Eric Elfman, Onit: Building Two Legal Tech Companies From Houston

1Mby1M Research · 1Mby1M Case Study

Interviewer: Sramana Mitra

This interview is part of the case study-based research and entrepreneurship education work of 1Mby1M, the global virtual accelerator founded by Sramana Mitra.

Abstract

Eric Elfman built two companies in legal technology from Houston. His first, Datacert, founded in 1998 after identifying a massive, unaddressed opportunity in corporate legal spend management, was funded through consulting revenue and $10 million in angel capital from local investors – including two professional sports team owners – before scaling to nearly $30 million in revenue and eventually selling to Wolters Kluwer in 2014 for over $300 million. After leaving Datacert in 2008, Elfman co-founded Onit in 2011, again targeting legal departments with a no-code workflow platform; the company grew slowly at first, reaching just $25,000 in recurring revenue in its first year and $2 million in ARR after four years, before doubling revenue annually from 2016 to 2018 to reach $16 million and complete a $200 million majority recapitalization with private equity firm K1.

This case illustrates how domain expertise and validated product-market fit – built through capital-efficient early fundraising and steady account growth rather than pure bootstrapping – can support a large, disciplined scale-up, reflecting the 1Mby1M emphasis on proving the model before deploying significant capital.

Transcript of the Interview

Sramana Mitra: Let’s start at the beginning of your journey. Where are you from? Where were you born and raised? What kind of background did you have?

Eric Elfman: I was born and raised in Houston, Texas. I had a different educational journey compared to a lot of entrepreneurs. I dropped out of high school when I was in 10th grade and joined the Navy. The Navy turned me around and straightened me out. There, I figured out that I wanted to be an entrepreneur.

Sramana Mitra: What was it about the Navy that turned you into an entrepreneur?

Eric Elfman: I was always an entrepreneur. When I dropped out, I was selling skateboard parts out of my car and was looking at getting a storefront. I was always doing something entrepreneurial. Basically, what the Navy did was straighten me out.

It helped me understand that the path from a high school dropout to running a successful business required education. My experience in the Navy showed me the need to get my GED and go to college. I eventually got my MBA here at Rice University.

Sramana Mitra: What year are we talking about?

Eric Elfman: I got my MBA in 1995. I got out of the Navy in 1989 after 10 years of service. I spent my time from 1989 to 1995 getting a college degree. In 1993, I started my master’s program at Rice University.

Sramana Mitra: In the mid 90s, you came out of an MBA program and at the same time, the internet bubble was starting to develop.

Eric Elfman: Yes, it was on fire. I studied entrepreneurship at Rice University and it has become the top entrepreneurial MBA program in the country. I knew I wanted to start a business, but I had no idea what that required.

I decided that no matter what industry you go in, if your eyes are open and you are looking for an opportunity to improve something, there are company-building ideas in every industry.

I went to work in litigation consulting where we were consulting the big Fortune 500 companies on big lawsuits. We were handling the financial side of it with the damage analysis and forensic accounting. It was in that job that I had an epiphany for my first company and it has driven the next 25 years of my career.

Sramana Mitra: What was that epiphany?

Eric Elfman: I was sitting in the conference room of a Fortune 10 company. It was a big Oil & Gas company here in Houston. I was listening to one of the senior lawyers talk about all the work they did with outside law firms. I asked how much the company spent on outside law firms.

They started to help me understand why there are so many rich lawyers. The man shrugged his shoulders and said it was somewhere between $400 to $500 million a year. He said that figure was low because they were decentralized in different geographies and businesses can hire their own lawyers.

I said that if $500 million is a shoulder shrug then there is a need for some business in the practice of law. That idea drove the first company and we are still selling to the legal departments 25 years later.

Sramana Mitra: What did you choose to do that first time? What year was that?

Eric Elfman: It was in 1998, three years after I got my MBA, that I founded my first company. I ran it for 10 years and eventually sold it for a little over $300 million, giving all the investors ten times their investment.

The idea was simple and it wasn’t rocket science. It brought in every department and fitted it into the legal department in a way that made sense for them. The first thing that the company Datacert did was electronic invoicing.

The average lawyer in 1998, whether they are working for Exon, Shell, or Apple, managed a couple of law firms and received invoices from them. These law firms were asking these lawyers to review invoices, sign them, and pass them for payment.

Lawyers would get two to three feet stacks of invoices every month from the law firms that they were doing business with. They couldn’t do a proper review of these invoices, because they had a day job and they didn’t have time to look through every single invoice.

At the same time, you had this inefficient paper-based world. In every Fortune 500 legal department’s file cabinet was a document called Outside Counsel Guidelines. It told the law firm what they could bill them for and how they could bill them. These were all these rules to manage cost, but there was no way to enforce them.

The data search idea was to remove the paper invoice system and switch to electronic invoices directly from the law firms and run them against the rules and validate them. The result of that was a 5% to 10% savings on the money they were spending with the law firms just by enforcing guidelines that were already set.

At the end of the day, it was like someone in the supply department was checking the box of all the paper clips they received and validating that you are getting what you are paid for.

That’s all we did. We brought that to the legal department and we had to invent a brand new space because the electronic invoice format for law firms didn’t exist. There was a lot of foundation building that had to go on, but that was the heart of the idea.

Sramana Mitra: What city were you doing this from?

Eric Elfman: It was in Houston even though our customers were all over the world. We weren’t Software-as-a-Service because it was physical software, but there was an online component to it.

I’ll back up even more because there was one more reason why I got into the legal industry. There were a lot of adjunct professors in the Rice University program. These were people who were working in an industry, so you were getting practical knowledge. One of the professors used to say that in the land of the blind, the one-eyed is king. What he meant was why would you take this shiny new MBA or go start a company in a space like investment banking and consulting where all the smartest people in the world were already competing.

Why not go to a backward or a slower industry where you don’t have to bring rocket science. You just need to bring a little innovation that could be repurposed for something else. That led me to legal departments because it was traditionally technology backward.

Sramana Mitra: What year did you start the company?

Eric Elfman: In 1998.

Sramana Mitra: Talk a bit about fundraising. You said you raised a lot of money for this company. What was it like to raise money in Houston in 1998?

Eric Elfman: It was like the backwater. I had two things going against us. One was Houston. There was an investment community that had been built in Austin, but Austin might as well have been an ocean away from Houston, which is a traditional oil and gas company hub.

We also had legal technology against us because there hadn’t been good examples of companies selling software to lawyers that had been funded. We had to fight this notion that VC’s generally don’t sell to lawyers or doctors because they are partnerships and the money comes out of their back pocket.

It was tough. There were also no accelerators at that time that we could take advantage of. There was no Rice Alliance for Technology and no Houston Technology Center. None of these institutions existed. It was kind of a backwater. We had to find a way to prove what our ideas were without using someone else’s money.

Sramana Mitra: So you bootstrapped?

Eric Elfman: We were bootstrapped to start with, then eventually raised money. I had to consult with folks like JP Morgan Chase and Ameritech. It was the first thing I did at the company I started and that was to have the money to fund the software development that we would sell back to solve this problem in the legal department.

Sramana Mitra: Were you consulting for the legal department of JP Morgan?

Eric Elfman: Yes, and they were helping build the products. Not only would I be providing services to them in the legal department, but they also needed the software that we were building. It was a little bit of co-development as well, but I was providing 10 hours of service to these two companies a day while trying to write the software that we eventually sold to them both.

We eventually got to a place where we had five Fortune 500 customers using our software. They were run-on servers in a closet in the spare bedroom of my apartment at that time. This was in the early days where people weren’t thinking about where this data was flowing through.

It was only at that level of proof point and half a million dollars of revenue where we could raise money, but even then it still wasn’t a venture capital play. I eventually raised $10 million of angel capital in the early formation of that.

There was a pretty rich population of angels that if you had the patience and time, you could touch. 

Sramana Mitra: Were these Houston angels?

Eric Elfman: The majority were, but we eventually stretched out to Louisiana, a little bit in California, and even in the UK. It started with people in Houston. They had friends that wanted to get in on it, so it got wider.

In addition to that, we raised $10 million of strategic capital through UPS and Wolters Kluwer – a big American Dutch publisher who eventually bought the entire business.

Sramana Mitra: How did you get to so many angels? It is an incredibly time-consuming matter and getting introduced to these angels is not straightforward either. What was your process to get to these people?

Eric Elfman: You know what defines an entrepreneur is tenacity and not getting frustrated by the news. We went knocking on so many doors that eventually someone answered. It was a few angels who answered.

The early investors in Onit were highly influential people including two owners of professional sports teams. One was an owner of a baseball team, John Moores, who was the founder of BMC software.

The other was Bob Mcnair who owns the NFL team Houston Texans. He owned Cogen technology which he sold to Enron. He was a local celebrity billionaire. I got their interest and they had a network that spun out pretty big and fast.

Sramana Mitra: You raised $10 million in angel capital and got that project to what scale?

Eric Elfman: I was there for 10 years. I could talk to you about what made me leave four years before the full exit. We had sold a big chunk of the business before I left. I got it to just under $30 million of revenue and over the next four years, it grew to $60 million before it was sold.

Sramana Mitra: What year was it sold and to whom?

Eric Elfman: It was sold in 2014 to Wolters Kluwer which was this big American Dutch publisher that was also one of the primary investors in the business. A lot of strategic money I raised came from them. The only reason that they funded the business was to buy it.

Sramana Mitra: Are you at liberty to discuss the exit price of the $60 million company?

Eric Elfman: It was just over $300 million.

Sramana Mitra: Why did you leave four years before the exit?

Eric Elfman: It was a lot of my own doing. I made every first-time CEO mistake you could possibly make. The good news was that the idea and basic execution was so good that we weathered it and came out strong on the other side.

I had let myself turn into a day- to-day manager. I started thinking about career planning and performance evaluations more than I was out in the field with customers and partners pursuing things that would help build the business.

I let myself turn into a day-to-day CEO as opposed to the entrepreneur that I was. It took me to things that I didn’t like and wasn’t good at. I boxed myself in a way that didn’t feel good.

I let some politics get into the organization that I didn’t know to watch out for. It started to feel like a company that was not fun or pleasant to be at. We had sold half of the company to the strategic investor.

I had some liquidity and I decided that I wasn’t the person to take the company to the next level. You bring the story full circle. We are doing everything different at Onit. We’ve learned from our mistakes. We have organizational help, and we’ve grown the culture of the business strongly.

I remain in the field and go on sales calls as opposed to being a day-to-day manager. I got an executive leadership team that does the day-to-day management for me. I used the lessons I’ve learned here in my present company. We’ve grown much bigger in a shorter amount of time than the company I ran.

Sramana Mitra: Did you bring in an outside CEO or did you promote somebody from the inside?

Eric Elfman: I had hired a COO who became the CEO.

Sramana Mitra: Was that the person who sold to the company that had already been a strategic investor? The exit path was already laid out? You just build longer and sell it at a higher price.

Eric Elfman: Exactly.

Sramana Mitra: What year did you leave?

Eric Elfman: I left in 2008. It was six years before the ultimate exit.

Sramana Mitra: What did you do next?

Eric Elfman: I took a year off. I did a lot of reflection. I wasn’t going to do another startup. It takes so much energy, and it’s a young person’s game. I didn’t think I was going to go and start another business but then I had to reflect and figure out what I was. Am I just an entrepreneur or a CEO? Could I be the CEO of someone else’s business?

I donated a year of my life to the Houston Technology Center, which is one of the earliest accelerators. It was funded by the city of Houston. I did consulting for free trying to help other startups through the early days.

I met with a couple of people and got offered CEO spots of young startups. Ultimately, after a year, I decided that the only thing that would make me happy would be to start from scratch and build my own business. I started collaborating with one of my earliest employees in the first company.

We eventually founded Onit, which was two years after starting to play with ideas. That was in 2011. We started collaborating around 2010.

Sramana Mitra: What was the premise?

Eric Elfman: We didn’t have one. We had this basic idea that if you gave yourself enough time and flexibility, there would still be plenty of problems to solve in the market. What we didn’t want to do was run right back into legal technology even though there were still plenty of opportunities.

We invested money and also hired some developers and started playing with ideas. We stumbled on the company builder, which is this idea that despite half a trillion dollars being spent every year in enterprise software, very little of it moved the needle in terms of productivity for end users whether you are a lawyer, a compliance person, investment professional, or running an accelerator.

People like us use Microsoft Office or Google apps to get the job done, and if we can’t solve a problem in a PowerPoint, spreadsheet, MS word document then it wasn’t a problem that was going to get solved.

We coalesce around this idea that the average knowledge worker manages their day through email and that email is the world’s biggest workflow platform. That’s where approvals are happening. It’s a bad place for the work of an organization to be done, so we wrote a note code workflow platform.

Out of the box, there is no specific problem, but it provides 95% of the solution for any workflow challenge. We licensed that platform to lots of our customers.

Our real go-to market strategy has been to preconfigure solutions that solve big problems in big markets and sell them as if they were a standalone product with the advantage of our customers being on the platform, able to expand into every one of our products over time. They can also use our platform to solve bespoke problems.

We are selling four main products today primarily in the legal departments. We also license the platform to our customers to write their solutions to workflow challenges.

Sramana Mitra: You went straight to legal again?

Eric Elfman: It was about who we knew. Not only did we go back to legal but we also ended up configuring a solution for the same problem that our first company addressed. We realized that despite our last company being one of the dominant players in the space, the technology was 15 years old.

There was room for a breath of fresh air. It’s a story as old as time – an entrepreneur starts a new business to compete with the old business. We didn’t start that way, but that eventually drove 50% of today’s revenue in competing in the space that we helped create in 1998.

Sramana Mitra: What was the use case that the first company did and redid in Onit?

Eric Elfman: It’s called enterprise legal management. It’s going to be boring if you are not a corporate lawyer. It is essentially a database that corporate legal departments of Fortune 500 companies use to store all of their legal work. This includes litigation, transactions, and mergers and acquisitions.

All of the matters that a legal department works on gets stored in our technology. We are also the e-billing platform, so all the invoices come from law firms through Onit to Onit’s customers. Over the years, we’ve processed $30 billion of electronic invoices from law firms.

Sramana Mitra: So it was an invoicing app again.

Eric Elfman: Yes. If you look at the first half of this year, it’s only 25% of new sales. Our model is to preconfigure new solutions that we are selling to markets that we are not already in. Every single year, we enter a new market. They are all expansion products for our existing customers.

We are trying to build new products as the older products start to tail off. This is how we are going to scale this organization from $40 million to $100 million and beyond over the next two years.

Sramana Mitra: What was the revenue trajectory?

Eric Elfman: It was flat in the early days. I’ve judged the Rice business competition for more than 20 years now and I’ve seen it change. Once someone hits a million dollars, that’s an inflection point. I like to say that I don’t believe that everybody can sell $300,000 to $500,000 worth of software.

If you sell a million, there is a market. The question now is how big the market is, what the pricing strategy is, how big you can grow it, and how you can attack it. Those are all the problems, but I no longer question if there is a market.

We started slowly. At the end of our first year, we ended at $25,000 in recurring revenue, much less than what we had originally for. We are writing the Onit playbook as we are executing.

Sramana Mitra: I don’t get worried about the first year being $25,000 as long as you’re finding a product-market fit.

Eric Elfman: The first four years, we were finding our way. Along the way, we grew it to $2 million of licensing revenue ARR. We were four years old when we looked at the space our old company was in and saw that there was an opportunity. The Fortune 500 market is saturated for that type of market, but we believe that a third of them are going to refresh their software, which cost $0.5-$1 million a year. It was a rich market. We said we can attack this market not by writing something new or pivoting but by targeting our workflow platform at a bigger enterprise class problem that we can go after and make some impact.

The company that I founded was merged with a $140 million a year business. It was a big competitor in the space owned by private equity firms.

In 2016, we said we were going to attack the space, and by the end of the year we were in every RFP cycle because of our reputation. By 2017, we were winning half of the deals in the market against these bigger guys.

If you plot backwards when we did our private equity transaction in 2018, we were at $16 million and in 2017, we were at $8 million. In 2016 to 2017, we were at about $4 million. There was doubling of revenue in each of those years. That was our breakout.

Sramana Mitra: You did a private equity deal in 2018 with the $16 million trajectory?

Eric Elfman: Yes. We did that deal in November of 2018. We were at about $14 million when they closed, but we had a clear sight to $16 million by the end of the year.

Sramana Mitra: What was this private equity firm and what kind of a deal structure did you do? Did you take some of the founders or did the early employees take liquidity? Did you put all of it into growth?

Eric Elfman: It was K1, a young private equity firm. They are about the age of Onit. They are nine years old, but they raised $4 billion and they are raising another fund that could potentially double that.

They are a young fund but eager with the singular focus of helping B2B SaaS companies grow from $10 million to $100 million. It was a majority recap.

For about a year before that deal, I was talking with my board about valuations for high-growth SaaS businesses. I didn’t believe they can get much higher, which means they can only go lower. I wasn’t predicting a dot-com crash event, but I said that there was an enterprise value and we ought to do a majority deal.

I got them on board and eventually raised that money. We had the patience to wait for that valuation. They took out all my institutional investors and the majority of my angel investors, and employees took some liquidity. I took some liquidity but I put in the majority of my stake into the next entity.

Sramana Mitra: How much did you raise?

Eric Elfman: It was a $200 million round.

Sramana Mitra: I did not ask you about the earlier funding round. It seems like you had angel investors and VCs earlier on as well. If you could just talk me through to what point of the history of the company that you raised money.

Eric Elfman: My partner and I were the first investors in the company and that is where we started playing with ideas. From 2010 to 2011, we raised angel capital of a couple of million dollars in total. It was nothing similar to what we did in the previous company because I was determined to get pure high-grade venture capital in this business earlier.

When we were still pre-revenue, we took $3 million from Austin Ventures, -which was a big player in Austin, but they were getting out of early-stage investing. A couple of years later, we took a total of $8 million from Level Equity out of New York. They call themselves private equity, but it’s a hybrid between venture capital and private equity.

We eventually raised $16 million. We have always been capital efficient. Although it’s nothing to raise $16 million, it got us to the exact number of ARR which is capital-efficient these days.

Sramana Mitra: With $16 million, you raised $200 million. You got a high valuation on that round.

Eric Elfman: We did.

Sramana Mitra: What happens after 2018?

Eric Elfman: We go to work growing the business. We’d always been an organic growth engine. We had never acquired a company like Onit. With private equity comes power to acquire. Six months after we did our K1 deal, we did our first acquisition of a Silicon Valley company for over $50 million.

Sramana Mitra: What do they do?

Eric Elfman: It was very similar to our primary product – enterprise legal management except for a sub Fortune 500 play. They operated at the next 2000 smaller legal departments. Earlier, it was a different segment of the market.

We acquired them not to convert their customers to ours; we continue to run that as a standalone business. All the employees report to the GM and instead of the GM reporting to the board, he reports to me. We collaborate on marketing and sales and continue to grow both of these as high-growth businesses.

Sramana Mitra: Was it an all cash acquisition, cash in stock, or pure stock?

Eric Elfman: I’d like to think that we did what K1 did for us. It was a mix of cash and stock. I needed their founders on board.

Sramana Mitra: What is COVID doing to you?

Eric Elfman: It’s changing everything. We have seen over $10 million of our pipeline shift as a result. Some deals just shut down. It’s going to have an impact, because we are selling to big companies. It’s easier for us to adapt to selling virtually.

It’s harder for our big customers’ legal departments to shift completely to buying big software virtually. It’s been a bit challenging. We’ve reached our Q1 targets, but we had to reforecast the business for the first time in my career at Onit. We never missed a target at Onit. We always outperformed.

We saw the writing on the wall. The sales are going to be harder. It’s going to be harder to maintain the same batting average that we had before. We reforecast and in March, we were doing our worst case planning to make sure that there was not going to be a cash crunch, but we changed that and said that we were going to do 75% of bookings in Q2, and 50% in Q3 and Q4.

It turns out that we were right in Q2. We only did 75% of our original plan and we think we are going to be right in Q3. We just don’t know the full effect. It is having an impact on the top line.

What we did was different than a lot of our peers. We did not do a reduction in workforce. We had 312 employees when COVID started and we are at 330 now. We found $10 million of cost to tear out of the business by getting more efficient without terminating a single employee.

Our original plan was to grow to 100 people this year. We are not going to do that, but we are still going to hire 40 to 50 people this year. I believe that as a workflow collaboration company like Onit, this current situation is driving people to push automation projects and workflow projects much faster. We are intent on coming out of this strong. in fact, stronger than our competition in terms of capability. I think in 2021 and 2022, it is going to be a better world for selling technology like Onit.

I lived through the dot-com crash. We were just three years old at Datacert when the whole world changed. I saw my private jet disappear. That helped educate me. I think strong companies get stronger in times like this and unfortunately, weak companies get weaker. We had turned our attention to M&A in this area. We have signed a letter of intent to acquire a company.

Sramana Mitra: It’s a very good time to acquire a company.

Eric Elfman: We are trying to sign the second letter of intent with another company and both of these companies are on different continents than Onit, so it’s creating its own set of challenges. There’s quite an unknown factor involved here – how do you do due diligence in a company that you have never seen and can’t fly to.

With K1 backing and support, we are leaning into the current environment and not just retrenching and hanging on to survive.

Sramana Mitra: You are going to be about $30 million this year?

Eric Elfman: Closer to $50 million. We are at $40 million already and that is only the recurring revenue. That does not include $15 million to $20 million of service revenue on top of that.

Sramana Mitra: Great story! Congratulations on all your success. Thank you for your time.

Key Takeaways

• Eric Elfman founded Datacert in 1998 after spotting a large, underserved opportunity in corporate legal department spend management, funding early development through consulting work before raising $10 million in angel capital from Houston-area investors, including two professional sports team owners.
• Datacert grew from five Fortune 500 customers running on servers in Elfman’s apartment to nearly $30 million in revenue by the time he left in 2008, eventually reaching $60 million and selling to Wolters Kluwer in 2014 for just over $300 million.
• Onit, founded in 2011, started slowly – $25,000 in first-year recurring revenue and $2 million in ARR after four years – before Elfman targeted the same enterprise legal management market Datacert had pioneered, doubling revenue annually from about $4 million in 2016 to $16 million in 2018.
• Onit raised capital in stages ($3 million from Austin Ventures, $8 million from Level Equity, totaling about $16 million) before completing a $200 million majority recapitalization with K1 Investment Management in 2018, which funded its first acquisitions and continued organic growth even through COVID-19 without layoffs.