’s true that, in case of a Brexit, many of the financial institutions will move out of London, many law firms will lose a chunk of their jobs, as they depend closely on the financial market.
Second, the number of foreign investments to the UK will also diminish, so the job for corporate lawyers; mergers could become more complicated and costly, as Paul Gilbert, a competition law expert at Cleary Gottlieb pointed out: Companies may have to undergo an additional merger review by the UK authorities – as they do in Switzerland, for example – as well as making a filing in Brussels. That would create additional burdens of cost, time and administration on merging parties.”
Ok, but law tech?
If the crisis will strike law firms once again, what will be the consequences on law tech? In particular what is going to happen to L2L startups – the acronym by the way stands for lawyer to lawyer – meaning those tech companies that create solutions for law firms.
A couple of options.
One: legal tech could prove to be the solution for lowering costs and help law firm to survive or even thrive in dire straits. I’m thinking of the 2008 legal crisis which witnessed (or maybe triggered?) the birth of the first law tech startups. For some law firms, tech and innovation became a way to improve efficiency and reduce costs. Document automation, e-discovery, contract analysis are a way to make the same work more quickly, better and for less money. Brexit could even make more law firm embrace the lean, high-tech, low cost model made famous by Axiom law or Riverview law.
On the other hand, technology is an investment, and investments are a cost. And some legal tech solutions still cost a lot: cloud computing and some machine learning softwares for instance. Last year, a survey carried out by Lexis Nexis among 250 law firms pointed out how 82% of them planned to invest in tech to be more effective in the following 18 months. Will it still be the case?
I guess this depends very much on two factors: the cost indeed of legal tech solutions (some are cheaper, some are less) and the propensity to risk of lawyers (which, ok, by definition, are quite risk-adverse). But the fact that the legal market may go through hard times with Brexit is not, per se, a negative factor for law tech. It could even be an opportunity. It could.
To sum up, the situation is complex. But a full fledged Brexit (out of the EU, out of the EEA) is likely to paint a gloom future for UK law tech startups. Less qualified workforce, less investments, higher transactional costs due to lack of uniform legislation are enough reasons to prompt entrepreneurs to look elsewhere.
Where, exactly? Many started campaigning for Berlin. And that could be true for law tech startups too: the German law tech landscape has become pretty rich, with a total of around 70 legal startups, covering the full spectrum of acronyms that legal geeks have learned to recognize: L2L (LexAlgo, Lexetius) , L2C (AirHelp, Advocado), L2B (Agreement24).
Jimmy Vestbirk agrees: “Brexit makes London less attractive as a global tech leader. The damage is hard to quantify at the moment but I have already had discussions with startups considering relocating to Berlin or Amsterdam.”
Raymond Blijd, Legal Pioneer, Amsterdam commented: Startups thrive on 3 things: funds, talent, and opportunity. Especially, Legal startups have a particular challenge with opportunity since a legal market, by definition, is restricted by jurisdictions. So while Brexit may open new doors for local legal startups, EU is still a bigger jurisdiction.
Zeit ist es nach Deutschland zu ziehen? [“is it time to move to Germany?” according to Google Translate]