- Mighty, a New York City-based startup that focuses on litigation finance, just got $US9 million in equity funding plus $US105 million more for its first investment fund.
- In litigation finance, investors fund lawsuits and get a cut of any settlement or cash award.
- The industry gained notoriety after Peter Thiel funded Hulk Hogan’s successful lawsuit against Gawker. However, Mighty sees litigation finance more as a tool to help ordinary people gain access to the justice system.
- Mighty provides software for litigation finance firms. It’s Mighty Capital investment fund will invest in them.
If you’ve heard of litigation finance, there’s a good chance you’re not a fan.
Mighty, a New York City startup, hopes to change your mind and put the industry in a better light – and on a better footing.
Litigation finance is the practice by which investors help fund plaintiffs in a lawsuit in return for a cut of payouts they may get from the proceedings. The best known example is perhaps tech billionaire Peter Thiel’s backing of Hulk Hogan’s lawsuit against Gawker, which ended in the closure of the digital media company – and a black eye for the emerging industry.
But people misunderstand the practice and don’t appreciate its benefits, said Dylan Beynon, Mighty’s cofounder and chief growth officer.
“People think it’s a loan, people think it’s predatory,” said Beynon, whose company offers software and, soon, funding to litigation finance firms. But to him, litigation finance is a way to help people “get a better deal from the justice system.”
Beynon and Mighty now have a way of spreading that message and nurturing the industry. The company just got $US114 million in new financing.
About $US9 million of the funding is in the form of a traditional investment deal, led by IA Ventures and Tribeca Venture Partners. The rest of the round will go into Mighty Capital, the startup’s new investment arm, which will invest in litigation finance firms across the country.
Lawsuits are expensive to pursue
Hulk Hogan aside, most people involved in lawsuits are neither rich nor famous. Many need help staying afloat financially while pursuing legal actions. The costs of fighting a case – from lawyer fees to medical bills to hiring experts or investigators – can all add up to quite a lot of money.
Those costs often sink a lawsuit before it reaches any kind of conclusion. Deep-pocketed corporate defendants will often “delay, defer, and deny” any kind of settlement, taking advantage of any and all kinds of loopholes in the hopes that the piling costs will force plaintiffs to drop their suits, Beynon said.
That’s where litigation finance comes in. It works as an investment, not a loan. If you win or settle your case, your backers get some pre-determined cut of the cash award. If you lose, they get nothing.
Mighty’s customers are generally involved in personal injury cases. But litigation financing is available for pretty much any kind of suit.
Litigation finance is becoming more popular – but it’s still controversial
Though it still isn’t well known outside legal circles, litigation finance is becoming more common. In late 2017, a study found that 36 per cent of law firms had accepted litigation finance to pursue a claim. That was up from 28 per cent in 2016. There’s no hard data on the size of the market, but top firms can invest billions.
However the industry remains controversial, thanks in large part to the Thiel’s backing of Hogan’s Gawker suit, which came to light in 2016.
In the wake of the revelation that Thiel was backing that suit, Lisa A. Rickard, the executive vice president of the US Chamber of Commerce, argued in a New York Times editorial that litigation finance is “a cancerous growth on our civil justice system” that turns the legal system into a “casino.”
But that’s not how Beynon sees it. Litigation finance benefits society, because it makes the justice system accessible to people who otherwise couldn’t afford it, he said. If you’re a construction worker who breaks your leg on the job, litigation finance might be the only way you can pay your bills while you pursue a claim.
So what does Mighty do?
While Mighty has been involved in the litigation finance industry since its founding in 2014, the way it’s pursued that industry has changed.
The company started out as a peer-to-peer service, offering a way for people to crowdfund their legal actions. The theory of Mighty’s founders was that ordinary people would offer better terms than big, institutional investors, Beynon said. Mighty cofounder and CEO Joshua Schwadron, an attorney by training who once made a go as a litigation financier, raised $US5.25 million to fund this first iteration of the company.
But Mighty soon discovered that institutional investors actually offered better terms to customers than people could get through its crowdfunding service. So Mighty switched gears, developing software to help investors find, assess, and invest in litigation.
Its software helps investors track the status of litigation, the value of deals, and the success rate of the attorneys and law firms they fund. Mighty currently has 60 litigation finance firms as customers.
“We’re providing tools to help them make better decisions,” Beynon said.
With the portion of its funding that will go directly into its business, Mighty plans to add to its 21-person roster, hiring in both engineering and sales.
Offering a helping hand to litigation finance firms
But Mighty has run into another problem – many of its potential customers are struggling.
Some litigation finance firms are doing well, particular jumbo-sized ones such as Burford Capital. Burford alone invested $US378 million in lawsuits in 2016.
But smaller litigation finance firms have trouble getting access to the money they need to invest in suits. Their borrowing costs can include a 20% markup from banks, Beynon said.
“They have a really tough time running their businesses,” he said. “They don’t always have access to capital.”
Mighty’s investment fund is designed to address that need. It’s intended to give smaller and midsized institutions easier access to capital so they can fund more litigation and scale their operations. Mighty will only be investing in the firms themselves via the fund. It won’t be directly investing in litigation.
Mighty hopes to use the fund to grow the market for litigation finance.
So what do investors get out of litigation finance?
Litigation finance can be very lucrative for investors. Some estimates say that litigation finance has about a 36% rate of return.
Beynon declined to discuss the returns Mighty’s customers are seeing. But the company talks to “tons and tons” of institutional investors interested in getting into the field.
Unlike the stock market, stocks, bonds, or even cryptocurrencies, litigation finance is totally separate from the broader financial markets. And because no two cases are exactly alike, it’s an investment that’s diversified by nature. That’s why many investors find it an attractive form of investment.
“It’s a tough market out there and people are looking for yields, and the yields are big,” says Beynon.
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