The COVID-19 pandemic forced restaurants, shops, movie theaters and countless other businesses to close. But alongside those closures, a surprising trend emerged: More new businesses formed in 2020 than the year before.
The uptick helped fuel growth for the legal tech company LegalZoom, which helps entrepreneurs start their businesses and provides other legal and tax services.
Last week, the Glendale-based company announced its plans to go public via an initial public offering. It's seeking to raise $100 million. The number of shares to be offered and the price range for the proposed offering have not yet been determined, the company said. It will trade on the NASDAQ under the ticker symbol "LZ."
LegalZoom's revenues rose last year to $470.6 million, a 15% year-over-year jump from its revenue of $408.4 million in 2019, according to filings. This year the company poured money into its marketing budget, and its revenue grew 27% in the first quarter compared to the same time period last year.
"The COVID-19 pandemic spurred new business formation and also highlighted the impact of policy and enforcement differences across local, regional and state levels," the company said in the filing.
LegalZoom sought to seize on the growth spurt among entrepreneurs.
In 2020, 4.3 million applications were filed for employer identification numbers that are needed to start a business, up nearly 25% from the 3.5 million filed in 2019, U.S. Census Bureau data show.
The pandemic forced many small businesses to slash their budgets, in some cases reducing funds for legal services and turning to the "do-it-yourself" model that LegalZoom offers. Meanwhile, individuals increased their use of online legal services as many firms shut down.
"We believe these shifts represent an acceleration of existing trends toward greater adoption of online services," the company said.
LegalZoom said 10% of new limited liability companies (LLCs) formed in the U.S. in 2020 were done through LegalZoom, while it facilitated the filing of 5% of new corporations. Those new business formations make up the bulk of the company's revenues.
But, like many online companies that boomed during the pandemic, keeping up the pace could prove difficult. The online company, which aggressively spent on marketing in a play to capture customers, warned that if it hopes to run a profitable company it must attract even more customers as well as retain old ones. Demand could also drop off and competition stiffen from rival companies including BizFilings, LegalShield, MyCorporation and RocketLawyer.
Still, LegalZoom estimates there is a $48.7 billion addressable market for its products.
LegalZoom has been adding new services, including a tax advisory arm that compete directly with H&R Block and Jackson Hewitt.
It's not the first time the company has filed for an IPO. In 2012, it filed but postponed the offering and withdrew two years later. A LegalZoom executive told The Wall Street Journal in 2014 it was "not the right time" as it saw public market conditions "dramatically worsen." At the time tech companies like Facebook were experiencing "troubled" public offerings.
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BAM Ventures, the early-stage, consumer-focused fund co-founded by corporate lawyer-turned-L.A. serial entrepreneur-turned-venture capitalist Brian Lee, has filed paperwork with the SEC indicating that it is in the process of raising a third fund with $50 million in dry power.
Lee and Shamin Rostami Walsh, BAM's managing director, declined to comment on the offering. Companies are barred by SEC regulations from "general solicitation" while they are raising capital, which includes speaking to the media.
The $50 million fund would be a considerable step up from BAM's $20 Fund II and $6 million Fund I, which provided early backing for buzzy consumer startups such as the video game maker Scopely and the trendy luggage direct-to-consumer company, Away.
But no investment has been more profitable than the firm's reported $150,000 pre-seed check to Honey, which turned into $45 million after the coupon startup was bought by Paypal for $4 billion last year. It is the sort of return VCs dream about and Honey's founders were turned down many times until they met Lee, who told dot.LA earlier this year that he invested after getting a "vibe" from co-founders George Ruan and Ryan Hudson at a panel where they were speaking.
"They knew exactly what they were building, and how they were going to get there," Lee said. "It gave us a lot of confidence to back them. Every time we met with them the numbers were growing, and we knew the future was very bright for Honey very early on."
Lee co-founded LegalZoom in 2001 and went on to team with celebrities to launch consumer brands, such as Shoedazzle with Kim Kardashian in 2009 and The Honest Company with Jessica Alba in 2011. Lee is also an investor in dot.LA.
'I Just Really Liked Their Vibe:' Serial Entrepreneur Brian Lee on How He Landed L.A.'s Biggest Exit and What Drives Him Crazy About Other VC's
As one of the founding fathers of the L.A. tech scene, Brian Lee is used to having entrepreneurs pitch him on ideas. What does he look for? It's not so much a business plan or even an idea. He says he goes off a vibe.
That's how he ended up being the first investor in the deal-finding browser add-on Honey, which was bought late last year by PayPal for $4 billion in what ranks as the biggest acquisition L.A. has seen to date.
The low-key Lee, wearing a baggy black hoodie, talked about that and other topics in a wide-ranging conversation in the decidedly un-sleek West L.A. street level office where he oversees BAM Ventures, the early-stage consumer-focused fund he co-founded in 2014. The onetime Skadden Arps attorney co-founded LegalZoom in his condo in 2001 and after that became known as the business guy celebrities go to to launch their consumer brands, such as Shoedazzle with Kim Kardashian in 2009 and The Honest Company with Jessica Alba in 2011.
Lee also discussed whether Honest, where he stepped down as CEO in 2017 after the once high-flying unicorn raised a down round, grew too fast and what Moviepass, the widely mocked movie subscription service he backed that folded last year, should have done differently.
How did you first find out about Honey?
I gave a talk to some entrepreneurs at MuckerLab and George [Ruan] and Ryan [Hudson] approached me as I was coming off the stage and I really liked their vibe. I believe we were the first capital into Honey and then followed on to that investment, which was interesting because to be really honest – and I'm not sure how honest I should be – not a lot of venture capital firms took them seriously. It was tough to raise capital for that business, partly because they were just a browser extension. A lot of venture funds turned them down because they've never seen an extension company scale to that extent.
When you say you got a vibe, can you explain what you mean? Was it really more of a vibe than what they exactly said?
Yeah. That's what we invest in, we invest in people. There's certain criteria that we look for in founders, a proprietary kind of checklist that we go through to determine whether or not these are the founders that we want to back.
Can you share what you look for?
I can't without fear of being sued [Laughs].
But can you share what about their vibe attracted you?
First there was this quiet confidence they had in spades. They knew exactly what they were building, and how they were going to get there. It gave us a lot of confidence to back them. Every time we met with them the numbers were growing, and we knew the future was very bright for Honey very early on. I thought they were very intuitive when it came to the next steps for what they were going to do.
By nature of your business you have very successful companies and a lot of ones that don't work out. You were an investor in Moviepass, which got a lot of press. What did you see in Moviepass that appealed to you?
It was disruptive, with great entrepreneurs. I really liked their approach. It's just the economics were never quite figured out. Moviepass is one of those ones I look back on and I still to this day think it should have worked. It's just that the model itself maybe shouldn't have been all you can eat. Maybe it should have limited how many times you could go, or when you could go, maybe not opening weekend.
"Moviepass is one of those ones I look back on and I still to this day think it should have worked."Shuttershock
When you say the economics were not figured out, isn't that something you would want to have figured out before you invested?
Not necessarily. We invest in entrepreneurs. So long as the idea seems like a big idea we will invest and try to figure out the business model at a later date. I don't think anyone can tell you that they thought Google or Facebook would have been what they are today in terms of the monetization engines that they've created. They were out there building social networks or search engines. I don't think they ever really thought that the end result would be selling ads. I can't imagine [Google co-founder] Sergey Brin woke up when they started Google saying it was going to be the largest ad company in the world.
Do you think that this emphasis on profitability being more of a focus now is detrimental?
Yes and no. It comes in waves and that's the thing about venture capitalists in general. When it's time for growth they want you to grow at all costs and when things tighten up they want you to get profitable at all costs. It shifts like the wind and it just drives me crazy. For me, we just want to build great businesses and that depends on the business model. It shouldn't be macroeconomics.
Another company you personally invested in as well through BAM was the luggage company Away. What did you see in that?
I thought it was a category that was sleepy. It was old, and it was stodgy and this millennial brand was coming out of nowhere and taking up a lot of the mindshare of the consumer. I thought it was a great product, so I thought they could get big.
The co-founder and CEO, Steph Korey, recently returned as the co-CEO [after an expose published in December in the Verge detailed a toxic work culture]. Did you think that was the right move?
Absolutely. Founders always make for the best CEOs at least until the time comes where the company scales beyond the founder. Sometimes you get those rare instances where the founder can be CEOs forever. You get your Michael Dell's and your Bill Gates and your Mark Zuckerberg but that's rare. Usually the CEO will get to a certain stage and you have to bring in professional management at some point.
Were you concerned about the culture at Away? There were some serious allegations raised.
I don't know much about that. I can't comment on the culture of the business. I haven't spent time there.
Is that something you focus on at your level, the culture of companies?
No, I would say that we don't really focus on the culture of the company that we invest in because there is no company when we invest. Typically, we like to invest in entrepreneurs that we think will create a great culture. We don't sit there and say we want to pick an entrepreneur that will create a horrible culture.
As you go forward with all these companies what lessons do you take forth from your time at Honest Co.?
We love mission-driven businesses, when people are very passionate about the company they work for. I believe in great teams, and I think we had a wonderful team at the Honest Company that really helped build that business. Mostly, singular purpose is a great thing for a business.
Do you think that you were not focused enough there and were trying to do too much?
Maybe a little bit, but I think we built the business with great size and scale and I think we brought in professional management at the right time.
Did you grow too quickly?
No, I don't think so. I think we grew at the pace that was allotted to us. I mean the consumer speaks volumes and they awarded us with growth.
What do you mean you grew at the pace that was allotted to you?
If the consumer is demanding your product then you're going to grow. The consumer fell in love with the Honest Company's products and mission, and we had great success.
Brian Lee and Jessica Alba, founders of the Honest Company, at Disrupt Conference in 2012. live.staticflickr.com
When you're coming up with new products, where do you get your ideas from?
Everywhere. Ideas come to me at the most random times. I'll give you a typical story, for let's say Art of Sport [which Lee co-founded in 2018]. I went to the drugstore and I was looking at sunscreens, which on a mass level is dominated by three brands and the number one SKU for each one of those is the sport version. The sport is in bigger font than the brand logo, so I was thinking to myself, "Are people buying the brand or are they buying it because it's sport?" I walked around the corner and I was looking at the deodorants and a third of them were sport related. I went to the body wash section and it was the same thing. But what occurred to me was that none of these brands – although they're great brands – were authentic sports brands. Old Spice was started in 1929, and now it's Old Spice Sport. It just didn't feel very authentic to me so I thought it was time that an authentic sports brand entered this category.
You were involved in LA's tech scene very early. How do you think it will be different in the next couple of years than it has been for the last decade?
It's a great question because even when I started LegalZoom 20 years ago – and I started it out of my condo – there was zero venture capital in the city, no angel investors and there were probably five engineers and we got lucky because we got one of them. In the earliest days of the L.A. tech ecosystem you had to fend for yourself. You had to build a profitable business very early because there was no capital. So anytime you look at early stage companies in L.A. back then they're monetization engines. LegalZoom was profitable really from day one. I would argue it wasn't until Snap came into the picture that we finally got some capital into the city, where it was more a question of scale, as opposed to monetizing immediately. That really changed the landscape for all of Los Angeles. Going forward, more and more capital is coming into the city which attracts more and more talent. I think the ecosystem is definitely taking hold.
This interview has been condensed and edited.
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