Sifted - The legal sector's GenAI race

Good morning there,

In April 2023, four Tinder product managers looking to launch their own startup sat down to discuss what industries were ripe for disruption with generative AI. They settled on the legal sector — one that’s full of laborious, document-based tasks.

Three months later, they founded LegalFly to take advantage of what cofounder Ruben Miessen calls a “generational market opportunity”. LegalFly’s €15m Series A, which it’s announcing today, is the latest in a string of raises for European GenAI legaltech startups. And they’re drawing some of the most notable names in VC. I dig into the rise of the sector below.

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Elsewhere today:

• Is the climate tech funding gap real?
• Venture debt on track for record year.
• What it takes to raise as a deeptech hardware startup in 2024.

— Kai Nicol-Schwarz, reporter

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The race to deploy GenAI in the legal sector

Speak to any lawyer and you’ll soon discover that the job is a far cry from the fevered excitement of a courtroom drama. Behind the scenes, there’s an endless amount of laborious and typically manual tasks like drafting, reviewing and negotiating contracts and other legal documents that have to be done manually daily.

It was this realisation that led four product managers at dating app giant Tinder, frustrated by what they saw as a lack of AI adoption at the company, to jump ship and found Belgium-based LegalFly last year. The startup is building a generative AI copilot for lawyers which eventually, it says, will be able to automate entire workflows in the legal profession.

“We were looking at what GenAI was good at, which is synthesising data and generating content,” says founder and CEO Ruben Miessen. “What industry works like that? Law, and it does it all in a very manual way.”

LegalFly — which has just raised a €15m Series A — isn’t the only European startup to spot a big opportunity for GenAI in the legal sector, and investors are increasingly pulling out their cheque book as they look to outcompete each other to pick winners in the space. 

In the UK, in the past six months alone, Luminance raised $40m, Robin AI picked up $26m, Definely $7m and Wordsmith AI $5m. Sweden’s Leya Law also raised $10.5m.

Those rounds have attracted some notable names in VC. 

Revolut’s Nik Storonsky’s family office QuantumLight, the founder-led firm Plural and Episode 1 have backed Robin AI. Notion Capital — which counts unicorns like fintech GoCardless and SaaS platform Paddle among its portfolio — put money behind LegalFly. Index Ventures and General Catalyst invested in Wordsmith AI. Leya Law got backing from Benchmark.

So why all the attention?

“The legal industry is a global behemoth that's seen minimal innovation since the advent of Microsoft Word in the 90s,” says Carina Namih, partner at Plural. “GenAI — especially with a human in the loop to keep accuracy high — is ideally suited to drafting, editing and negotiating legal documents.”

That’s got VCs on the hunt for a horse to back.

“We [had] been looking at making an investment in the [GenAI legaltech] market for sometime,” says Jos White, general partner at Notion Capital — which led LegalFly’s Series A.

Law firms and legal teams have cottoned onto the opportunity, too, says Miessen. “Everyone is hiring a head of AI. Why? Because they’re ready to buy [AI solutions] now.” It amounts to what the LegalFly founder calls a “generational market opportunity”.

But the sector is heading for a showdown.

Glance at the homepage on the site of any of the GenAI legaltech startups mentioned in this column and you’ll notice they’re all promising to do similar things — like review and draft contracts and legal documents. 

“It’s a race at the moment,” Definely CEO and cofounder Nnamdi Emelifeonwu told Sifted in May. “There will be winners and losers.”

It’s why LegalFly went back out on the fundraising roadshow just months after closing a €2m seed round in November 2023. Players in the market need to act quickly to snap up as much market share as possible ahead of the competition, Miessen says.

So which startups will come up trumps in the sector? How long will it be until we see a European GenAI legaltech unicorn? Get in touch and let me know. 

— Kai Nicol-Schwarz, reporter

🇩🇪 Munich-based Alpine Space Ventures has closed its first fund at €170m. It’ll seek to do 10-15 deals, mainly at Series A, into companies focused on the industrialisation of space, and connectivity and data. It’ll write tickets up to €5m.

🤔 Is the climate tech funding gap a myth?

😯 Venture debt is on track for a record year.

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Munich-based VC First Momentum has released the ‘deeptech napkin’ — its take on fellow German VC Point Nine’s SaaS funding napkin — that aims to distil what it takes for deeptech hardware startups to raise in 2024 into a neat 4x7 grid. 👇

European VC rounds raised in 2023 with the participation of at least one crossover investor — which invest in both the public and private markets — fell from $39bn in 2021 to $11bn in 2023, according to a new report from growth equity VC Revaia along with PitchBook. 

The report, which tracked the activity of 65 crossover investors between 2018 and 2023, found that those same investors contributed 20% of all European funding rounds last year; it was 33% in 2021 and 25% in 2022.

Also in the data:

• 26% of their investments were at the early-stage — a shift from two years ago when only 10% of their deals were at that stage. 
• The activity of those investors peaked in 2021 when they invested in almost half of all late-stage deals in Europe; last year crossover investors were only in 22% of late-stage deals.

Hannover, Germany-based HERO Software, a SaaS platform for tradespeople to manage work, raised €40m in Series B funding. Eight Roads led the round and was joined by Federated Hermes and Cusp Capital. 

Rome-based Exein, which develops embedded cybersecurity for IoT devices, raised €15m in Series B funding. 33N led the round and was joined by investors including Partech, United Ventures, eCAPITAL and Future Industry Ventures. 

Berlin-based lemon.markets, which provides API infrastructure to help launch investment products, raised €12m in funding. CommerzVentures led the round and was joined by investors including Heliad AG, Creandum, Lakestar, Lightspeed and System.One.

Munich, Germany-based trail, a copilot for AI governance, raised €1.45m in pre-seed funding. CapitalT led the round and was joined by investors including NP Hard and Mozilla Ventures.

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