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1/ Atrium failed because they tried to create a vertically integrated law firm by doing too much at once. Note that my opinions are based on speculation and hearsay. But I won’t let that stop me since this is, after all, Twitter. That being said, here we go.
2/ Atrium was an attempt to create a vertically integrated law company focused on serving early stage startups, consisting of two layers: (1) Legal Services and (2) Legal Tech. There was a third, more important layer, which I’ll get to in a minute.
3/ Creating a vertically integrated law company is not that controversial. Many Biglaw firms are trying to do this as well, creating their own captive ALSPs and acquiring/inventing their own tech. E.g. Wilson Sonsini/SixFifty; Fragomen/SimpleCitizen.
4/ To achieve vertical integration, it helps to dominate one layer before moving up or down the value chain. E.g. Standard Oil monopoly in refining, before moving to the high-risk high-reward world of exploration. (Don’t know why that was the first example to come to mind.)
5/ What about Atrium? What did they dominate first? Not legal tech, since they were building that from scratch. What about the legal services? That’s not it either. Atrium lawyers were talented, but they were up-and-comers, not established practitioners with massive reputations.
6/ But that’s OK. Because they did dominate in one specific area: Business Expertise. Specifically, they offered clients access to Kan’s knowledge of startups, which importantly, included fundraising advice. I believe this was the true source of their traction early on.
7/ I don’t know how much law revenue was generated from clients who wanted Kan's business expertise. But it must have been significant. Similar to firms that employ famous ex-politicians with limited legal expertise, who can bring in clients for cross selling other legal servcs.
8/ So why didn’t this model work? I’m not exactly sure but I have a few ideas. I’ll repeat this again for emphasis: This is based on speculation and hearsay. I never worked for Atrium, and although I have friends who did, we never talked in detail about their internal operations.
9/ Atrium tried to add too many layers at the same time. E.g. if they had only focused on legal services, and created a firm off one rainmaker (Kan), and later added a proprietary legal tech layer, I think that could have worked. Why didn’t they? Because subscription revenue.
10/ VC backed cos. need sub rev, because it’s valued at a premium. Services revenue, especially for their initial market (startups) is one-off. I mean, how often does a client need to incorporate? How much repeat business can you get from a startup that has 10 employees?
11/ One-off revenue streams keep valuation low. Just ask any law firm owner who’s trying to sell their practice. What are the multiples buyers are willing to pay? I’ve heard 1x to 3x. For reference, it was recently reported that legal tech unicorn Ironclad was valued at 50x ARR.
12/ Now let me be clear. You can still create an incredible business without subscriptions. My former firm, Sullivan & Cromwell, generates an absurd amount of non-recurring revenue. But building that type of firm/company is a completely different game.
13/ What about Atrium's tech arm? Could it generate sub rev? Absolutely. Unfortunately that part of the business was plagued by other problems. It didn’t have product market fit. The tech never caught traction among non-Atrium lawyers, and was used mostly by Atrium’s own lawyers.
14/ By the way, the above is what I suspect Justin Kan was talking about in his AMA when he said to avoid “fake markets” and how “adding more money” doesn’t solve lack of product market fit.
15/ When you add it all up, it was only a matter of time before they lost steam. Without rapidly growing subscription revenue, and without Kan’s constant involvement as a rainmaker, it was probably challenging to find a path to the next round of funding.
16/ To Kan’s great credit, it sounds like he saw the writing on the wall, and shut down the company before burning even more money. It’s also become apparent that Kan has tremendous self awareness, just by looking at his AMA responses.
17/ Why am I writing about Atrium today? Well, because I’m worried. I’m concerned that the only thing casual observers will remember from the Atrium story is that the legal industry is not ready for innovation. And that couldn’t be further from the truth.
18/ Atrium failed because of poor execution and planning. They had wonderfully talented people who unfortunately applied the wrong lessons of company-building to a space that required a bit more nuance and a slightly different approach.
19/ If you enjoyed this post or want to hear more speculation about legal tech, follow me on Twitter. I'm a former lawyer who's been in the space a few years now. In my free time, I attempt to sell & market legal tech on behalf of Evisort.
