Innovate or Get Regulated to Death: Why Compliance Is LegalTech's Biggest Opportunity

Have you ever been deep into developing an innovative product only to find yourself overwhelmed by unforeseen and newly enacted regulations? 

That’s the compliance speed trap: you’re sprinting toward innovation, and regulators drop a freight train of paperwork in your path.

LegalTech founders and in-house teams are facing an overload of regulations. Our team has identified three patterns:

A daily storm of rule changes. Imagine waking up to find 220 new regulatory updates dropped worldwide every day. That’s what companies face: U.S. federal regulations have swelled to nearly 200,000 pages (1), an 18x growth rate over the last fifty years, and every week brings fresh proposals. Manually parsing that flood feels like using a teaspoon to bail out the Titanic.

Total Pages Published in the Code of Federal Regulations (1950–2021), Regulatory Studies Center, George Washington University (Nov. 1, 2022), https://regulatorystudies.columbian.gwu.edu/sites/g/files/zaxdzs4751/files/2022-11/totalpagescodefedreg_11-01-2022.pdf.

But the volume is only half the story, the cost is staggering. According to congressional testimony from economist Casey Mulligan, new federal regulations added an estimated $617 billion per year in costs through 2022, based solely on rulemakings (2). This figure excludes costs from statutes and other regulatory actions and accounts for deregulatory offsets. While this figure reflects a macroeconomic burden, the ripple effect hits startups hard. Rising compliance costs eat into already-tight budgets, diverting capital away from innovation and into red tape.  

And nowhere is that pressure more acute than in legal departments. Today’s Chief Legal Officer (CLO) is handling contracts, ESG reporting, data privacy audits, cybersecurity, and AI governance. This expansion of responsibilities comes while many legal teams are working with flat or only modestly increased budgets. It’s no surprise, then, that 58% of CLOs now oversee three or more business functions beyond Legal, and 27% manage five or more (3). It can feel like a nonstop game of whack-a-mole: fix one problem, and a few more pop up behind it. Many legal teams say they’re stretched thin trying to keep up with everything on their plate.

AI compliance as the new Wild West. GenAI is the craze, but 38% of executives say regulatory headaches are their biggest barrier to deployment, up from 28% last year. Over half of companies have shelved projects because they can’t tame data risk concerns. With no unified global AI rulebook, every region creates its own. Startups end up reinventing the compliance wheel again and again.

This regulatory patchwork isn’t just a LegalTech problem. It’s hitting startups across all regulated industries. Take PerceptIn, an autonomous-driving startup. Although not in LegalTech, PerceptIn faces challenges that mirror those of founders in highly regulated sectors. The company spent $344K on compliance per deployment, 2.3X its R&D budget and far above the EU’s 17.6% benchmark. While mature software firms allocate about 13% of their spend to compliance, AI-centric startups can see that jump to 42%, diverting precious resources from product breakthroughs into regulatory paperwork.

Here’s the good news

Compliance doesn’t have to be your kryptonite. Think of it as your secret sauce. Bake automated monitoring, policy update alerts, and built-in risk checks into your platform from day one. Suddenly, you’re not just another startup dodging red tape. You’re the partner clients rely on to navigate the regulatory maze.

Regulation isn’t the roadblock. It’s the express lane for anyone smart enough to build compliance into their DNA. 

Ready to shift gears?

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1. Hearing on "The Golden Age: Unleashing Main Street Through Deregulation," 119th Cong. (Apr. 1, 2025), https://www.congress.gov/119/meeting/house/118074/documents/HHRG-119-SM00-20250401-SD002-U1.pdf.

2. Hearing on “Congressional Oversight of the Administrative State,” 118th Cong. (June 14, 2023) (testimony of Casey B. Mulligan), https://oversight.house.gov/wp-content/uploads/2023/06/hoc_testimony_mulligan_20230614-1.pdf.

3. 2024 InnoLaw CLM Market Study, https://clm.innolawgroup.com/innolaw-clm-market-study-2024.