Deal Details
Startup: UpCounsel
Security type: SAFE
Valuation (cap): $28 million
Minimum investment: $250
Where to invest: Wefunder
Deadline: December 9, 2021
UpCounsel began as a traditional online marketplace play. There were lawyers on one side and clients needing legal assistance on the other. Making legal services cheaper and more accessible was a good idea. The company grew into a $50 million concern.
But it ran up against an activist investor. A change of ownership ensued. It was the first of many changes. The company adopted a new business model. Instead of taking a large cut on transactions taking place on its marketplace, UpCounsel began charging lawyers a subscription fee. The fee ranged from $1,000 to $2,000 — averaging around $1,250 a month. In this new model, customers only paid an 8% fee (including a 3% processing charge). And lawyers could not only tap into a rich source of legal requests, but also access multiple practice management tools such as time tracking, billing, collections, messaging and more.
UpCounsel’s new ownership knew what it was doing. The new model works great. Subscription revenue this fiscal year will be around $3 million, more than doubling over the previous year. And unlike before, it’s repeatable. It’s providing a more stable cash flow with low churn. Visitors to the UpCounsel site are also increasing. Some 1.8 million people visited the company’s site in its latest reporting month. That’s more than an 80% increase over the year before.
The difference between the UpCounsel of today and the UpCounsel of a few years ago is night and day. Under its previous owners, profitability was a pipe dream — even during its peak growth period. Now the company is cash-flow positive AND showing great growth. The company is now a much stronger investment opportunity.
And its valuation is no longer $50 million. It is now a $28 million cap. So investors are getting a bargain.
1,000 Is UpCounsel’s Magic Number
An attractive valuation means little if the company itself is lacking in upside. But UpCounsel is brimming with upside potential. It currently has 147 lawyers on its platform — all vetted for quality. It’s adding around 10 to 15 lawyers a month. After this raise, that rate should increase sharply. If all goes according to plan, by 2024-2025 it will have more than 1,000 lawyers on its site. That’s seven times its current pool of lawyers but still less than 1% of the total number of lawyers in the U.S. Given that 73% of the U.S. legal workforce will be freelance or part time by 2025, signing up 1,000 lawyers is extremely doable.
Okay, ready for some math?
With its current number of lawyers, UpCounsel is on track to make $3 million this fiscal year. With 1,000 lawyers, it should then make at least $21 million ($3 million multiplied by seven). That’s a minimum figure because UpCounsel will also be leveraging its lawyers to make more money in new ways in the near future. For instance, lawyers who wish to become semi-dedicated General Counsels for prospective clients must not only undergo a more rigorous vetting process but also pay UpCounsel an extra $750 a month to be considered for these coveted assignments.
How UpCounsel’s Lawyers Find True Happiness
Happy lawyers and customers are more important to UpCounsel than anything else right now, including how many lawyers and how many customers it’s serving. If the numbers work, growth will follow. So let’s take a closer look at the numbers.
UpCounsel spends about $6,000 for every lawyer it onboards. It makes back that money in just six months. Everything after that is pure profit. Its customer acquisition cost to lifetime value ratio is 12X. (That’s three times better than the 4X figure I usually look for.) Importantly, demand is exploding. Tons of projects are piling into UpCousel’s marketplace. Lawyers have the opportunity to make three to four times their subscription costs by working on one to two projects a week. This is exactly what solo practitioners need. They’re historically bad at finding clients and growing their clientele. UpCounsel solves a big problem for them.
Happy lawyers? You bet.
UpCounsel also saves clients a lot of money. Its targeted user group is startups. Startups are used to paying about $100,000 a year in legal fees. With UpCounsel, they’re getting top-shelf lawyers to perform legal services at around three times less than what they would usually pay. Happy customers? Absolutely.
Back on Track
UpCounsel is not your typical just-out-of-the-gate startup. It was founded in 2012. The current leadership team bought the website in March 2020 for pennies on the dollar. It’s a great turnaround story. The company’s new leadership has done an outstanding job of finding new ways to mine revenue from both sides of the marketplace.
While it is cash flow positive, UpCounsel doesn’t make a “formal” profit yet. But that’s only because it’s making payments on a low-interest loan it’s carrying from buying the business. And it’s not far off from making a profit. It has several new revenue-generating services in the works. And it has put its legal problems far behind it. In fact, new regulations now allow UpCounsel to offer concierge services to its hundreds of paid clients. This change opens up the possibility of a range of services where additional revenue streams can flow into UpCounsel’s coffers. One intriguing option is creating its own full-service “branded” legal firm. This single step, the company says, could potentially increase revenues by four to six times.
But what really got my attention was something quite rare. UpCounsel has not spent one dime growing its customer base. It reflects a market where growing demand is overwhelming supply. And where UpCounsel’s value proposition — spending less for reliable legal services — is finding a ready audience and solving a real problem.
But there’s more to it than that. The website has 10,000 article pages that provide a backbone for the company’s muscular SEO capabilities — meaning that UpCounsel is likely to show up as a top result in many Google searches. By using that strength, UpCounsel could continue to spend next to nothing and still grow its customer base. CEO KJ Erickson says UpCounsel will, however, finally be putting money into growing the demand side (in addition to the supply side) of the business.
KJ is an old hand at heading up startups. She started her first one — an NGO servicing refugee camps in Central Africa — when she was a sophomore at Stanford. More recently, she founded Simbi — a marketplace for bartering services — and sold it in 2018. In 2019, she got a call from an old friend and colleague of hers — Xavier Helgesen, the founder and CEO of Enduring Ventures (the company that bought UpCounsel’s website assets) — asking her to join UpCounsel.
KJ’s fingerprints are all over UpCounsel. She’s a big believer in working smart and “deeply leveraging activities.” And she’s pushed UpCounsel to squeeze more revenue dollars from its users while also expanding both sides of the marketplace. KJ is joined by Paul Drobot, the company’s chief revenue officer. He comes from legal tech firm Atrium. The fact that UpCounsel has done so well at incorporating a subscription model has everything to do with Paul applying the knowledge he picked up at Atrium and throughout his 30-year career in sales leadership.
The Lesson of Casper
Do I see any dark clouds on the horizon? Sure, if I squint hard enough. Marketplace startups lack defensibility. It’s an issue common to all marketplace businesses in the early years. Network size carries huge competitive advantages, but networks need time to grow. There is a period of vulnerability in the early stages before they grow large and formidable. Another company — perhaps doing a couple of things better — can swoop in and capture market share. UpCounsel is still in an early stage and thus vulnerable. But while the risk is real, it’s not significant in UpCounsel’s case. It would be extremely difficult for another company to match UpCounsel’s advantages in execution and SEO capabilities.
And it would be even more difficult for a competitor to match the bang UpCounsel gets for every buck spent. To reiterate… it makes back all its customer acquisition expenses on adding lawyers in just five to six months and currently spends no money on capturing new customers. If you don’t think this is a huge accomplishment, then consider the case of Casper.
Everybody knows Casper. Its direct-to-consumer mattress business is heavily advertised on TV. But that comes at a cost. Its massive marketing budget that drives revenue has rung up $300 million in net losses. It was a pre-IPO unicorn. It lost half its worth at the end of its first day of public trading. And just last week, Casper announced it was being sold to a private equity firm. Unbelievably, its shares halved once again.
There are thousands of startups that spend vast amounts of money to fuel growth. It’s practically deemed unavoidable… or even a positive. “Spend now to dominate tomorrow” is how the thinking goes. And the corollary is this: investors who value rapid growth must accept high burn rates, tons of debt and large losses.
An Inescapable Conclusion
UpCounsel carries none of those drawbacks. Nor is it on board with that line of thinking. As a matter of fact, this is a big reason why it’s crowdfunding. UpCounsel didn’t want to have to follow the venture capital mantra of “growth at all costs.” And it hasn’t. It’s EBITDA-positive. Its net burn is a big fat ZERO. And the company says it doesn’t plan to ever NEED to raise money — it will only raise again if it’s confident that the return on investment far exceeds the dilution itself.
Along with high margins, low churn and low costs, UpCounsel is highly scalable and will soon roll out new revenue-boosting services. Its leadership is disciplined and focused rightly on keeping its users happy.
Its slogan may not be “build back better.” But it aptly describes UpCounsel’s journey to date.
How to Invest
UpCounsel is raising up to $5 million in this round of funding on Wefunder. You’ll need to sign up for an account there if you haven’t yet.
Once you’re signed in to Wefunder, head over to the UpCounsel raise page. Now enter the amount you want to invest and click the red “Invest” button on the right-hand side of the screen. The minimum investment on this deal is $250.
Risks
This opportunity, like all early-stage investments, is risky. Early-stage investments often fail. UpCounsel may need to raise another round of funding in a year, if not sooner.
If it executes well, this shouldn’t be a problem. But that’s a risk worth considering when investing in early-stage companies. The investment you’re making is NOT liquid. Expect to hold your position for five to 10 years. An earlier exit is always possible but should not be expected.
All that said, I believe UpCounsel offers an attractive risk-reward ratio.