I keep hearing a version of the same line from CIOs, innovation leads, and GCs sizing up a legal tech vendor: “Andreessen Horowitz is investing in them, they’re smart, so the product must be good.” Financial stability absolutely belongs in a vendor risk management program. But using VC backing as a proxy for that stability is a category error.
Most Investments Don’t Succeed
Venture Capital firms (VC) investors are generally sophisticated and well-resourced. But what they’re optimizing for is a high risk, high reward outcome that isn’t a useful signal for buyers of any technology. VCs are not trying to “pick the winners” in the same way law firms are.
Instead, their approach is to spread investment across many high-potential companies, know that many will fail, and count on a small number returning 100x their investment or more to carry the entire fund. Research on outcomes puts the failure rate for venture-backed startups at around 60%. That is far beyond the risk tolerance of most law firm and corporate legal teams who are seeking stability and longevity from all their vendors.
This article explains what a valuation really tells you, what critical information about private companies stays hidden, how to navigate those gaps, and the new reality for legal buyers.