Money is pouring into legal AI companies, but what do the best VCs actually think of this space? Hey there, I'm Zach Abramowitz and I am the Legally Disrupted on episode 48 of Legally Disrupted. I'm talking about investing in legal startups because that's something I'm kind of back to doing. So, after initially pausing my investments in legal AI after ChatGPT launched, I've been back at it recently. So earlier this year I invested in Sandstone. That company is growing rocket speed. And I'm actively evaluating several other deals.
Now when I asked Jonathan Levy from Y Combinator last year about why YC was investing in more legal companies, I said, 'Does this have to do with the vertical?' And he said, 'No, we don't really care about verticals, right? What we care about is super top talented teams. We're like the NBA draft. We just go for the best entrepreneurs, best athlete on the board.' And he said that right now it is the case that the top entrepreneurs, the top startup founders want to build something in legal.
Now, I've certainly seen this firsthand like top talent is flocking to legal. Look no further than Harvey and Lora, right? But it's not just them. This entire space is attracting a different kind of entrepreneur. Trust me, I've been following the space for a long time, there is a significant and very noticeable upgrade. And honestly, I've got some FOMO, right? If I've been looking at this space for years and now all of a sudden it gets flooded with top teams, you think I don't want to invest? Of course not. I don't want to be the guy who's been looking at legal tech and evaluating it for years, knows all the teams, knows all the crevice, knows all the customers. Sounds like a flex. It is. But I also now have some serious FOMO.
At the same time, this is a dangerous game. Like right now, it's true like the product capability has never been better, but it's also never been easier to replicate these products. You know, before it was acquired by xAI, Cursor was already being pronounced dead in some circles and they had billions in ARR and a customer base that absolutely loved them. You can't talk to devs over the last year without them raving about Cursor. Now, what does that mean then for application layer companies like Harvey and like Lora, especially as Claude, which is the model of the month, gains serious traction and lawyer attention, right?
We've already seen litigators building incredibly powerful proprietary systems directly on top of base models like Claude. By the way, Quinn Emanuel has now been talking about their Claude product. We just saw Freshfields announce that they're rolling out Anthropic licenses to their entire team. So like on the one hand, yes, the teams have never been better, but that also means the competition is stiffer and the stakes are huge with legal AI startups raising eyewatering amounts of cash and getting valuations that we've simply never seen in this sector.
To break all this down and kind of get inside the mind of like how an elite VC is looking at this, today I'm talking with Keith Rabois, a managing director at Coastal Ventures and one of the most successful founders, angels, and VCs of the last 25 years. He's a founder of OpenDoor. He was also an early investor in YouTube, Lyft, Eventbrite, Palantir, like his angels as an angel. By the way, fun fact, Keith was also a litigator at Sullivan and Cromwell and a clerk on the Fifth Circuit Court of Appeals.
So, we discussed number one, why he invested in Spellbook, one of the fastest growing legal AI companies, why he's not an investor in Harvey and Lora, why you're seeing top VCs suddenly pouring money into this space, and because Keith doesn't shy away from politics or sharing his opinion, I asked him about his prediction that the Iran war would finish in just 4 days, where he comes out on the Dwarakish Jensen Wang podcast, and whether the Trump administration is getting good advice on AI. So without further ado, let's get disrupted.
So Keith, really excited to talk to you about this space. First of all, I noticed, you know, and doing a little bit of research on you, I actually didn't know this, that you were an attorney at a major AmLaw 100 firm. How long did that legal career last?
You found my legal background out of my bio? But yeah, I spent a long part of my life practicing law. If you combine law school, clerking and practicing, basically spent all my 20s as a lawyer. So I was for almost four years a litigator at Sullivan Cromwell in both Washington DC and New York after clerking on the Fifth Circuit Court of Appeals.
So like you, I know you've invested in Spellbook and I want to talk with you about that, but just broadly speaking, is any of your interest, and again I don't know how interested you specifically are in legal tech, you know, other than having invested in Spellbook, does that time in the firm inform you at all?
Well, sure. I mean, you know, having practiced law, definitely helps understand the profession, what matters to clients and customers, how lawyers actually do their work. Although, truthfully, I haven't practiced law in 25 years. I'm not so sure there's any changes in the practice of law in 25 years, but in theory, there could have been. Law moves at the most glacial pace you can imagine probably of any profession other than the heavily regulated ones like education and maybe healthcare. So I didn't even have external email when I practiced law. I had a secretary literally who would type up my handwritten notes.
That said, most of the legal tech that we see, not all but most, is interesting. It's an obvious application of LLM. We can talk about why most of the companies that are well known are focused on the commercial and transactional nature of the practice of law. I was a litigator. So I primarily was focused on disputes after commercial agreements were executed. Maybe poorly executed ones, but fundamentally there was going to be a very significant dispute either between the parties to a contract or with a regulator or the government.
When I was involved, I focused mostly on antitrust litigation, intellectual property litigation and some what would be called white collar criminal defense. And so yeah, it helps a bit. I also have a lot of connections still into the legal world. Most of the people I went to law school with are practicing law at the prime of their career unless they've sort of morphed into politics or something. And that can be helpful too in performing diligence, etc. on these kind of companies.
Yeah. And our conversation will morph into politics in the end. But I wanted to ask you, I asked this question to Jonathan Levy from Y Combinator, which was, you know, I see you guys have invested in a lot of legal tech companies even before LLMs arrived, but even more since. Is that because you're bullish about the space? And he said, 'No, not at all. We are just, it's all about investing in talent, and it happens to be that there's more top talent in legal right now.' I see you're nodding your head. Is that how you look at it?
Yeah, I mean I have no personal interest in investing in a particular domain, but we're in the business of investing in the best founders on the planet. And historically, the best founders on the planet were rarely interested in the legal field, in reorienting law or improving the practice of law, or didn't understand it. You do see many top tier teams focused on innovation in the legal sector right now and so it does make it easier to invest, to follow the talent as Jonathan suggested. That is definitely my model. But I don't have any top-down organizing principle that says hey let's go find some more legal AI.
That said, I do think the logic of LLM being applied to law is pretty obvious. It's not surprising to me that other than coding and possibly customer support that law is at the frontier of adoption. That makes tons of sense if you think about how work and how the written language works and how law is predicated on the written language and precedent. But I'd be happy investing in a database or a consumer application. But I follow wherever the best people on the planet kind of want to take their lives. And if they want to practice law, they want to improve law, if they want to change law, that's great.
Do you think it's getting harder to find billion-dollar opportunities in this space? Meaning, it feels very much to me like yes, it's a great application of the tools, like you said, it's kind of obvious, but ultimately, I do sometimes step back and think like, how does legal compare if a VC like you is looking at a company that's in defense tech or that's coming up with new autonomous drones. That actually sounds like a bigger market opportunity to me. And I think the question is not just like legal versus other verticals but I'd like to get your sense of even software, is it obvious today that a software company is as exciting to invest in as it was maybe 10 or 15 years ago or are we kind of past that point where these are billion dollar opportunities and it feels like there's very mixed signals.
I think the details really matter at the micro level. Any one company can be incredibly important, generate incredible value for shareholders and for investors. So for example, climate tech quote unquote was a terrible field, but Elon created Tesla, which would have been one of the best investments in the history of the globe. So I think you need to find Elon's, not find climate. And in software, I think traditional software is under a lot of scrutiny and for some substantially serious reasons.
First of all, the ease of creating new software, the ease of creating integrations, which were historically a significant moat, those have all changed in the last year or two. And so the workflows that used to protect incumbents with mediocre software I think are also under attack because either recreating workflows is pretty easy or agents quote unquote are going to perform the workflow instead of humans and or there's a bridge between a historical workflow and the new workflow so you don't have to retrain millions of users. All those things are true and so the people taking sort of a short perspective on traditional software whether in the private or public markets are probably directionally correct.
But the outlier position in one good software company could transcend the returns on all of the cynicism in all the other companies. And it's a sort of interesting place where I said to a founder recently, I'm like if I had seen your product five years ago it would have been the best legal tech product I had ever seen, I would have invested after the first call. But today the ability to replicate these tools is just incredible. And the other problem is like there are attorneys who are really starting to code. I showed a product recently to a guy who had been a paralegal on litigation teams. He came back to me nine days later. He shows me he's got the product. He's built it himself and it's working. It's working really well. And it's like that's not pie in the sky to talk about people coding their own now. Quinn Emanuel, John Quinn was just on Bloomberg talking about how they've built their entire litigation platform on Claude.
Yeah. No, I think a lot of top law firms and corporate counsel may code their own. It's a very realistic option. There are questions you have to think through about doing that and what advantages you have and what disadvantages do you have but it's conceivable where X years ago it was inconceivable.
Now you're an investor in Spellbook and I want to get like your perspective on why you invested there other than the fact that Scott is obviously a super impressive founder. But I did want to flag he has been doing some very good contrarian narrative on this. So he published recently his demo analytics and it was basically showing that the week that Claude Legal came out with their announcement, single biggest number of demos. And what I've explained, I'm curious if this is your perspective or you look at it differently, to people who are asking this question like what's the moat, I'm like I don't think people rip and replace products they really like. That's generally true and certainly over a short time frame. If you expand the time horizon to years I think that's less true, but in months, in one to two years, that's probably true.
Basically, if you're addicted to a product, I could use metrics like NPS and things like that, but ultimately if you're satisfied with the product, you're not really looking for alternatives. And even if you heard about an alternative that sounded great, you're going to discount that by the pain and friction of adoption, some discount about the probability that it's actually that good. So, the more satisfied you are, the more insulated you are for a reasonable amount of time, right?
But the difference being that the SaaS products you're locked in. But I haven't met a ton of people at law firms as an example that love their case management platform, that love their document management system.
Oh yeah. Or just generally who loves Salesforce like nobody. I mean like so you can take like an NPS perspective, take all software. Who loves Excel? Some people. Not normal people but some. But like basically you can take any software product and say like how much do people love it? If the end user is like thrilled versus quote unquote locked in. Like think about the connotation of locked in. Basically, if your users are locked in, it means they probably don't love the product. If you have to lock them in, that suggests that they're barfing. They just don't have a lot of choices. And so, yeah, if people love your product and you wake up every day and you're a satisfied customer, you're just kind of immune to like advertising and marketing and sales. And the less satisfied you are, the more open you are to, oh my god, maybe there's something better. And so I think there's a correlation there.
Going into Scott in particular, when you saw the product, you're obviously aware of like Harvey and Lora and the other players out there. What did you like about Spellbook?
Well, I love Spellbook because first of all, we're not really targeting the practice of law. I just think that the Loras Harveys make no sense. Trying to improve the productivity of American law 100 or 200 or 250 or whatever American law firms that scale bill by hour except for two, and the incentive of improving their productivity is counter to their business model. And even if they were agile enough to adopt to it then you're still probably looking at fee compression not market expansion. So, if you make all these lawyers more efficient that practice at law firms, clients are going to demand lower fees and the net market you're serving just isn't that exciting. You can look at stats if you want. Roughly all software sold to law firms, somewhere around maybe a few billion dollars, maybe up to 10 billion. That's it. That's not a great market, right?
At Spellbook, we've always targeted commercial contracts and we're mostly focused on in-house enterprise teams. In-house enterprise general counsels love to save money. They love productivity improvements. For example, most GCs are under budget pressure. Their CEOs, their CFOs do not want to spend more money and allocate more money to the legal team. Yet, they have more to do than ever before. They have more agreements, more counterparties, more sophisticated regulation to comply with. So what Spellbook does is it frees up time for a legal team to use the same size team or even a smaller team perhaps and get more done. That's incredibly attractive.
So we're really focused on commercial agreements and the number of people who touch commercial agreements is also in the billions. So there's not that many lawyers in the world. There's not that many lawyers in the United States. There's too many, but there's not that many in the grand scheme of things. But the people who interact with contracts, sales people, biz dev people, customer success people, huge number of people, probably a billion and a half people on the planet touch a contract every year. So we're in the business of facilitating, accelerating, improving, basically creating the infrastructure for commercial agreements, which the western world really runs on.
Meaning legal for Spellbook is more like a go to market not necessarily the end customer. You're going where the contracts are.
The legal AI is like a category which is misleading. We're in the business of providing the fastest, safest commercial agreements in as automated a way as absolutely possible. And that does improve the workflow and it does improve the life of transactional attorneys and especially in-house corporate attorneys and should reduce costs and wasted expenditures, but it's mostly about improving outcomes like less mistakes, less exposure.
I bet you the average general counsel at a Fortune 500 company has no idea how much exposure they have in all their agreements because they have hundreds of thousands to tens of thousands of agreements. They have not scrutinized every single one of them and there are terms in each one that could be less than ideal and they don't have a dashboard or an ability to just dive in and see what the hell's going on in my company and Spellbook provides that.
So for example in Q1, that's much more of like a director of sales or a VP of sales mindset. I agree with you. The GC, even when GCs had CLMs, it wasn't like a use case they thought about. They never thought like that's something that should be my responsibility to have like a high level and in the weeds view of all my contracts in and out.
And you know, it's extremely valuable like having this bird's eye view of every agreement my company touches. What if the law changes somewhere? What if the law changes in Georgia? How does that affect us? What if we realized that we got in a dispute with a vendor over here and you know what? We've been doing this kind of deal for like 20 years. How many different deals have we done that have similar not necessarily exact verbatim clauses because that you could probably do with a regular search maybe. Spellbook does really really well. Spellbook basically improves the quality and the visibility of your legal agreements. And the world runs on legal agreements. Like we have this kind of funny, amusing stat that we use that the average NBA game before the lights go on, when the fans show up, there's 150 contracts that go into game day. Or putting the recent NASA launch to the moon, 5,000 contracts.
Do you think anybody has the visibility into all 5,000 contracts?
Absolutely not. But Spellbook-like products do.
Yeah. And that's super interesting thinking because I sort of think of Spellbook and what's exciting about Spellbook is the fact that it diffused to a lot of small and solo law firms who previously just did not buy these products at all, did not buy tech products, also have an incentive to sell. And what I always liked about Spellbook is it kind of proves the point that no, people will buy any technology if it's actually good and useful to them.
Small law firms and individual practitioners have different incentives than large American law companies. Like for example, if I'm running my own little law firm, maybe I can take on new clients that I'm more productive or maybe I can just go home earlier and hang out with my kids. And or maybe I keep more money because I'm more effective. You know, I might have a fixed cost arrangement with a client. So the economics of mid-market and smaller law firms in the United States are more amenable to improvement through technology than the American law 100, which is going to be disrupted one way or the other. Clients are basically going to say, 'We're no longer paying $2,000 an hour for your associate to do effectively cutting and pasting, period.' And half the profits are going to evaporate of the American law firm.
Well, how are you thinking about that at Coastal Ventures? Meaning like I know Fred Wilson wrote this whole post where he said that VC in 2026 was going to be done without a lawyer. You know, it's felt to me like especially like early rounds a lot of times really don't need that much.
Sure. Well, they are kind of done without a lawyer. I mean, people have been doing seed rounds on SAFE notes which basically don't require a lawyer for the most part for like 15 plus years. So seed rounds basically go on autopilot anyway. Series A's are going to be similar. The reality is most venture can be done without a lawyer. Certainly on the VC side because we just do so many deals. I think a founder might want counsel because they don't always understand the document because it may be the first time they ever raise money or second time or something like that. It's an ad hoc transaction but for a typical VC it makes no sense to have lawyers on 90 some odd percent of all investments. There's an occasional corner case, an occasional quirky investment, but they're pretty rare.
You know, we were talking before about all the capital flowing into application layer companies and some of the risks associated with that, with the shrinking cost of software development. When it comes to these kinds of companies, when it comes to the application layer companies, I've heard that a lot of VCs are getting out and there are a lot of healthy secondaries. Are you seeing the same thing when you start getting into the B and C rounds of companies like Harvey, like Lora, like Cursor even? Are VCs hedging their bets? And is there a difference maybe between like tier one VCs and perhaps more middling VCs?
