In this post, Greg Buckles comments on the CD Disco IPO in the larger context of software companies and service providers targeting the SMB/solo market, and the adoption trends those customers have exhibited over the years.
I am generally bullish on what I consider to be the undersized eDiscovery market. The $44 stock price spike after the CS Disco’s IPO equates to a $2.5B market capitalization. That is a 36X MULTIPLE of CS Disco’ s reported $68.4M 2020 revenue. Red flags pop up for me considering that CS Disco lost $29.8M in 2020 and $22.8M in 2019. According to the IPO filing, CS Disco carries $161M in VC debt. This is still well under Silver Lake’s rumored $3.6B investment in Relativity. CS Disco seems to target the schools of SMB fish while Relativity is out harpooning whales. I get that self-service SaaS eDiscovery platforms like CS Disco, Logikcull and Everlaw address the underserved SMB/solo firm customer base. That equates to dramatic growth potential with relatively low service overhead. A recipe that investors appreciate. CS Disco started with a deep bank of services for a one-price-fits-all cloud platform. Those professional services provide support for small firms or private companies wading into the rapidly evolving eDiscovery world.
All of these potential self-service customers have been around for the last decade. As one of my favorite entrepreneur mentor’s Nick Mehta once advised, “An educational sale is an uphill battle.” Maybe this explains the pandemic explosion of eDiscovery marketing edutainment webinars, articles, interviews and CLEs. In my opinion, eDiscovery competence and technology adoption are still shockingly low outside of corporate serial litigants and their firms. I launched my first contract review shop 28 years ago on Summation 3.1 and the Texas Take-Or-Pay Wars. I never thought I would find small firms still manually reviewing custodian self-collected documents three decades later. It seems to be safe to assert that much of the legal market is slow to adopt new practices or technology.
Circling back to CS Disco, I am pleased that their IPO has been received so well. It bodes well for other consolidated competitors considering going public. We need some IPO success stories after Nuix, HP and other spectacular eDiscovery flops. I hope that the CS Disco team leverages their new capital to meet shareholder growth and profit expectations. If not, you can bet that market capitalization will drop. I will be watching for acquisitions, new offerings and marketing campaigns from CS Disco.
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