Toronto’s Blue J Legal raises $167-million as demand for its ChatGPT-like chatbot for tax pros takes off

The privately held company reported in two filings on July 25 with Canadian securities regulators that it had raised $161-million from investors outside Canada, and $6.4-million more within Canada. A corporate filing by Blue J with the federal government last week indicates that the financing values the company at more than US$300-million.

One of the securities filings reveals that the company has added two directors, Cathy Gao, a partner with Sapphire Ventures in San Francisco, and Allen Miller, a partner with Oak HC/FT in New York. A source familiar with the matter confirmed the two U.S. funds co-led the deal. The Globe and Mail is not identifying the source as they are not authorized to discuss the matter.

Past investors include Canada’s Mistral Ventures, Relay Ventures and Generation Capital, as well as U.S. funds Ten Coves Capital and LDV Partners.

Blue J was set to announce its financing next Tuesday and only agreed to share details with The Globe if it waited to publish the news three hours after a U.S. publication broke the story. The Globe declined. “At this time, Blue J cannot confirm any details” until Tuesday, spokeswoman Holland Eichorn said in an e-mail Friday.

Blue J is one of several legal-software companies bringing AI-driven products to law firms to hasten the automation of often tedious, time-consuming legal work. Many have experienced blistering sales growth, sparking massive investor interest.

In June, U.S.-based Harvey AI, a legal-AI software company, raised US$300-million in a deal valuing it at US$5-billion. That was co-led by venture-capital giants Kleiner Perkins and Coatue, four months after raising a similar amount at a US$3-billion valuation.

And in June, legal-software company Clio, based in Burnaby, B.C., paid US$1-billion for Barcelona-based vLex LLC, maker of an artificial-intelligence tool that keeps lawyers from accidentally citing fake court rulings.

Legal-data giant Thomson Reuters Corp., whose controlling shareholder, the Thomson family, owns The Globe and Mail, has also been active in developing and buying AI-powered tools to offer clients.

Blue J is a University of Toronto spinout led by Benjamin Alarie, the Osler Chair of Business Law with the school’s faculty of law, which began developing artificial-intelligence-powered software in the mid-2010s. Its original product helped lawyers and accountants speed up the process of researching complex taxation matters, powered by predictive analytics software.

Blue J raised venture capital, and its early product sold decently, counting Canada’s Big Four accounting firms and the Canada Revenue Agency as customers. But “it was OK, it wasn’t awesome, it wasn’t a home run,” Mr. Alarie said in an interview early this year.

After OpenAI launched ChatGPT in late 2022, the conversational AI chatbot that provides text responses to questions in seconds, Mr. Alarie realized his company could fold generative AI capabilities into its product to answer far more tax-research questions.

Blue J incorporated OpenAI’s large language model technology into its product, relaunching it in mid-2023.

That effort produced answers in about 90 seconds, but they were wrong about half of the time, a by-product of the quirky tendency of LLMs to generate “hallucinations,” or incorrect information.

Blue J set about to improve the product, in part by licensing data from Tax Notes, a leading publisher of tax views and commentary, and benefiting from improvements to successive releases of LLMs.

By last December, Blue J could produce answers within 10 seconds that were 95-per-cent-plus accurate and enabled users to have technical back-and-forth conversations about complex tax matters with the program. Some companies found that their users could save two hours a week each using Blue J, which retails for $2,995 a year in Canada per user.

“You just need to be able to articulate a technical tax question clearly and you get a ton of value out of Blue J almost immediately, which is a huge selling feature and why things are going so well for us,” Mr. Alarie said in December. By the end of this year, Mr. Alarie has predicted Blue J will be more than 99-per-cent accurate.

The speed and accuracy of the product spurred interest as legal and accounting firms – from solo practitioners to large enterprises – flocked to the platform.

Blue J was boosted by distribution partnerships with the National Association of Tax Professionals in the U.S. and associations representing chartered professional accountants in Canada and the U.S. Customers include KPMG, Richter LLP and Baker Tilly. By early this year, Blue J was expanding into the British market.

Annual recurring revenues soared, reaching US$2-million by the end of 2023, and US$9-million a year later from the new product. Sales have continued to expand at a fast clip, clocking in at more than C$20-million on an annualized basis now, making Blue J a relatively rare company in the enterprise-software space to have experienced strong sales growth amid a continuing period of economic uncertainty.

“This is really working,” Mr. Alarie said in January. We have really good product-market fit.” Keeping up with constant tax-law changes “is a never-going-away problem.”