A broad selloff has hit legal tech and software companies as investors rethink exposure to software, private credit, and AI-linked bets across public and private markets. Portfolio managers are recalibrating risk, pulling back from names that rely on aggressive growth forecasts or expensive financing. The shift signals a cooling period for some of the hottest themes of the past two years.
Selloff grips legal tech and software names with investors reassessing software, private credit, and AI‑exposed holdings across public and private markets.
The pullback arrives after a long stretch of investor enthusiasm for subscription software and AI tools. Many legal tech firms benefited from rising budgets for e-discovery, contract analysis, and compliance. Now, higher financing costs, questions about AI monetization, and pressure on margins are testing those gains.
What is driving the retreat
Several forces appear to be at work. Valuation fatigue has set in for high-growth software that still runs at heavy cash burn. Rising borrowing costs are straining firms that leaned on private credit to fund sales expansion and acquisitions. Buyers are also scrutinizing AI products that lack clear returns or defensible data advantages.
Public market volatility feeds back into private valuations. As multiples compress in listed software, late-stage marks in venture portfolios face pressure. That dynamic can slow new funding rounds, lengthen sales cycles, and push management teams to cut costs.
Legal tech faces slower buying cycles
Legal departments and law firms are weighing renewals more carefully. Tools that promised fast savings now face proof-of-value tests. Buyers want measured rollouts, clear productivity gains, and strong security assurances. Projects seen as optional may slip to later quarters, even if long-term demand remains intact.
Vendors with strong net retention, sticky workflows, and deep integrations are better positioned. Point solutions tied to single use cases may feel the downdraft more acutely. Cross-sell and consolidation pitches continue, but procurement gates are tighter.
AI expectations meet budget reality
Investors are separating durable AI businesses from marketing-heavy stories. Training and inference costs remain high for many models. That raises questions about gross margins and pricing power. The firms gaining traction often pair proprietary datasets with narrow, high-value tasks, such as review acceleration or risk flagging.
The market is rewarding evidence. That includes lower handling time, fewer escalations, and faster matter resolution. Vendors that publish audited metrics and customer case studies may find a more receptive audience, even amid a pullback.
The private credit connection
Software borrowers used private credit for speed and flexibility as equity markets cooled. Now, higher rates and tighter covenants are changing the math. Refinancing risk looms for companies with near-term maturities and thin cash cushions.
Some borrowers face tougher amortization schedules or warrants. Others may seek equity top-ups to de-risk balance sheets. Lenders remain active, but diligence is deeper and structure matters more.
Public and private markets in a feedback loop
Public market resets often preview private marks with a lag. Crossover funds can become net sellers to manage liquidity. That can weigh on late-stage valuations and delay IPO plans. In turn, founders trim hiring plans and emphasize efficiency.
Strategic buyers may step in as prices fall. Well-capitalized platforms could acquire niche tools to fill product gaps. Still, boards will want clear integration plans and near-term accretion.
How companies are responding
- Focusing on cash flow, not only revenue growth.
- Packaging AI features as paid add-ons with clear ROI.
- Consolidating vendors to reduce overlapping spend.
- Refinancing early to address rate and covenant risk.
- Prioritizing security, compliance, and audit trails.
What to watch next
Earnings updates will matter more than usual. Investors are watching net retention, sales efficiency, and cash burn. They are also tracking churn in small and mid-market accounts. Guidance on AI revenue contribution and unit economics will be a key tell.
On the financing side, deal terms in growth rounds and private credit refinancings will set the tone. Wider spreads or tighter covenants could signal more stress. Mergers and asset sales may rise if valuations stay lower for longer.
The selloff has reset expectations for legal tech and software. Durable businesses with clear savings and disciplined financing should navigate the shift. The rest must prove product value, pricing power, and a path to cash generation. Investors will be listening closely in the next reporting cycle.
