How did a $75 million startup close doors in 36 months?
The failure of Atrium is a fascinating case because the startup was not only highly well-funded, but it had a founding team with a lot of startup experience and success behind its backs.
The legal tech startup was co-founded by Justin Kan in 2017. You might have heard of Kan’s name before, as he was the founder of Justin.TV, which later morphed into the streaming platform Twitch.
After jump-starting the live gaming content industry, Twitch was sold to Amazon for nearly $1 billion.
After this grand exit, it’s not surprising that Andreessen Horowitz – one of the best-established venture capital funds in the valley, decided to back Kan’s new project.
Yet, the know-how of the funding team and the $75m in funding wasn’t enough to make Atrium a success.
Atrium was a hybrid legal software and law firm. Like many other startups, Atrium’s ambition was to disrupt an industry. In this case – the well-established in terms of processes (and rather conservative) legal industry.
The company’s primary goal was to offer full-stack services that optimized the end-to-end legal processes related to founding and operating startups. It was meant to achieve this by having a dual-entity model – a tech company developing the required software tools and an independent law firm incorporating those tools and providing consultancy services to existing clients.
As many would argue, partly thanks to Kan’s charisma and previous success, Atrium quickly became well-trusted by clients and investors alike. VCs were flocking to offer their capital, and the freshly created company managed to raise over $75 million by several VCs (around $10m of which were raised when it was still just an idea). The most famous of them included Y Combinator and, as mentioned, Andreessen Horowitz.
Unlike most law firms that charge their clients hourly, Atrium’s business model was based on monthly subscriptions that started at $500 (reaching up to $1500 for add-ons). The membership included access to their in-house developed software and consultancy services by the law firm. The software had a documents management system, optimized legal workflows, centralized communication, and other features.
Atrium managed to attract many clients, many of whom were left surprised and confused by the pivot in January 2020 (just several weeks before the final shut down), when the company announced a layoff of an unspecified number of lawyers so it could focus entirely on the tech entity. Those lawyers formed an independent legal firm that took on Atrium’s clients.
As soon turned out, the pivot was not enough to optimize the operational costs, so Atrium’s executives decided to close doors for good in March 2020, returning some of the money to investors.
Ironically, after this final shut down, the law firm that sprung from Atrium continued working independently.
Many factors contributed to Atrium’s failure, even though it had a promising start. Almost 1 year after the closure, Justin Kan took the time to reflect on Twitter some of the biggest mistakes on an executive level. The first one is:
“Adding more money to a situation of lack of product-market fit rarely works.”
To get perspective, let’s start with the fact this is not the first time a tech firm tries unsuccessfully to disrupt the legal industry (e.g., Celarspire).
So why is the legal field such a hard nut to crack?
There are already many legal IT providers that establish and optimize the processes. However, there is no single SaaS or marketplace that dominates the industry.
Achieving rapid exponential growth is quite challenging, given the industry is highly relationship-driven. Establishing a close understanding of the needs of each client is critical, and one-on-one relationships are not scalable.
Of course, the idea is to streamline the process and make it scalable (to make a product out of a service industry). However, it might be the case that there is no market need for such a one-size-fits-all solution in law.
With this in mind, we once again reach a conclusion that we often go to in these articles: all the money in the world wouldn’t be able to save a startup that lacks product-market fit. Like many failed projects, Atrium didn’t manage to shape its tech offering into something the market needed, and as a result, it was forced to close its doors.
From this point of view, it’s not a big surprise that the law department of Atrium stayed in business – it offered the one-on-one attention the clients needed. The one-size-fits-all tech solution did not.
“The more people you have, the harder it is to bubble up feedback or turn the ship.”
Let’s talk numbers. For less than 3 years, Atrium found around 450 clients. This was not enough to pay the salaries of the 200 people it employed. One could argue that Atrium had a classical case of premature scaling – growing the business too much before you can justify it.
More importantly, the growth rate was not good enough to justify the $75m raised in VC funding, especially bearing in mind that the growth expectations are even higher for software companies.
Employing too many people too early is costly and removes flexibility, which you desperately need as a young startup struggling to find PMF.
Another factor that played a significant role was the business model. As already mentioned, Atrium was a full-stack vertical startup. This means it offered A-Z legal services with all the necessary tools created in-house – no dependence on third parties.
This strategy was quite unusual because even though it might sound ideal from a client’s viewpoint, the reality is that outsourcing is much more cost-effective than creating everything in-house.
This is why more and more industries are turning towards agility, and the legal field makes no exception. Chances are low for a legal firm to have a particular software need that it cannot find from external providers and must create it from scratch.
Complete vertical integration is desirable (as demonstrated by Apple), but it is tough to achieve because it requires extreme scale. While it makes sense to become a full-stack startup, it makes less sense to start out as one. It’s much easier to specialize on a specific value chain link and then grow from there once successful. This approach creates less complexity, and complexity is a killer of startups.
The subscription model was also not working in Atrium’s favor, as it turns out. Kan shared himself that “We should have moved more quickly to a flat rate hourly model and iterated the business model. We didn't do enough turns of business model iteration quickly enough.”
The pivot in January 2020 (cutting the legal division and focusing on tech 100%) did aim to address the red flags. Still, it ultimately failed to fix the lack of product-market fit, so the executives decided to end the struggle.
Last but certainly not least, there is one more ingredient for any business (or any other endeavor) to be successful, which we rarely speak about:
“Only work on things where you have intrinsic motivation. If you don’t, you’ll lose motivation when times are hard, or your own goals change.”