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Litigation Financing 2.0: Financing the Business of Law
The capital structure of the typical law firm has barely changed in living memory, but the traditional barriers to innovation are slowly cracking, creating opportunities for great lawyers to build the best professional homes for themselves. It is not accidental that funding the creation or growth of law firms and practice groups has tended to follow a traditional path. Rather, this circumstance is a combination of traditional legal temperament and structural barriers to innovation. Recently, there have been changes to both.
Let's start with something simple: why the tech industry has venture funds and incubators, but the legal industry does not. Besides prohibitions to law firms being owned by non-attorneys, there's also a second reason that is less obvious. Traditional lenders have been willing to treat consistently generated fee revenue as an income stream against which to lend. But it is only more recently that the individual litigations themselves have begun to be treated as assets that can be monetized. This process, litigation finance, is by now familiar, but below I discuss the next step for that industry: financing the business of law itself.
Sources of Capital for Law Firm Operations
Starting a new law firm, opening a new office, or lateralling a practice group takes money. Between salaries, overhead, and marketing costs, even a financially sound operation may find itself in need of capital in order to grow. Without outside investors, that money has traditionally had to come from one of two sources: bank loans or the partners of the firm.
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