The need for modernization in the legal industry helped drive RF Investment Partners’ recent minority investment in Nextpoint, a Chicago-based company that develops software for law firms.
“One of the things that stood out to us about the market is, you have an industry that’s really behind on technology and historically been a slow technology adopter,” Jacob Gordon, a director at RF, told PE Hub.
The legal software industry is still green. There are still a lot of manual processes in the legal world, meaning there’s an opportunity for it to become automated, leading to potential sales in the market. Gordon said law firms tend to have really good retention dynamics. Once they adopt a technology solution, they tend to commit to it.
eDiscovery specialist
Founded by CEO Rakesh Madhava in 2001, Nextpoint specializes in electronic discovery, which is software that preserves, collects, reviews and exchanges information for the purpose of using it as evidence. The eDiscovery market is on a path of growth. According to SkyQuest Technology Consulting, the eDiscovery market was worth $11.74 billion in 2022 and will be valued at $23.45 billion in 2030.
Nextpoint’s competitors include traditional services as well as eDiscovery software providers. A big player in the market today is Chicago-based Relativity, which is also private equity-backed. Silver Lake made a growth investment in Relativity in 2021.
“They’re a formidable competitor,” Gordon said. “But Relativity is really geared towards selling to the higher end of the market, the top 100 law firms in the world.”
Though Gordon said Nextpoint has historically been strong in the market for law firms with fewer than 50 employees, the company is making progress moving upmarket. “We can service both the smallest customers and the largest customers.”
RF also wants to continue to grow and invest in Nextpoint’s eDiscovery products. Nextpoint has released two products. First is a data mining solution, that can track down text messages, emails, documents and social media posts as part of the eDiscovery process. Next, is a litigation suite, which is a workflow product that helps law firms manage the entire litigation process.
Though Nextpoint is RF’s 12th investment in the software sector, it is the firm’s first investment in the legal software subsector. It won’t be its last.
“We’re actively pursuing new opportunities and anything touching legal,” Gordon said. “We’re really excited about the market. And we would love to invest in other companies that fit our investment thesis, parameters and characteristics.”
First institutional capital
RF typically invests in healthcare, business services and industrial or consumer businesses that typically seek EBITDA margins of a minimum of 10 percent. The margins can be as high as 40 percent.
RF typically looks for software businesses that have $5 million annual recurring revenue and above, with strong retention and typically have a clear path over the next 18 months to cashflow neutral, Gordon said.
“They typically are founder-led, and we’re usually the first institutional capital in the business,” he added. The firm typically helps companies with growth goals, such as building up their infrastructure, hiring their first CFO and refining their go-to-market strategies.
Gordon said RF is looking to new investments in other leading technology businesses. It is also focused on companies that specialize in workflow automation and touch data and businesses.
In February, RF announced an investment in Phoenix-based Ally Waste Service, a valet trash and recycling provider for multi-family housing communities, student housing and senior living facilities.
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