January 26, 2024

Pandemic, War, Recession: 3 Lessons Learned from Building a Startup in the Age of Permacrisis


Legal Nodes was launched in 2019, which was a good year for the company. It started with a 3-month incubation program from Longhash in Berlin, followed by several startup boot camps in the Baltics (Baltic Sandbox, 70Ventures). We then went on to win the Startup Competition at IT Arena and were selected to attend the Startup Grind Conference in San Francisco. We learned a lot, experimented, and honed our offering. It seems that few people at that time imagined how the world would change in early 2020.

And then it began... 2020-21: pandemic. 2022: full-scale war. 2023: global economic recession. The Guardian characterized 2022 as a "permacrisis", which means “an extended period of instability and insecurity”. Unsurprisingly, Collins Dictionary announced it as their Word of the Year in 2022. Reuters calculated that in January 2023 alone, the tech industry had 5 times more layoffs than in all the months of the previous year combined. Recently, the Forecasting Research Institute released a forecast that estimated the chances of human extinction in the context of a nuclear crisis and rapid AI development sits at a gut-wrenching 1 in 5.

When you analyze the last 3 years and read the forecasts for the near future, a question arises: how do you continue to build a company in such turbulent times? And what should be the company's product that will not only survive, but also grow and develop in these conditions?

This article does not contain recipes for success or an action plan for business development during a permacrisis. I also will not copy the thesis from books by Nassim Taleb, Ray Dalio, and other authors who wrote about antifragility, principles of survival in uncertain conditions, etc. This article is an attempt to structure our own thoughts that have accumulated during work on Legal Nodes during the pandemic, the ongoing violent attacks upon Ukraine, and the global economic recession.

Because it’s one thing when you read inspiring stories about how other companies went through difficult economic times in books, and it’s quite another thing when you go through it yourself, with your own company.

Lessons learned while building a startup during permacrisis

Building a company is a path of trials and errors. Building a venture company is when the number of trials and errors required to find product-market fit is multiplied by ten. Or possibly even ten-thousand. It certainly feels like that sometimes. And when you add to this the "headwind" of global upheavals (pandemic, war, recession), the error multiplier goes off the charts.

Each trial goes through a 3-stage cycle: "hypothesis → test → conclusions." Repeated conclusions become lessons. Here are the lessons for building a legal product that we at Legal Nodes have learned over the past few turbulent years:

  1. diversified market
  2. antifragile business model
  3. competitiveness of unit economics through AI

In the following paragraphs, I will try to explain what each of these lessons means for Legal Nodes.

Lesson 1: diversified market

If a startup's product is overspecialized and is sold to a local market then the product is at risk of losing customers and revenue if something happens to the industry or market. So for example, a startup with an overspecialized product means that the product may be sold in a narrow industry, for example organizing offline events for the hotel business. This startup only sells to a local market, and consequently only operates in one country. So, should the startup encounter another pandemic and face a strict lockdown like the ones introduced in certain countries, then hotels will close, and offline events will be banned or severely restricted.

That example might be a little obvious, but it applies to lots of businesses in various ways. At Legal Nodes, we experienced a similar situation when the war in Ukraine began. For the first few years of operation, our main market was Ukraine. Through the Legal Nodes platform, Ukrainian founders had the opportunity to legally structure their startups to attract foreign investment and enter foreign markets. In 2022, everything changed. Following the start of the war, venture investments in Ukrainian startups sharply declined, and Legal Nodes lost about 70% of its clients. Focusing on our local market was no longer a viable strategy. We had to go global to survive.

Lesson 2. Antifragile business model

When an economic recession occurs, companies begin to optimize costs to reduce burn rate and become profitable as quickly as possible (or remain profitable for as long as possible). Therefore, if the product's business model lacks flexibility that allows customers to easily increase or decrease usage volumes (upscale/downscale subscriptions, transition from subscription to pay-as-you-go/on-demand services, etc.), and if the startup's unit economics are not adapted to such flexibility, the product is likely to experience customer churn in a declining market.

These processes began to occur at the beginning of 2023, when practically every company began to review contracts with contractors and analyze subscriptions in order to optimize costs. Similar requests from companies began to come to Legal Nodes, which, in turn, required a review of the format of our subscriptions and an update to our unit economics.

As a result, we've introduced a new subscription plan where customers who don’t need active legal work can subscribe to ongoing support for their company maintenance legal tasks. We also unbundled some of the features of our existing subscription, so that customers can access features on a more flexible pay-as-you-go basis. This solution has helped us offer a competitive service to our customers and helped us retain customers who didn’t consistently need huge volumes of legal work for their projects. 

What about focus?

Before moving on to the third lesson, I want to pause and reflect on the question of the founder's focus. After reading about the two lessons mentioned above (diversified market and combined business model), a founder is likely to have questions:

  • How can they develop a product without having a clear focus on a specific geography and industry?
  • How can they pitch a startup to investors with a diversified market and a combined business model? What should they be calling their startup? A SaaS, marketplace, or platform?
  • Which type of customer should they focus on during the sales process (B2B/B2C/B2B2C)?

The short answer is that focus is necessary, but there is a nuance. The long answer is in the next section.

Gravity and its consequences for startups

Mentors in accelerator programs regularly asked us the questions described above. We often encountered these questions in the startup literature recommended to us. And, of course, this is what every investor tried to clarify in conversation after our pitches. These questions, of course, are often the right ones to ask in essence, but very often they are not asked as open-ended questions: “What is your business model?”. Instead, they’re asked as leading questions: “Are you a marketplace?” 

Leading questions create a very strong gravitational pull for founders. It’s worth noting that in this context, this concept of "gravity" is described in the book "Play Bigger". Founders are pulled into categories of startups that have already been formed in the market. It’s easier for investors to operate in these categories, so the pull gets even stronger. The end result: founders begin to start doing not what they had planned, but instead what they are "prompted" to do by investors.

When we pitched Legal Nodes, investors often tried to categorize our company. We were called "Uber for lawyers", "Upwork for lawyers," and "a legal service for startups like Clerky/SeedLegals." This constantly rocked the focus of the team and challenged us with doubts about whether we should build a marketplace or SaaS, sell services to SME or enterprises, or work in the Eastern European market or in the UK. This is how we experienced the "gravity" that is so dangerous for founders. There is a very thin line between what founders believe (and what they want to build) and what the gravity created by the authority of advisors/investors/market trends "prompts" founders to do.

It was only during our time at Techstars that we realized how important it is to focus on the authenticity of our own product, rather than trying to "fit" it into an existing category in the market. (I wrote more about this in a note about Legal Nodes' experience with Techstars). The war in Ukraine and the global economic recession taught us to look not only forward (into the vertical of our own niche), but also sideways (looking for and analyzing the use cases of our product in adjacent niches and markets).

Legal Nodes' combined business model

After we diagnosed the "gravity syndrome" in our own company and began to develop immunity to it, our focus crystallized, based on the needs of our clients and the market, rather than the categories that gravity repeatedly tried to drag us into.

This allowed us to update Legal Nodes' business model, which now includes:

  1. Subscriptions, within which the client receives access to the Legal Nodes platform and its resources including legal knowledge bases, templates, and "commoditized" legal services to solve their cross-jurisdictional legal requests.
  2. Commoditized services of a global network of lawyers, legal add-ons is the more user-friendly term we use to describe these. Our clients can order add-ons on-demand in the jurisdictions and legal/compliance areas that are relevant to their legal needs.
  3. Legal management service, offered through our Virtual Legal Officers and provided directly by Legal Nodes. This set-up helps streamline the process of providing legal services between clients and a global network of lawyers. We are also able to collect data on various global legal add-on services to be able to build clients a comprehensive multi-jurisdictional structure.

Create a product that you would use yourself

Today, Legal Nodes' combined business model allows clients to very flexibly meet their legal needs, namely, to have a subscription to help them launch several legal projects simultaneously. For example, they might need help with structuring a new investment round or launching a product in a new market. When busy periods are replaced with quieter ones, clients can switch to a maintenance subscription, where the intensity of legal work decreases and only periodic support of an existing legal structure is needed. For example, clients may need help with regular monitoring of tax reporting and financial deadlines or help with contract work during the sales process.

Only now am I beginning to understand what the phrase "Create a product that you would use yourself" means. Today's combined business model of Legal Nodes (software subscription + marketplace for legal services + project management support) reflects our own needs for service flexibility that we use in the company. This approach gives us (Legal Nodes) and our clients the ability to easily scale service usage when development/fundraising/sales is active, and also easily reduce its intensity when cost optimization is needed. This flexibility makes the product "antifragile", which is particularly important in a declining market.

Not only investors but also market trends create gravity

Continuing on the topic of gravity, I remember how during an acceleration program, some advisors recommended that we focus on the Eastern European market. Others recommended that we define the sphere of legal services and focus specifically on it. Some advisors suggested creating a service for registering companies in different countries, others advised to create a service in the field of international taxation.

However, in addition to the gravity created by advisors and investors, there was also a gravitational pull of market trends. From the beginning of 2019 (shortly after GDPR came into effect), there was an increasing demand for data protection services in the legal consulting market. At that time, services for privacy compliance began to actively appear. When the pandemic passed its peak stage (end of 2020–beginning of 2021), free capital accumulated in the global economy, which caused a growth in venture deals and M&A. At that same time, we observed a growth in legal platforms for startups, services for cap table management, etc.

The end of 2021 and the first half of 2022 were marked by a boom in Web3 and a demand for financial and investment compliance, and today the rapid development of AI is beginning to return demand for services in the field of data protection, as well as creating a new niche: AI ethics compliance.

Each market trend described above was a powerful trigger for legaltech entrepreneurs to start building new services in niches that were just beginning to form. All founders who have experience building venture projects know the feeling of FOMO when the market begins to inflate a new trend bubble and there is a temptation to "ride the hype wave".

How to build a product in the conditions of market gravity

Our team also experienced the aforementioned feeling of FOMO, as each of the mentioned trends seemed to us a unique opportunity in the market, which in turn constantly made the team doubt whether it was worth focusing on an existing niche or starting to test a new one.

This lasted until we realized that the world would never be the same again, where new market trends existed for 3-4 years, which gave entrepreneurs the opportunity to build, develop, and sell a company within the cycle of the trend (hype). Today, it seems that the duration of cycles of these trends has decreased by at least 3-4 times and that we are approaching the speed of world development, in which predicting new trends becomes increasingly difficult. This, in turn, makes it very difficult to build products focusing on an existing trend, as at the moment when founders complete MVP and attract first investments, there is a probability that a new trend will replace the existing one. This has been dubbed the "matchstick effect" where the fire fades as quickly as it flares up. An example of this would be Clubhouse.

What should a business do in this case? In my opinion, if we cannot predict changes, we need to build a product that will be flexible enough to be able to adapt quickly.

Diversified Legal Nodes Market

When we at Legal Nodes looked back over the last 3 years and analyzed how quickly market trends are changing today, we realized that the globalization and multi-sectoral nature of our platform is NOT a disadvantage (some investors called it a lack of focus). Instead, it’s a big advantage.

Today, the Legal Nodes product is:

  1. Diversified horizontally. It is working at the intersection of legal systems, covering 10+ areas of law and compliance in 20+ jurisdictions, and serving use cases for companies in fintech, Web3, SaaS, eCommerce, service IT agencies, etc.
  2. Diversified vertically. It is suitable for founders of small startups who need to create legal structures and maintain them, as well as for larger companies with in-house departments that need to have the flexibility to increase legal team capacity during high business seasons without increasing headcount.

This allows us to find balance in conditions of uncertainty and rapid market changes, as when some services become irrelevant or some markets slow down in growth, our product can more easily find use cases in adjacent areas/markets. This is because we built Legal Nodes to be a legal platform that is global by default from day one.

Although the pace of change in the global market has significantly accelerated, it still operates on the principle of "the law of connected vessels," according to which when the water level decreases in one place (financial liquidity decreases in one market), there will always be another place (market) where it must rise. And in this law, it is important to build a product that will become a "connected vessel" and can migrate flexibly from one niche to another, remaining antifragile in conditions of global uncertainty and unpredictable changes.

Lesson 3. The Use of AI as a Necessary Condition for Business Survival

In the previous paragraphs, I deviated somewhat from the lessons mentioned at the beginning of the article to share how we at Legal Nodes learned to work with gravity and continually try to adapt to the approaching singularity. In this section, I want to return to the third lesson, namely to clarify the role of AI technology in modern conditions.

In my opinion, AI has already ceased to be simply one of the "trendy technologies" that help startups attract investments. With the advent of the first LLMs, the accessibility (adoption) of AI technology has made the same leap as electronic computers in the distant 90s, when the appearance of the "desktop" interface transformed computers from technical devices for developers into personal computers for the masses.

Today, we are already seeing how AI is actively changing the market for copywriters, and how this technology has caused protests in Hollywood. These cases illustrate how quickly one can become non-competitive if one ignores this technology. Therefore, in my opinion, the use of AI technology is no longer a tool for positioning one's own innovation or a separate slide in an investor pitch deck. Today, the use of AI is a necessary condition for business survival.

How ignoring AI makes business economics uncompetitive

Before delving into the above thesis, I would like to note that it is primarily relevant to the so-called white-collar business (“knowledge workers”), where the unit economics of almost every company is built around “person-hours.” Two strategies for increasing revenue are built around person-hours:

  • the more person-hours a company can charge customers for, the more revenue the company can generate
  • the less unpaid person-hours each “knowledge worker” has to spend, the higher the business's marginality

Now that we have a high-level understanding of the unit economics of white-collar businesses, let's consider how ignoring AI affects their work:

  1. If knowledge workers continue to spend hours on tasks that AI can already complete in seconds (such as preparing follow-up APIs, answering simple questions, editing text, etc.), clients will start to refuse services from such providers.
  2. If knowledge workers continue to spend as much time on unpaid (administrative) tasks as they do now, the business will never be able to offer clients the flexibility and price competitiveness that providers with AI-automated administrative functions offer.

How we approach using AI at Legal Nodes

Since lawyers are a very bright representative of "knowledge workers," the above theses will soon become just as acute for them as they already have for copywriters and screenwriters. And considering that this technology evolves 3 million times faster than the human brain, it is naive to think that within the next 3-5 years, there will be any niche in the world that AI will not touch.

That is why since the beginning of this year, we at Legal Nodes have been building a culture of using existing AI tools to automate administrative tasks and developing our own AI tools (legal co-pilots) for lawyers who support clients through Legal Nodes. More about our AI plans can be found in the article on the Legal Nodes blog.

Stoicism in times of permacrisis

In conclusion, I would like to mention one more lesson that is probably all-encompassing in relation to the above. It is that no matter how difficult the situation is in business, there will always be an angle from which that situation will look like a new opportunity. Lack of investment is not a reason to close a company, but an opportunity to build a profitable business right away. The outflow of clients is not a reason for bankruptcy but an incentive to rethink the business model and test new markets.

In 2020, the Legal Nodes team survived a pandemic. Then in 2022, much of the team worked in conditions of complete blackout last year. And through all this we transformed into a profitable business this year amid an economic recession and a decline in the venture market. And the aspects of our company that were previously described to us as drawbacks or red flags became tools for survival and growth in times of turbulence.

Today, founders from different industries flexibly use Legal Nodes, changing the types of subscriptions depending on the needs and financial situation of the company, and have the opportunity to solve legal problems of their own business through Legal Nodes in 20+ jurisdictions and 10+ areas of law and compliance. And we at Legal Nodes seem to be starting to better understand the words of famous stoics, constantly trying to look at today's challenges as an opportunity to build a product that will be "antifragile by design."

Disclaimer: the views expressed in this article are those of the author and do not necessarily express the views of Legal Nodes LTD. The information in this article is provided for informational purposes only. You shouldn't construe any such information as legal, tax, investment, trading, financial, or other advice.

Nestor is a Co-founder & Head of Web3 Legal at Legal Nodes. Having over seven years of legal consulting experience, Nestor loves working with innovative startups and Web3 projects, helping them navigate the regulations and scale on global markets.

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