Investment in AI and legal technology has surged, creating inflated valuations and high expectations. Many start-ups, particularly those building products on top of large models like ChatGPT, are now facing the same risks that preceded the Dotcom crash. A market correction appears likely.
Law firms should proceed cautiously, focusing on sustainable business models, contractual protections, and long-term value.
Where We Are Now
Over the past two years, the legal technology sector has seen unprecedented investment, much of it driven by enthusiasm around AI. Start-ups such as Harvey have achieved valuations of around $5 billion, despite limited trading history. This mirrors the Dotcom boom of the 1990s, when companies were valued on promise rather than profit.
When that bubble burst, only those with genuine business fundamentals survived.
Lessons from the Dotcom Era
The Dotcom crash showed how easily excitement can outpace reality. Many companies raised huge sums of money without clear paths to profit, and most disappeared when investor confidence faded.
A small number with sustainable models – Amazon, Google, and others – emerged stronger. The same pattern is now visible in AI-driven legal technology: rapid funding, unrealistic valuations, and a coming period of consolidation that will leave a handful of resilient players.
Why the Market Is Fragile
Several structural weaknesses are now visible in legal tech:
Thin differentiation: Many tools rely on external AI platforms such as OpenAI, meaning they lack defensible technology or proprietary data.
High running costs: Using large language models (LLMs) requires expensive computing power, keeping margins thin.
Valuations disconnected from reality: Traditional valuation methods suggest many firms are overpriced relative to their size and maturity.
Dependence on a few major providers: Most are exposed to changes in pricing or licensing by OpenAI, Anthropic, or Google. These major providers are also increasingly becoming competitors in their own right.
Competition from incumbents: Established platforms such as Thomson Reuters, LexisNexis, and Microsoft are embedding AI into their systems, reducing the need for smaller standalone tools.
Two behaviours in particular are now exposing these weaknesses – heavy discounting and rapid cash burn.
Vendor Discounting and Valuation Pressure
A growing number of legal technology providers are offering substantial discounts on licences and long-term contracts. At first glance, this may seem attractive for firms seeking to reduce costs, but it often reflects deeper commercial pressures.
Many vendors are under pressure to demonstrate rapid revenue growth to support high valuations or attract new investors. Discounting helps them quickly sign clients and lock in future revenue, even if it erodes margins. In practice, this means that some vendors are prioritising short-term optics over long-term sustainability.
This behaviour is risky for both sides. For vendors, it burns cash and inflates acquisition costs. For clients, it creates hidden exposure: once embedded, switching becomes difficult, and price increases after renewal can be significant. In some cases, aggressive discounting is an early indicator of financial strain or an attempt to sustain existing valuations before another funding round.
How to Assess Discounting Offers
- Short-term discounts tied to pilots or capped usage are generally low risk.
- Multi-year discounts with limited exit flexibility may signal cash-flow or valuation pressure.
- Bundled or “free” seats that exceed your actual needs suggest aggressive revenue booking.
- Pressure to sign before a quarter-end or funding round is a red flag for revenue chasing.
Law firms should treat large or inflexible discounts as possible signs of distress. Always seek transparent renewal terms, data portability rights, and the flexibility to exit agreements without penalty.
Cash Burn and Continuous Fundraising
A further signal of stress across the sector is the exceptionally rapid rate at which many AI-driven vendors are burning through cash. Companies such as Harvey have undertaken multiple large fundraising rounds in quick succession – raising sums that seem disproportionate to their stage of commercial maturity.
This behaviour suggests heavy cost structures, especially related to foundation model use, and a reliance on external capital to sustain operations. While aggressive fundraising can indicate ambition, it often reflects a valuation treadmill, where companies raise money simply to justify prior valuations rather than to fund real expansion.
For clients and investors alike, this represents a continuity risk: if capital markets tighten or investor appetite wanes, the service could collapse abruptly. Law firms should therefore assess not only the quality of a vendor’s technology but also its financial discipline and runway – how long it can operate before needing fresh capital.
What Happens Next
The market is likely to experience a period of consolidation and correction over the next 24 months:
- Valuations will fall as investors become more selective.
- Many start-ups will fail or be acquired by larger players seeking teams or technology.
- Established platforms with deep workflow integration, will dominate.
- Clients may face service disruption as smaller suppliers close or merge.
This shake-out will echo the post-Dotcom cycle: fewer players, but stronger and more sustainable ones.
What This Means for Your Firm
If you are considering investing in legal tech
- Focus on companies with genuinely unique data, technology, or intellectual property.
- Look for integration into established legal workflows and demonstrable user adoption.
- Assess profitability after accounting for infrastructure and model costs.
- Insist on a clear, measurable path to sustainable revenue.
If you are already heavily invested
- Map your exposure and identify which tools are critical to day-to-day operations.
- Review contracts to ensure rights over data and continuity protections.
- Negotiate step-in rights in case a vendor fails or is sold.
- Reduce reliance on a single AI model or supplier.
- Benchmark current tools against integrated alternatives such as Microsoft Copilot.
What You Should Do Now
Next 30–60 Days
- Reassess vendor contracts for exit flexibility and pricing transparency.
- Build internal awareness of which systems are high-risk dependencies.
- Test data export and portability processes.
- Quarterly
- Conduct vendor “health checks” covering financial strength, investor backing, and funding cycles.
- Rationalise your technology stack to focus on fewer, better-supported platforms.
- Develop internal AI capability so vendors plug into your infrastructure, not the other way around.
- Monitor the market for early signs of vendor distress: reduced support, slow updates, or sudden pricing changes.
Conclusion
Investor excitement for AI has outpaced business fundamentals in the legal tech sector. A correction is both likely and necessary. The next 24 months will separate genuine innovators from those built on borrowed technology and speculative funding.
For law firms, the most effective response combines disciplined investing, diversification, and a focus on tools that clearly enhance legal service delivery.