The Daily Journal’s “slow and terrible” road to LegalTech success
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“All of this automation and effective software is going to happen, but it’s incredibly difficult,” remarked legendary value investor Charlie Munger at the 2020 annual meeting of the Daily Journal Corporation, which he chairs, on legal technology.
While the Daily Journal has traditionally been a legal publisher, it has grown somewhat discreetly into a legal technology (“LegalTech”) company, with over 70% of its revenue generated by its litigation-focused Journal Technologies division.
While Charlie Munger’s comment is specific to this business, it captures the zeitgeist for LegalTech in many ways. While automation and innovation are the logical thing to do in the legal world in the long run, it doesn’t mean an easy path – and in the long run it could still be a long way.
Legal tech is at an interesting tipping point. On the one hand, the sector seems to be accelerating to maturity, which can be seen in rising valuations, capital inflows and even LegalTech-specific SPACs. However, due to a variety of industry-specific factors, the challenges remain and are likely to continue. “Hardware is heavy” is an old saying used by investors to explain their preference for asset-light software companies, and while this is essentially different, LegalTech’s innate challenges can be of similar magnitude.
The development of the Daily Journal and what Charlie Munger learned at its annual meeting provide a unique opportunity to assess LegalTech’s challenges while highlighting its opportunities. As Munger pointedly warned, however, success is “It won’t be easy and it won’t be quick. ”
Daily diary: background & overview
The Daily Journal, as Charlie Munger explained, “began as a public rag. . . and turned into a very successful legal daily newspaper “which focused on publishing appellate reports -” an ideal niche. . . [for a] small but very profitable paper. “
The Daily Journal currently publishes 10 newspapers. The largest are the Los Angeles Daily Journal and the San Francisco Daily Journal, which were founded in 1888 and 1893, respectively, and had 6,300 subscribers as of September 30, 2020. Other major company titles include Daily Commerce, The Daily Recorder and Inter-City Express. The revenue model consists of around 67% subscriptions and 33% advertising.
Worldly shifts have put pressure on this business model and the readership has declined. “Technological change is destroying the daily newspapers in America. . . The income goes away and the expenses stay and they all die, ”said Munger at the annual meeting.
Along with an enviable portfolio of marketable securities, the Daily Journal has met these challenges by developing a “second deal”. . . to replace the newspaper’s economic strength that is at risk, and that is Journal Technologies. “Munger described Journal Technologies as” a computer software company helping courts and government agencies replace error-prone, inefficient processes with simpler and better processes that software executes. ”
In particular, the department offers “case management software and related services for courts and other judicial authorities” that “use the Journal Technologies product family to support the electronic management of cases and information, to contact other critical judicial partners and to provide electronic services to them to expand the public, including a secure website where traffic quotes can be paid for online, and members of the bar. ”The suite of products is divided into three core products,“ eSeries ”, the most popular of which is eCourt®.
Journal Technologies was developed through a disciplined M&A strategy followed by extensive ongoing investment and R&D. The business was built through three main transactions as shown in the table below:
The end of 2012 and 2013 happened to be the best time to buy a LegalTech business. These years marked the bottom of LegalTech investments, but preceded a boom in innovation and technological maturation. In other words, a fundamental value investment.
In 2013, New Dawn achieved annualized sales of around 12.7 million US dollars with a small operating loss, which means a purchase price of around 1.1 times the futures contract. In contrast, it has recently been reported that some LegalTech companies are generating 50 times their sales with comparable sales.
The decade between 2011 and 2020 was a time of great transition for the Daily Journal. The two critical interrelated issues were the decline in traditional business – where sales fell 53% from $ 31.5 million to $ 14.7 million – and the rise of Journal Technologies, where sales rose 1082% from $ 2.98 million to $ 35.25 million.
These topics are presented in the following table, which shows the revenue for the two reporting segments of the Daily Journal: (i) the traditional business, which is comprised of the newspaper business, and (ii) Journal Technologies.
As shown above, Journal Technologies accounted for only 9% of sales by the 2012 and 2013 transactions. As a result, the Daily Journal’s business mix changed quickly and dramatically, and the Journal Technologies division’s revenue surpassed its traditional line of business by 2014.
The following graph shows the total revenue of the Daily Journal as well as the share of Journal Technologies. There are two notable food stalls. First, the company’s total sales ended the higher period despite the continued deterioration in traditional business. Second, the Daily Journal grew into a LegalTech-centric company as Journal Technologies’ revenue share rose to 71% by 2020.
Journal Technologies’ growth, however, has not been linear or straightforward. In the four years following the New Dawn and ISD acquisitions, the unit’s return on sales actually shrank before seeing strong growth in 2019 and 2020.
Journal Technologies’ revenue mix could help explain the uneven development. The following graphic shows the three revenue drivers for the segment: (i) license and maintenance fees (the SaaS business); (ii) consulting fees; and (iii) other public service fees. The purple line shows the percentage of revenue from recurring license fees compared to more volatile consulting and service fees.
An important aspect is that despite the lower predictability, fees for consulting and public service were decisive factors, averaging 34% of total sales and in some years even 44%. LegalTech companies often discuss whether they should offer advice-like services to complement a core SaaS offering. A possible lesson from the experience of the Daily Journal is that the approach can have advantages despite a sales profile that differs from SaaS ARR, also because complex products can require a higher touch.
Indeed, for LegalTech companies, the human capital-intensive dimension of business can also be a function of the underlying technology that often uses AI. As the venture capital firm Andreesen Horowitz noted: “We have found in many cases that AI companies simply do not have the same economic structure as software companies. Sometimes they even look more like traditional service companies. “
Daily Journal strategy and lessons for LegalTech
The Daily Journal’s successful transition from a newspaper group to a LegalTech platform offers several key insights to gamers across the LegalTech ecosystem.
- First, the Daily Journal didn’t start from scratch by entering a completely unknown sub-vertical technology. Instead, the company used its existing strengths and relationships with the judiciary and government agencies to grow the business without completely changing its core.
- Second, the strategy was very forward-looking – not reactive. The Daily Journal was first acquired in 1999, long before LegalTech was a household name. Later deals followed just when everyone else was selling, and it made it possible to acquire good quality assets at low prices with a large margin of error.
- With a nuanced appreciation for the complexity of the space, the Daily Journal was patient and disciplined in building Journal Technologies. As Charlie Munger explained, unlike traditional SaaS companies – which “can be a goldmine because they’re just standard and you crank them out and everyone uses them” – “a branch of software that is very, very much in itself difficult is where everything takes forever is very difficult to do. “Because of this complexity[a] Lots of people just totally avoid it. . . They just want to get some pieces of software out and know where everything is in the cloud – whatever they’re doing – and count the money. ”
Differentiation between SaaS and LegalTech
Charlie Munger’s remarks at the Daily Journal’s 2020 annual meeting hit the nail on the head regarding some of the differences between LegalTech and other SaaS products.
Journal Technologies’ customer base consists of government entities that “all have special requirements and almost all are quite bureaucratic”. While these challenges may be more acute for Journal Technologies, highly complex customers and procurement processes are generally inherent in LegalTech.
At the same time, his tailor-made and detail-oriented work requires “armies of people”. Since the company’s work involves processes that are essential to the administration of justice, quality is important from both an economic and a normative point of view. The business bears little resemblance to an app; It can’t be plug and play with 80% operating margins – mistakes matter.
As a result of this industry-specific complexity, Charlie Munger aptly stated that scaling a LegalTech business “It won’t be easy and it won’t be quick.”
This facet doesn’t just apply to Journal Technologies’ business. For example, DocuSign, the darling of the stock markets in the COVID era, had no significant sales for the first ten years in the first ten years from 2003 to 2010, but subsequently saw extremely rapid growth according to Form S-1 of 2018.
However, the success of companies like the Daily Journal and DocuSign also shows the enormous potential of LegalTech. Journal Technologies is growing steadily with high sales quality, a strong customer base and huge green fields at home and abroad.
It’s “a big market” and Journal Technologies “could have a big share of it,” said Charlie Munger.
“[W]We cannot guarantee that we will be successful, but I think it is likely. I just think it’s going to be slow and terrible. “