Jason Lemkin wrote an excellent analysis of the CS Disco’s loss of$2.25 BILLION since their IPO. Harry DeBari’s additional commentary caught my attention and got me thinking about the “eDiscovery IPO curse” that Barry Murphy and I used to joke about. eDJ Group was a boutique analyst group covering a ‘nascent market’ back then. The Guidance Software (Encase) IPO was a big deal and a bigger let down. The potential combination of large revenue and tech 5x-10x valuations had angel investors and VCs demanding briefings on every eDiscovery service provider launching their home-grown software. Depsite that promise not many managed to go public.
Most had decent revenue and growth as private companies. Lemkin is right that Logikcull’s sale for $300m on just $2.5m in VC funding was an excellent market move by Andy Wilson. Here is where I differentiate eDiscovery startups that are acquired vs. those that go public. Technology acquired by global service companies generally just drive service revenue (Attenex/Ringtail for FTI is a good example). Some languish before being spun or sold (Concordance to LexisNexis to CloudNine). So why do most public eDiscovery companies wither on the open market?
My theory is that the legal market is a services market tied to the largest corporate/regulatory matters. Staying on the cutting edge requires massive development investment and a diverse, evolving customer base, i.e. AmLaw 200 law firms. Enterprise customers want stability and workflows customized for their verticals. Startups target firms with big cases with relatively simple SaaS sales. Few make the transition to the long cycle enterprise sale model despite the giant infusion of shareholder cash.
A quick chart of normalized stock prices over the first 72 months following IPO helps illustrate the spike of hope followed by waning market confidence when public eDiscovery company revenues fail to multiply. Selling a vision to investors is not the same as sustaining YTY growth exceeding the tech indices. Thank you for indulging my now amateur analyst pontifications. It is time to get back to testing Purview and other enterprise technologies for my clients and managing those monster matters. I hope to see as many of you as possible in New York!
Greg Buckles wants your feedback, questions or project inquiries at Greg@eDJGroupInc.com. Reach out for a free 15 minute ‘Good Karma’ call if he has availability. He solves problems and creates eDiscovery solutions for enterprise and law firm clients.
Greg’s blog perspectives are personal opinions and should not be interpreted as a professional judgment or advice. Greg is no longer an investigative journalist and all perspectives are based on best public information. Blog content is neither approved nor reviewed by any providers prior to being published. Do you want to share your own perspective? Greg is looking for practical, professional informative perspectives free of marketing fluff, hidden agendas or personal/product bias. Outside blogs will clearly indicate the author, company and any relevant affiliations.
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