Rick Weber on the DAT File Podcast Transcript

Okay everyone, this is the DAT file podcast that explores the ideas, opinions, and back stories to the people shaping the world of electronic discovery. I’m Brandon Law, the founder and CEO of Oasis Discovery and host of this here podcast. On the show today, I talk with Rick Weber. So Rick is a, lawyer, a business advisor. He’s an entrepreneur. He’s a lot of things. He goes way back to the beginning of eDiscovery. He was there, and he was involved in the creation of what I consider the first eDiscovery software, which was Discovery Cracker, he ended up selling that to Doculex. He’s built and managed service companies like Elijah. He’s an expert in cybersecurity. To me, I think one of the most interesting things, he, he’s done his, what he’s doing now, which is his role at Arbor Ridge, and that’s really what we spend probably the second half of the conversation really talking about, you know, really the business of e discovery. We go into great length about everything from EBIDA and multiples to know all the different valuations, really the in’s and outs and the behind the scenes of how these companies, these huge Legal technology and eDiscovery companies are worth so much money. But first we start at the beginning, like always I ask Rick how he actually get into the industry.

Accidentally. I started as a lawyer in ‘94 at Mayer Brown in Chicago, in the litigation department. I knew literally before I even started – having been a summer associate at Mayer Brown – that I was not going to be in for the long haul. And as a summer associate, I kind of saw that that three year mark was like, you get kind of like a three year free pass and then it was sort of, you kind of had to really crank it up if you want to stay and try to make partner and all that stuff. So I kind of knew going in that, okay, I’ll be here for about three or four years. After that I left, I became a prosecutor for the Securities and Exchange Commission, here in Chicago.

That was a great job. I absolutely loved that job. Kind of similarly when you go to the SEC or into the government, you either stay there for three to five years and kind of hone a very specific skill, , and then leave or you become a lifer. And I didn’t want to be a lifer at the government. So I knew I was going to be there probably about three to five years. After about the three year mark, I was trying to figure out what my next move was, and the most logical step was to basically go back to a law firm and become a securities litigator. Go in as either of counsel or a partner and that was for sure the most logical step. But, the problem is I didn’t want to go back to a law firm. This was 1999 and I was trying to figure out what I wanted to do with my life and I sort of vividly remember I was at a continuing legal education seminar here in the Chicago Bar Association and it was kind of boring, so I pulled out a bunch of pieces of paper and just started making lists of things that I liked – what I liked, what I didn’t like, you know, just professionally and sort of at the end of this exercise it kind of spelled out management consulting. So I thinking I’m going to be in management consulting and this is around the time when McKinsey and Bain and all the big management consulting firms were starting to hire lawyers, not just MBA’s. So I kind of walked out of that seminar thinking, okay, I’m going to go into management consultant. A good friend of mine, who, for lack of a better word, was a legal technologist, by the name of Jay Leib who’s very well known in the eDiscovery business space. So, Jay and I were good friends. And we were getting drunk over tequila on a Thursday night ready to go out for a, you know, the big Thursday night.

And I told him I was going to leave the SEC and go into management consulting and in that conversation he says “if, you’re going to go into consulting, why don’t we just do our own thing?”

Yeah, consult me.

Yeah. So it was a Thursday night and I said you know, let me think about it over the weekend. And I was young and single and no debt, no kids, no wife. And I remember thinking to myself that like if I’m ever going to do something like leave my job and make no money now is the time and I’d rather try and fail than not try and regret. And I always knew I wanted to be an entrepreneur and I’m like, you know, sort of this is, this is my time to really give it a shot. So I gave my notice that Monday that I was leaving the SEC and I decided we’d start a company and we started coming to called Advocate Solutions.

We used to joke that I was the advocate and he was the solution and we would sit with lawyers and the IT guys and bridge the communication gap. And you know, this is late 90’s/2000 – That problem still exists today – but what lawyers need and what they do in their profession is a language that’s completely different than what IT does and what IT needs. And it’s just still hard to sort of get them communicating on the same page. So we would sit with these, these lawyers in the IT guys and consult with them when we would bring in the best third party software products like Summation or Concordance, Jay would do some of that. I had some consulting work that I was able to do to bring in a little bit of money. And along that process we had a couple of two things happened. We were officing out of Bowne Business Solutions at the time that was a blow back company and they were, this is during the Microsoft litigation and they were printing out Microsoft emails and then scanning, coding and OCR’ing back into the computer. And we saw that process and it made no sense that they were taking something that was digital, turning it to analog and then taking it back to digital again. And, we also had a client that called us up and said, hey, we, you know, he sold us Concordance, but we have 10 gigabytes of Lotus notes data that we need to get into Concordance. Can you help us? And when you’re a startup, they answered every question like that is absolutely for sure we can do. No problem, no problem. , I don’t know exactly what Jay had to do with the help of another guy to get that data into Concordance, but it was a hell of a mess. But between those two things, sort of the light bulb went off and it was, this is the next big wave. Now it sounds silly. Now this is, but this is 2000. And you know, again, people were printing out, he files scanning, coding and OCR. I mean it was like a dollar twenty five a pop and it was like going around the block to go next door because it was digital and you wanted it to stay digital. So we kind of white board and sketched out this idea of what if we could take these emails and electronic files and convert them to a tiff image natively and pull out the text, populate a database and suck out the Metadata, which people didn’t even know what that was. But that was becoming a big thing in the Microsoft case about access to documents and when, when documents were opened and modified and things like that.

And we kind of like sketch this whole thing out. And I was like, oh, this could be pretty cool. So Jay says, you know, we need, we need a developer. So we found a developer and the idea was we’ll pay this guy for about a month to develop this product, it will be built and then we’ll go out and sell it as a service. So that was the naive at the time that didn’t take a month. That would take them off. Yeah, it’s pretty straight. Pretty straightforward. It took us five minutes to sketch it on the board, so it’s only going to take to develop it. So one developer who we couldn’t get rid of became two developers and so on. And so we, we develop this product, we called it a, we were calling it Outlook Cracker. We used to talk about cracking emails and this, that, and the other thing. So we started selling this as a service. We basically went to all of our law firms that we, had sold Summation and Concordance to and said, look, you know, we can get emails into the same system a lot faster by going through this process then printing, scanning OCR. So we had a little bit of traction and one day Jay says to me, you know, someday someone’s to shrink wrap a solution like this and instead of like a couple of competitors, we’re going to thousands of competitors and unless we hire a bunch of salespeople, we’re going to be out of business. And I said, if someone’s going to shrink, wrap this and put our service business out of business, why don’t we shrink, wrap this and put our business out of business. Right? And he liked the idea. So we basically hired more programmers, got rid of our sales guys, and really just aggressively doubled down on the technology and the software. We rebranded it to Discovery Cracker. And this was 2001, we had one client that somehow found us on think in the Yahoo blog. We found him or he found us and corresponded, yeah, we can solve this problem and this is back in the day where, we didn’t even have an installation package for the software, so Jay would have to fly down on site with computers and the software and like loading it and literally building a Discovery Crackers system on-site. This guy blogs are posted a blog about us and he literally, he said it’s magic in a box and that was it. We exploded from that like enough people saw that we got I think the next day, like 20 emails from people, Hey, I saw the blog, we have the same problem, can you help us? So Discovery Cracker was born by that.

Did you have any competitors early on?

CaseCentral,FIOS, EED, They were competitors, but they weren’t selling software. That’s it. It was give us your emails. Will host them

I don’t remember a competitor coming in for you guys until those guys out of the Pacific. North West Pac-Legal. Yeah. Yeah. So they were kind of around. And then also Z print.

Yeah. Z-print really wasn’t a competitor either.

It was just a better way to print stuff out. So you could scan it back in.

Yeah, exactly. Z print ultimately became kind of a Discovery Cracker product Discovery Cracker was really the first product to do what it did and it was taking native emails and electronic files and processing them and popping them into Summation, Concordance and behind your own firewall rather than having a being hosted print drivers that pushed out tiff’s instead of pieces of paper.

That’s when I, that’s, that’s to me, that’s when the industry started for me. I was running a little scan shop. I came in a little bit later. I was probably cracker version for. I remember when five came out, it was like four dot three or something, and I was running this little scan shop and, it was a nightmare and one day a red computer, I remember it clear as day. It was enormous. It was, it was red and it sat under my desk and the sales guy came in and was like, Hey, this is what we’re doing now. This is called a cracker box. What we do is instead of printing out all this stuff anymore, we’re going to do electronic stuff. And I was like, all right, our first client was this guy named Greg Chan. He’s still around and he gave us a one gig file and one gig and $1,000. And it was, no, it was actually a, a proof of concept, right? He’s like, if you can get through this one Gig, you can have my business. So I get one gig of data. It’s a one PST and Cracker. Never seen it, never heard of it, nothing like that. And we had to deliver a DAT file because obviously it was going into Concordance and, it took me about four days to get through all of that and it was a nightmare. We didn’t get the project. Obviously. We obviously didn’t know what we were doing. But yeah, that’s kind of when it all started I think for, for a lot of us, like the real old timers that were around there at the beginning.

We made a lot of millionaires.

You sure did.

it’s insane, you know, sort of like, you know, Belichick branches. The number of people that were sort of early adopters of Discovery Cracker that became eDiscovery processing companies – the amount of money they made in that service and then ultimately selling their companies. It’s insane.

Well, you made a lot of millionaires, but you also made a lot of hundred thousand dollar errors. You know what I mean? And that was part of that group. I didn’t own that company, but I went from being, you know, $19 an hour to $25,000 a year to 50 grand, 80 grand or 110 grand. That was just on cracker, you know, because I was the only guy who could really start to do this stuff and we’ve failed more than we won back then. But yeah, it built it built careers and built a lot of you.

You make an interesting point because if you look at the salaries of the sales reps back in 2003, ‘04, ‘05, ‘06, ‘07. When we started discovering cracker, we were charging twenty five cents a page, which I don’t even know what that would translate into a Gig, but then it was then gig pricing came in maybe 2005, ‘06, ‘07, range. But yeah, you’re talking three, four grand a Gig. And with the amount of money that was coming in that the salaries of these people for this industry compared to other industries was insane. You couldn’t get a sales guy for under $100,000 if not a quarter of a million for some of these guys, but what that allowed everybody to do, since all of a sudden there was tons of money in the market is it allowed us to all invest in our businesses.

Right. We had extra money so we could hire kind of level everybody up because a lot of those companies were running like basically sweatshops. I mean, mine was, it was, yeah, it was a very low margin, very commoditized industry, but we had relationships with all these law firms. You know, there was this big problem that we could solve and all of a sudden we had a bunch of money because they were given us $1,200 a gig or $2,000 a Gig for this stuff. And even before that, like you said, per page, and we invested it in servers and we invested in talent and everything kinda got leveled up and built the foundation for what that service provider market was going to end up maturing into.

For sure. So fast forward a little bit, this was 2002, you know, those were some really intense years. I mean, obviously anyone, I think anybody in a startup, yeah, knows what those two first, first two years are like. And at that point people knew who we were and we had a number of groups approach us about buying us and I think Jay and I were just exhausted truthfully. Doculex gave us an offer that made sense for us at the time. You know, in hindsight we sold the company way too early.

Jay says the same thing

Way too early. I hope he’s listening. When your business partner is a visionary, it’s hard to know how far into the future the prediction is. So in 2002, Jay came to me and said, the tiff is dead. We need to, we need to think about selling Cracker to another group. So I think Jay was right, but it just took 10 to 15 years for him to be right. But, you know, I, I, so I’m thinking, oh my God, the tiff was going to die. Let’s sell this thing. So that, that was sort of an impetus to maybe sell. We also actually had an idea for a product called fast view, which we had completely specked out, which is basically what Relativity became

Native file viewer?

Yeah, with, taxonomies and analytics. And again, he’s a brilliant guy way ahead of his time. , but we were exhausted and still scrappy and it was just, I think we were looking

After going through that. The trauma of that – I went through that as well, like every day could be your last day, you know, every month can be the month you don’t make payroll and you go through that and then someone comes and says, I’ll give you $10,000,000 and you’re like, done! Like I just don’t have the insurance anymore.

It’s the emotions that you go through in a startup on a daily basis. It’s one minute, you’re a millionaire and one minute you’re going out of business and everything in between. And I can just change throughout the day. , so we sold, to Doculex in 2003. And I stayed on with them for three years as part of that deal. , and then I kinda had a, my daughter was born, my father had a heart attack and I took six months off to try to figure out what I wanted to do. I had spent 6 years as a hardcore attorney. Six years as a hardcore business guy, entrepreneur. I had to kind of decide whether I wanted to go back into law or go work for someone or. Anyways, long story short, someone I had known in the industry, , called me up and he had started new discovery company out of Texas, called eDirect Impact a guy by the name of Sami Rahman. And he called me up and said, look, I’m developing this project management technology and software, you also do business. I have no clue what I’m doing. I’m in debt. Would you like to come be my business partner and take on, you know, I’ll get, I’ll give you a big chunk of the company in exchange for sweat equity. , you know, and who wouldn’t want that offer, right? Yeah. I’m in debt. I can’t pay you, but I can give you stock in a company that’s actually in the red – do you want in? And I’m like, yeah, absolutely. Let’s do it. So he was in Texas, I was in Chicago. I knew I was probably going to be moving at the time. , so got involved with him. , we had a really amazing run for a year and a half. Got out of debt. Everyone got on the payroll. We were doing really well then there was a personal situation that he had. I won’t go into it here, but he, he had a life altering change, with, with a child that was born at 26 weeks and that the timing couldn’t have been worse because that literally happened right at the beginning of the economic meltdown. So between him just being completely mentally disassociated from the business, rightfully so. And the economy, , we decided at that point we were, even though we were out in this great growth curve, that it just made sense to maybe combined forces with another group. So we sold 51 percent of that company to a Texas based company. Long story short there, it just wasn’t a great fit. So the integration was moving slowly. The personalities were fine. It’s just the businesses didn’t fit well for, for various reasons. , they also, ironically, were in negotiations to get bought out and they did, they got bought out in 2012 before we had been fully integrated.

So I got at that point, I got the company back and my business partner, Sami was out. It was really is just me and one other person. So I went from like, my shares of this company would went up. They went down, they went up and so I ended up getting the company back in 2012 and merged it with a company here in Chicago called Elijah – a computer forensics company. The CEO and founder of Elijah was a good friend of mine. He and I were actually summer associates together at Mayer Brown, a very close friend and it just made sense. You know, he was doing computer forensics, a little bit of hosting, but we were really heavy in the hosting with project management technology that could sort of sit on top of everything and that was 2013, and that merger workout. Great. As both the forensic business unit grew and the discovery business unit grew, we really saw that those two businesses as businesses don’t fit computer forensics as a, it’s basically a law firm or a consulting firm. We charge by the hour and we provided very highly skill and it’s project based. Obviously eDiscovery it’s hosting, it’s a technology business, you know, you throw computers added it’s a gigabyte business and there was very little to no crossover between the discovery folks and the computer forensics folks. So at that point in time we talked and my business partner, his passion really is computer forensics. , I don’t know how deep you want to get into my thoughts about the industry, but I thought for us at the time it made sense to get out of your discovery and sort of let everybody else fight over per gigabyte pricing. And you know, Relativity deployments.

so you saw in 2013, 14 that you wanted to be in the forensics business and the discovery business was not going in the direction you wanted it to be?

No, I think in 2016 two things: as the overall business was growing, we saw the glaring division between the two different businesses that we were running and they fit in perfectly on the arm model, you know, you get the data early, you harvested or you do forensic analysis and then you just pop it through a hosting engine that will make sense. But there’s a clear hand-off between the computer forensic guys in the discovery guys. And again, they’re just very different businesses. So when we made the decision, hey, if we have an opportunity to, to, to, to break apart this business and keep the forensics and sell off the discovery, that might be an interesting opportunity. Got It. And that’s basically what we did. So in 2017 we sold off the eDiscovery business unit, and maintained the computer forensics business and we’re a pure play computer forensics company. And adding things like data security, penetration testing, vulnerability assessments, we’re doing M&A Cybersecurity Due Diligence. We’re trying to get a little more away from, not more away from, but we’re trying to be more inclusive of non-litigation technology solutions and services associated around the computer forensics skill-set that our team has.

I hear breach is a big, big hot spot right now. Is that kind of fit into the cyber world or is that more on your mind? Like the discovery skill set?

No, so again, eDiscovery skillset is eDiscovery skillset, the computer forensics skillset is a computer forensics skillset. As a computer forensics company, we now get a lot of phone calls about it from for incident response and so there is an incident someone clicked on an email they shouldn’t have or someone detects that there was a maybe an intrusion. It’s we need to figure out what happened. So that’s really our computer forensics folks going in and doing a forensic analysis to figure out after the second someone clicked on this email. What then happened? Yeah. So we can then do that forensic analysis and figure out what happened. And then there’s the remediation, so it’s, you know, how did it happen, what happened after it happened, and then how do you fix it. So I think there’s kind of three distinct parts to, to that and you know, our skill set is really what, what happened once they clicked it, , we can get involved in, we can get involved in some remediation as well as, you know, how do you prevent this from happening in the future? So that’s kind of where the business currently is going. , you know, I’m the, I’m the only guy in the company who doesn’t do the work. So with that I had in, in, and I was, I had managed the due diligence process for this deal now. That was my fourth deal

and I was managing the discovery business and that was gone. So earlier this year, I’m in a conversation with my business partner. It was, you know, we’ve done a lot of deals were lawyers like we understand this industry. There’s so much consolidation going on.

We can take lessons learned from everything that we’ve done to this point and help other companies that are looking for an exit, maximize their, their outcome and bigger companies looking to grow through acquisition, find great targets and sort of with that idea over it was, it happened at legal tech this year. We were having coffee and just sort of came to me and we sort of just one of those ideas that just wouldn’t go away. And the more we thought about it, it’s like it was just, this is a perfect idea for us. I mean, we just are perfectly tailored for, you know, we can, we’re not going to give legal advice, but we can, we can help our clients, you know, maybe make a better deal for themselves from the legal experience. Plus we’ve done deals. We know how to structure.

That’s right. You know, from a, from the buy side what, what that’s like and what the whole processes, whether it’s someone’s first time or it’s their fourth time, they still want someone who’s been through it. , but then on the buy side, you know, folks that want to get into this space that might not necessarily have that refined taste to know the difference between a winner and a loser. They need someone to help kind of be their guide. Exactly. Exactly. So I’d like to talk a little bit about, yeah, earlier this year when you’re looking at it and you said there’s a lot of m and a in this space. It feels to me like 2015 started 16 and 17 was super hot and then kind of with like the end of it feels to me like the, the pace dropped off after the big mergers went through, you know, crawl and l discovery at the end and then DTI and epic at the end. And that to me sort of felt like all the small companies had been rolling up and rolling up and rolling up and rolling up advanced discovery and Concilio maybe being the third kind of big one. I wonder now, well first of all, is that also how you see it and in moreover like, well how do you see the space now? Is there still a lot of opportunities are still a lot of activity or has the MNA pace really dropped off?

No, I think the M&A pace is still very strong. I think what we’re seeing based on, so you’re exactly right. I mean at the roll ups were such that there is a very. There’s still a lot of under $10,000,000 eDiscovery companies out there and there’s still a lot of over a hundred million dollar companies out there with the big roll ups. There’s not a lot of $25 to $75 or even $20 to $50, million dollar eDiscovery companies. They, they’ve kind of disappeared.

Right? The middleclass yeah. The middle class has gone, so I guess ironically it sort of resembles maybe what’s happening beyond eDiscovery, but it’s get richer and then there’s the one percent and the rest. Yeah, there, there’s no middle class anymore. There are some, but they’re very hard to find and they’re. And they’re the types of companies that have withstood 25 offers already. Right? Like they, there’s a reason they haven’t sold. Right. Even even some of them have become like iPro, perfect example, you know, the original owners forever, I don’t know what their revenues were, but medium sized company impervious to being bought out.

I mean, you, you would’ve thought they would’ve been bought out 10 years ago and they didn’t. And Lo and behold, they got bought out by private equity group a couple of years ago and , so the, the middle class is gone, but there are still a very large number or a decent supply of good under $10, million companies doing, doing litigation services, legal technology, eDiscovery. Well, there’s a look, there’s a lot of startups. There’s a lot more tech startups today than certainly then, you know, there were no tech startups when we started Discovery, Cracker. There was Summation, Concordance, and then we sorta we came along, you know, I cannot came along, there were a couple, you know whatever, there, there were some. But now it’s, it’s, I mean, you don’t even know who these companies are and it’s like, oh, you’re doing well.

So globally, I think you’re just seeing a lot more technology development and you’re seeing that now in our space. So there’s definitely a lot of startup technologies and a lot of these companies just aren’t gonna make it and whether they have good tech or not, I guess will dictate whether they’re, whether they’re going to end up in, in good hands. So, you know, we’re, we talked to a lot of these groups that it’s Kinda the same thing. You know, we had this idea for tech, we’ve developed it, it’s great, but to get it to market there’s so much noise. We’re struggling. We don’t have a budget to hire 20 sales people in 20 marketing people, you know, what do we do? So then it’s, you know, maybe try to find them a good home or maybe somebody, maybe a company comes to technology play and the key people go on board.

And a lot of these bigger companies are just getting stronger because now they’re buying good tech and a couple of really good key people at a dollar amount that’s, you know, pretty good deal for them. , you know, what oftentimes just comes down to a sort of a buy versus build analysis by the companies as to whether this is technology they want and if they do, do they want to buy it or do they want to build it and time to market and so on. , so there’s definitely a lot of small startup technologies that I think are going to disappear. I think there’s some that might make it, a few will make it in each sector, you know, not a few total, but you know, of the new sort of CSdisco’s, Everlaw’s and Logikull, I mean I don’t believe all of them are going to survive. I think a couple will emerges is as strong companies, maybe they will, but I think some will disappear but, but those, those groups are getting heavy, heavily VC backed. So I don’t put them in those categories. I’m talking about the companies that you sort of never heard of that are self funded or maybe they got friends and family round of a half a million or a million and now all of a sudden

Between like the service provider role up model, which is mostly like you build the service business, you have recurring revenue. It’s more like evident and multiple and that’s the kind of private equity that we’ve seen that, that m and a that’s rolled up everything into Epiq, etc. Etc. On the technology side with the VC and getting like ever logged, getting funding. A lot of people are getting funding right now. , it seems like that’s, and I don’t quite know the difference. Like it seems like the technology side businesses, the software type companies, they don’t have the revenue yet. Like they’re doing, they’re selling IP. They’re not necessarily selling, you know, we did $17,000,000 in profit last year. They did none. And like they have, they have to customers and that’s what they’re selling. It seems like a very different play in terms of who’s in, who’s interested in what type of e discovery company, and I’m making the distinction there because a lot of folks kind of conflate the two that in discovery software company has the same sort of opportunities or the same types of investment or investors as the service side business.

Absolutely. So look the I’ll, I think you’ve drawn two distinctions between private equity and venture capital and align between technology and services. So I tell people that venture capital, venture capitalists by dreams, private equity buys reality and it’s a completely different conversation as a completely different analysis and when you’re talking to a venture capital, it’s, here’s what we’re building, here’s why it’s disruptive and here’s how many zeros we’re going to make for our investors in two, three, four, five, six years. And they’re mostly pre-revenue and in fact are, they’re losing a ton of money. And if you looked at that as a business, it’s you’re losing money, you’re going to go out of business. You have no customers. So private equity is sort of this like cold dose of reality of . What do you, what is your bottom line? What’s your profitability? They have a formula. It’s you know,net earnings times a multiple equals a purchase price and if there are no earnings

to try to get a private equity group to say the value of this technology is acts. They. They really wrestled with that conversation because private equity guys don’t think that way. They have shareholders and the limited investors who invested in the idea that we’re going to buy a company that’s doing a certain amount of revenue, you’re going to throw a little bit of gasoline on it or maybe I had the right people or get rid of the companies, roll it up with some other stuff. I do some add-ons, make the growth bigger and then you’re going to sell it down the road for more than what you paid for it and you’re going to get a return and the returns are not the same kind of things that VC’s are looking. VC’s are looking for 10 x or even 100 x private equity guys, you know, much smaller acts.

It’s you don’t want to return 10, 15 percent return to your investors. Maybe more. That’s that. That’s a good play because these are alternative investments for investors. Then investing in the stock market where venture capitalists, again, they’re buying dreams. So it’s hard for technology companies today in our space if they’re in a situation where they have to sell their technology because they just got to a situation where they just, they, they for whatever reason, can’t continue. We don’t want to run out of runway. Yeah. It’s either go to VC and continue to sell the dream and raise more and more money. And a lot of these companies I believe are doing that. , I don’t have detailed financials for some of these groups, but, the valuations that some of the companies are getting in my mind so far surpass what they could even conceivably be worth one day. I think it’s somewhat stag.

What are they selling? Are they selling this? Is the discovery’s going to be a $20 billion market by 2022 and we currently have all this great movement and all this great tech and you know, where the next big thing is that the dream that they’re selling almost like that. Even if we get 10 percent of the $20,000,000,000, is it, is it that naive?

No. VC’s aren’t that naive, but I think it’s the first part. I think it’s right. It’s, look, you know, this is going to be a $20,000,000,000 industry and it’s continuing to grow and we’re cutting edge and we can grow and you know, then there’s opportunity to outside of legal, you know, so it’s not, you know, I don’t, I most, most VC’s, if you say the market is x and we’re going to get five percent, okay, how are you going to get damaged you to execute. So it’s not quite that naive, but it’s, yeah, it’s a growing market, , you know, selling hopes and dreams. that’s it. So I think a technology companies in distress technology company or technology company that can’t continue is finding itself. I think in a difficult situation because private equity doesn’t know what to do with it because the company itself has no value because they’re losing revenue and then it’s the VC route which is trying to sell them on the dream and then you know, but raising money is a full time job, which is, which is why people need help from people like us, which is, and, and I’ve, I’ve, I’ve experienced this, you know, if you’re constantly doing presentations and pitches and responding to docent requests and whatnot, it is not only is it extremely time consuming, but it’s very difficult from a mental perspective because your brain starts, you start playing tricks with yourself, which is, you know, do I do I do these three things but I may sell or these guys may invest or what if they don’t invest and then it becomes a bit.

Yeah. You said you started thinking about everything differently. You start thinking about personal stuff differently. I don’t know. I can, I can have a bunch of money in six months you started thinking about hiring decisions within the company. You start thinking about, you know, sales differently, short term versus long term, you start thinking about investing in the business differently and if you go through that cycle for six months or a year or you know, some of these companies that have had their, you know, they’re trying to sell it for multiple years, who it’s, it’s a huge, huge distraction and it feels like, you know, if you try and sell your house and your house is on the market for more than like six months. Two things I think happened. One, people think why is no one buying this house? That’s problem. But also the homeowner is in that same short term mentality. You know, they might change a light bulb but they’re not going to really spend the money to do the repairs and the maintenance like a roof to be done. It’s not leaking, but you know, you’re a year away. So if it passes inspection, right, let’s see if it passes diligence. And I think that’s a very real thing that happened.

Well, and I just had a conversation with someone earlier where it’s a service company and again there’s a formula, so right now service companies are selling to a lot of this sub $10,000,000 e discovery companies. There is still a very big market from industry consolidation and strategic’s, so it’s a lot of the big boys that you mentioned are still continuing to buy up. The little guys and a lot of the big boys are now backed by private equity, so it’s not the CEO of the. It’s not the guy who originally owned the company. It’s now the private equity group that’s backing that company and so it’s like going to daddy Warbucks saying, look, I found a company I want to buy daddy, how much can I pay? And it’s there’s a formula. It’s what are their earnings? Here’s, you know, if there’s anything proprietary, maybe it’s six x seven x. If they’re big enough, maybe it’s six x. If it’s just sort of a meat and potatoes you discovery company with, you know, little collections that will regrow whatever, you know, maybe it’s three, four x, especially if it’s small, but there’s a formula and it fits into that formula

when you start getting into the $50 million dollar companies, which I know there’s not a lot left. And here we’re talking service again. Is that where you’re starting to get 10, 10 x return on the high? Because I mean I wrestled for like an 11 or a 12 multiple. What was with that? I, if you could answer that question for me, I would love to have an answer. I think people are still scratching their head at that one and there are clearly.

Okay. So there’s not lot of other ones that are like that. These are all private companies for the most part. So nobody really knows all of the details outside of the people involved in the deals. So a lot of this just comes, becomes anecdotal to some degree. So you know, I don’t know exactly what they sold for, but if they sold for that multiple than it was significantly higher than what we’re seeing. And that was also a couple of years ago in that frenzy that you talked about now it’s kind of settled down a little bit and a bit a bit of the frenzies over. So if you’re, if you’re, if you’re, if you happen to be one of those middle class companies doing middleclass revenue that we talked about, I think you can get into the eight x range, you know, and especially if you’ve got proprietary technology or you’re doing something differently, there’s definitely an argent to be had that, you know, you’re seven, eight, nine x, which is more the range that you see for tech companies in our space. And on The smaller side, well, you know, and if you’re doing paper, there’s very little appetite right now for papers to the point where a lot of the bigger companies don’t even value it. It’s just, it’s just an item on the bands.

They’re going to have to spin it off anyway. Spin it off, kill it off, let it ride its course. It’s just, it’s just sort of there. What do you do with it? some. Some. Some of the groups seem to have more of a tolerance for it than others. I personally kind of feel like paper’s a bit like vinyl. It’s making a bit of a comeback in a way because so much of its gone, but the ones that are standing, you know, lawyers still need paper, so crushing it. I know a group, they’re doubling down on paper because they look around their market and they’re like, no one else in Houston is even doing this now. I, I think there’s a small renaissance to be had so, but it’s probably not going to be a huge market, but it does seem like an underserved market at this point.

I, I think I clearly think it’s been right sized to the point where it’s probably been two right sized, but multiples for sort of the bread and butter eDiscovery business that’s doing under $10,000,000 is in that four to six X range. You know, good people, good clients, you know, certainly clientele is important come vendors that have corporate relationships, there’s a premium for that versus law firm relationships. and I think that that’s probably going to be the case for a long time and will continue to be the case. But you know, I think the holy grail for a vendor is to have corporate, a strong corporate client more so than a law firm client. You know, because The weird thing about our industry is, you know, if, if Bob Jones at Jones Day, is your client, Bob Jones is your client, not Jones Day.

In fact, most of the lawyers at Jones Day probably don’t even know Bob Jones and they probably have no clue that he’s using you for eDiscovery and when he leaves the firm, you’re probably going to get his business when he ends up somewhere else. So now Jones Day is no longer your client. So it’s not, you know, it’s just. I used to tell people that Mayor Brown wasn’t a 500 person law firm, it was a law firm of 500 people and it was almost like 500 different law firms within the firm and there are pockets of people that work together, know what everybody’s doing, but once you get outside of that very small pocket, there’s very little communication amongst the attorneys about what they’re doing. Some firms have a centralized lit support person or eDiscovery decisions have to go through centralized people.

Those are better clients. , you know, certainly than the law firms where it’s just sort of the wild west where anybody can use anybody. But even at the firms where there’s a lit support manager, if, if a senior partner wants to use a vendor, that vendor is going to get used. And if a client tells that law firm, no, you’re going to use this vendor because that’s the vendor we’ve vetted and we like. It doesn’t matter what kind of relationship you have with that lawyer or that from their corporate clients. Gonna win. So the corporate clients are, are really the holy grail. Well, and I think it’s particularly important from a private equity standpoint that if you have an owner who’s trying to exit the business or there’s going to be any sort of turnover that they have to predict post deal, what effect is that gonna have on some of these relationships?

If three, three sales reps leave, or if the founder, the CEO or whatever is the one who is really the one making it rain post-deal who’s, who’s going to be in that spot. And I think that that’s, that’s another thing where it has to be contractual and usually with the corporation that relationship is stronger. But I think this is where like the managed services deals have gained so much popularity on the vendor side particularly because isn’t that one way that they can prove that that’s going to be sticky revenue that’s going to be there post-deal? Yeah, absolutely. Look, the hosting is a beautiful royalty that comes in every month, but when the case has gone that royalty ends. So the managed service agreement where you know, you’ve got a client and it’s x number of dollars per month and includes x number of services and it’s a three year deal.

Absolutely. But you raise a good point too because one of the things that a lot of the larger strategic’s, you know, one of the first questions that we get when we’re representing someone on a sell side is what are the owners want to do? Right. And it’s much generally speaking, it’s much more favorably interpreted when, hey these, these, these guys have gas in the tank and they’d like to stick around and they just want to be a part of a bigger group that goes a lot further than the guy just wants to cash a check and get out and, and that’s okay. You know, those deals can happen but you’re going to scare some buyers off. And especially if it’s in a market where it’s difficult for that group to support. So you know, if the client, if, if, if one of the large strategic already has a presence, you know, a large presence in that city or that state and it’s knocking out a small player in that space, you may not need as much.

Yeah, they may want you to go on or is, hey look, stick around for six months or a year, we get it. But if it’s in a, you know, some city or state where they don’t have a presence and those relationships go back a ways, it’s much more favorable for, you know, to think that these are gonna want to stick on. Especially if the group, if it’s not a strategic, if it’s just a private equity group trying to enter the market. I mentioned they see it my way differently too. They don’t have other resources to sort of lean on. There’s not a CEO in the wings, so there’s no other folks that can step in and run that operation. If this is their first or second group and they’re sort of new to the discovery market, I would imagine they need, they need all that to stay intact for the long term.

Absolutely. Yeah. And then you also have California, which is a bit of a wild card, so any deal in California is always looked at a little differently than anywhere else because California has unenforceable non-competes so he needs to look to see who owns those relationships. So for example, if it’s, you know, company doing $5 million and it’s like two or three key salespeople that are, that are holding those relationships, that becomes scary for a buyer because those three people could just leave the next day. And, and that has happened. I mean there’s, some, there’s some examples where California companies have been bought and what they thought they were buying wasn’t there after a short period of time because the people laughed and he couldn’t go after him. So those become, those become a little trickier deals as well. You can lock up the, you can lock up the owners with no with earnouts, but you can always lock up all the account managers and sales.

that’s it. So it’s a lot easier to lock people into agreements when it’s part of an asset purchase agreement and you’re dealing with these sellers and owners of the business. So for example, you know, a two year non-compete, a five year non-compete, for example, is not going to be enforceable in almost any state, but if it’s in the context of an m and a, it’s not an employment contract at that point. It’s part of a deal and there’s a contract that’s separate and apart from that. So that’s, that’s the way that these guys get locked up and rightfully so. , but if it’s a salesperson who has no vested interest in the company and they’re just being asked, hey, you need to sign this docent. If you, you know, you’re not going to get paid by x anymore, you’re now going to get paid by y. And you got assigned a new non-compete or a new agreement.

And maybe we’ll give you a bonus. Even so in California, those, those agreements are just not enforceable if it’s with someone who’s not an owner of the business. So California deals get a little tricky because of that.

What, what do you think about the NUIX – Ringtail deal? Or have you thought about that at all?

No, I definitely think about it. , It’s good for Legal M&A, just it’s more, more deals. FTI has been wanting to sell Ringtail for years. That’s no small secret. Yeah. And I mean they, they’ve been packaging it up and spun it off a couple of years ago. I knew I knew Eddie O’brien. He was in our Advocate Solutions office in 2000 talking about Ringtail. So I mean I’ve known them. He was one of the, one of the entrepreneurs back then with the new technology and had a very small but loyal following and then did, did the deal with FTI and I don’t know if they ever really fully knew what to do with it. so they sold it off. No. It’ll be interesting to see what NUIX does. They put a very lightly veiled post the day after the deal if you went to their website, it looked to me like a very interesting, a shot across the bow to Relativity.

I just went to their user conference and it was not veiled. It was very direct that they think they’re the next big thing. It’s a. Yeah, I don’t, I don’t know if I necessarily think they’re aware they, they think they are. I think they have a little bit of enthusiasm, which they should. I mean, it’s, it’s an exciting deal for them. But, I think there’s a lot of work that they still need to do to kind of put something together.

you know, at the end of the day it’s gonna come down, you know, I, I haven’t seen Ringtail in yours.

No one has. I think that’s the problem, right?

it’s got to work and people got to like it. So if people don’t, you know, all the marketing and everything behind, it’s not going to help. But you know, NUIX has a good following. But again, from an M&A perspective, it’s more deals and better deals are good. Look at some point they’ll run out. So that’s bad I guess, but there’s always, always new service companies. There’s always new technology companies, you know, M&A is good.

are there particular areas that you’re telling by vendors to buy side people to look in? Like where there’s particular value in the industry?

So I think a lot of the large industry consolidators who are backed by private equity, again, the private equity is looking to make an ROI for their limited partners. And to do that you buy companies, you make them bigger, you make them more profitable and then you sell them. So I think a lot of these companies are looking at 2022, the year, 2022 to 2025 is sort of like, let’s continue to consolidate, let’s consistently to buy companies and let’s look to flip this to a larger private equity group or let’s get out and, and our, our, our partners will have made money and we’ll move onto the next one. That’s what these guys do. , so for the, on the M&A side, again, technology and ways to differentiate and fetch higher valuations. So I think a mix of service companies and tech companies or service companies with proprietary tech, is looked upon very favorably. Some of, some of the larger groups don’t want to bring on too much tech and get too far down in big development. You know, some of them I think may want to go after relativity, so may not. But generally speaking, again, they’re a mix of good services, managed services agreements, long term good corporate relationships and tech. And to be able to sort of seamlessly integrate service offerings in a packaged manner is, I think where the industry is kind of headed. I think, you know, eDiscovery vendor is a name that’s going to be rebranded in the near future. I think it’s limiting, you know, I think managed review is a big piece and collections and all of it. I think it’s, I think the bigger companies want to kind of, you know, kind of like a business process outsourcing and other industries where they, you know, it will come in and manage all of this for you is where I think the legal industry may be headed, you know, so again, it won’t be hey, we are an eDiscovery vendor.

It’s, we Are a legal process outsourcing vendor that can manage any and all aspects of your legal needs including legal staffing or legal work or whatnot. I mean I think what’s not even being ever been talked about because it doesn’t really has never really pertain to much of what we do in legal tech, but it’ll be interesting to see just even what happens in the practice of law, what impact is AI going to have on the work that young associates do? Where’s that going to be in 2030? I think law firms are continuing to struggle with their revenue models and how do they continue to bill at the rates that they’re billing. You know, you See a lot of consolidation in law firms. You what impact is an AVVO gonna have on the way that law is practice. I mean what impact. There’s already obviously been a huge impact in the way that outsource managed review has had on sort of that young lawyer associate work and work from India, so it’ll be interesting to see what happens In sort of the traditional law, the law firm side of things and if there’s winds blowing one direction or another and how they impact each other, but I certainly am fascinated to sit back and watch how AI and a lot of the technologies that are being developed today in legal tech are going to start displacing the need for lawyers on the lawyer side. I think that’ll be interesting to watch.

You think that’s happening. Starting to happen could happen?

Well, It’s happening in the sense that there’s just more data that can be the amount of data in some of these lawsuits can even be reviewed. Right. And you have to throw AI at it or tech you have to.

So yes, I think it’s already having an impact. I was talking to a friend who works for a big company that does, , they do a lot of incident response, but they also do a, , they’re big staffing company and they do a lot of doc review and privilege review and he was talking about they’re really thinking that like, even privileged review is a short time, short term kind of business for, you know, the same thing for incident response and like GDPR requests. And he’s like, that’s all. There’s technology that’s out there. Not everybody knows about it yet, but soon they’re going to find out. And then that staffing side of his business is a, it’s not gonna not gonna be nearly as profitable. It is these days. And so they’re, they’re acquiring the technology. Are there licensing or whatever they need to do to be prepared for that. But, you know, that’s just an example from the, the sort of vendor business staffing side, which isn’t quite the same as law firms, but it’s the same problem, right? Throwing them lawyers that problem.

Well, I, mean, I, think we’re either at or nearing period of time where the technology is changing faster than humans can change to adopt it. So there is always a lag between, oh my god, this technology could do all of these things, but it just has yet to be implemented.

Does it feel like the lag is longer in this industry, like the lag is longer in this industry because of legal precedent and because of, you know, challenges to the discovery process from opposing counsel. and do you think that that affects it or is this just like, this is how it is in all the industries that there’s always going to be a lag between technology adoption in the old way of doing things?

Well, we’re, we’re slow in this industry. , I mean certainly fin-tech is, you know, everybody’s looking for an edge. So they’re always looking for how they can use technology for an edge. Right? I think medical slow law is slow because lawyers are risk averse and like the status quo, and they’re also going to be as resistant to technology that’s going to reduce billable hours as they can. So I think for those reasons you see the adoption of technology in legal as a, as a broad vertical, slower than other verticals and I think that will probably always continue and it’s the pressure from the corporations that, that are saying, you know, you’ve got to do something to do something or we can’t use or is

Their not technology averse?

As, as alternative billing mechanisms are sort of imposed. Downward law firms are gonna have to find ways to be profitable with less overhead. So for example, if you walk around any of the really large law firms, they’re not occupying nearly the amount of real estate that they once were. So, you know, they’re already trying to find ways to reduce overhead and, and that will continue in. You know, I’ve heard of a friend of mine opines that you’re going to start seeing the, the, the big accounting firms and the big consulting firms starting to provide legal services and legal work and a lot of this stuff and you know, those are pretty entrenched relationships, you know, from, from all the accounting stuff. And if they start offering legal services, what does that mean for the big law firms? So it’s kind of interesting.

very interesting. Well thanks for taking the time to do us. It’s, it’s so in one hour, however long we went from scan print now, you know, putting stickers on them and then scanning them back in mass to cyber investigations and due diligence. So It’s quite a span of time and a in the industry. I mean it, it’s evolving and it’s evolving quick. That’s, that’s I think the funnest part of, of business in general.

I’m having a lot of fun being involved at the M&A side where I’m still completely immersed in it, but I don’t have to talk about load files.

I want to be you.

All right. Thank you so much rick. Man, I learned a ton and I really enjoyed so hopefully you guys liked this too. , I put a little bit here at the end of some of our earlier conversation that I had cut out initially, but he had asked me a little bit about the podcast and her statistics and kinda know how many listeners do we have and stuff. So I thought I’m an improved this year at the end. , before I get to that, just a quick reminder, I’m, I’m going to actually do a write up of this episode, kind of a business side of you, discovery and M&A and all of that stuff. If you just listen to the podcast, you might want to check out the website blogs so you can kind of read my summary and my takeaways from this. And I think that’s it.