The following interview is a conversation we had with Otto Hanson is the Founder and CEO of TermScout, on our podcast Category Visionaries. You can view the full episode here: $7 Million Raised to Build the World’s Leading AI-Powered Contract Review Software.

Otto Hanson
Hey, Brett. Really excited to be here. Yeah.

Brett
So before we begin talking about what you’re building there, let’s start with a quick summary of who you are and a bit more about your background.

Otto Hanson
Sure. I’m Otto Hanson, co-founder CEO of term Scout. My background is I grew up in Arizona, love the outdoors, live in Colorado now. Worked in startups early in my career, got beat up by lawyers a lot and decided that if I was going to be a good entrepreneur, I needed to have some legal background. So mid career kind of left entrepreneurship, went and got a law degree, and then ended up going and practicing law for just a few years at a large corporate law firm. Became what I like to call a minimally viable attorney and lasted just long enough to identify some big problems with contracts, in particular as a big body of legal complexity and legal blockades to commerce, so to speak. So saw some problems and decided to go out and fix them at Term Scout.

Brett
Wow. Interesting journey working at a big corporate law firm. That sounds like a lot of fun. What was that experience like?

Otto Hanson
Grueling. You hear stories about long hours, heavy stress, and I actually really like the work. It’s intellectually challenging. It’s interesting work, and it’s also incredibly stressful. As a corporate attorney in particular, you’re really in the middle of people’s make or break business transactions, the really big ones, the mergers and acquisitions, the VC financings, and you’re the guy that’s slowing everything down and keeping them from closing. And there’s also just a tremendous amount of pressure to get every single I dotted and T crossed, and my body didn’t deal with the stress of that environment very well, so I’m really glad to be out of it.

Brett
Nice. Yeah, I can imagine. And what’s your favorite outdoor activity to do there in Colorado?

Otto Hanson
Stand up paddleboarding on rivers is my current favorite hobby. Not in the winter. Wintertime. Right now we’re doing a lot of sledding. We’ve got two daughters, one six months old and one two years old, and they are hardcore sledders. 

 
Brett
Nice. That’s awesome. All right, two other questions we like to ask just to better understand what makes you tick as a founder. First one, what CEO do you admire the most and what do you admire about them?

Otto Hanson
Yeah, this is an easy one for me. It’s Yvonne Shernard of Patagonia. The CEO of Patagonia. Former CEO of Patagonia. But he founded Patagonia incredible clothing company. Super big fan of their products and brand and just company ethos. But really he as a founder, he was kind of a dirtbag climber who loved the outdoors and decided to start a small kind of gear company to help finance his climbing addiction, so to speak. And as the company got bigger and better and better, he built a phenomenal company. But he then gave the whole thing away. And he really is you see CEOs out there today, you see this effective altruism movement, and it’s like people are trying to amass billions of dollars so that they can, quote, unquote, give it away. But to date, I don’t think anybody’s actually truly given it away. What most CEOs do is they earmark it, but they promise to give it away over a period of time.

Otto Hanson
And during that period of time, in the interim, they’re amassing additional wealth off of the capital. So not to diminish that’s better than nothing, and we need more of that, too. But Shinard really, I think, took it a huge step further and said, here’s the whole company. We’re donating the charity. No tax advantages. Just talk about a guy who’s really talking the talk.

Brett
Yeah. For lack of a better description, him and Patagonia are just a very aligned organization. I think it’s become cool in recent years to be a mission driven company, but I think for a lot of companies, it’s just bullshit. It’s something they say to appeal to investors or to customers. But everything that Patagonia does, every action they take, every move they make really does seem to be very aligned around their mission, which is so cool to see.

Otto Hanson
100% agree. We only hope to follow their model and be as big and successful both on the pure company metrics side of the house and on the impact on the environment or social costs that we want to move. 

 
Brett
So when I see your name on the Forbes Rich list after Term Scout goes public, I’ll say, all right, have you given away all that money yet?

Otto Hanson
Yes. Hold me accountable. Come back and play this clip for us so we can get alternative if, God forbid, I have proven to be corrupted like so many others by that point.

Brett
Sounds good.

Otto Hanson
All right.

Brett
And what about books? There’s a specific book that’s had a major impact on you as a founder, and I always say this can be a business book or it can just be a personal book that’s really influenced how you view the world. 

 
Otto Hanson
Yeah, it’s such a great question. I love that you asked this in your podcast because there’s so many good answers for me. It’s the Lean Startup by Eric Reese. It’s, I think, just a fundamental sort of building block of any startup is understanding how to build, measure, learn to use the terminology from the book, but really how to learn. A great mentor of mine once said, the best companies are the companies that learn the best startups anyways. And that book is all about how do you learn really fast, because we’ve all got ideas, and 99% of them don’t work. For whatever reason, the market doesn’t want them in that particular format. The economics don’t work, whatever. There are a million reasons why things don’t work. But usually there’s something in that vein that if you’re able to learn quickly and pivot quickly and adjust, you can find the version of that problem that you want to solve that can be successful.

Otto Hanson
And so we spend a lot of time, we ask every new employee to read the book. We have a YouTube video that’s kind of a condensed version by this guy, Alberto Savoya, who does, like, a build the right hit, very similar type talk, which is all about how do you build something, how do you prototype something quickly, get it in the market, get some customer data, and then figure out what to adjust and how to win.

Brett
And you mentioned there ideas that you think are going to work and they don’t. Is there an example of an idea that in your brain you’re like, this is genius, this is going to work for sure, and you went out and tried to execute on it and just found out it didn’t work.

Otto Hanson
Oh, my gosh. A huge graveyard of such ideas. The first one that came to mind was actually one of the first ideas that we toyed with. So term scout our company. We’re all about helping people understand contracts. Our goal, our mission, is to make contracts simple and useful. And the first idea that we toyed with and actually launched was kind of like a Yelp type app where attorneys could register, prove that they were an attorney. And then if you were an attorney, we would let you create a public review of a contract that you were reading. The idea was like, actually, when I practiced law, I read the Salesforce Main Services Agreement. It’s called their primary customer agreement for multiple different customers. And I was like, wow, if I could have just created a single review, maybe shared it with a bunch of people, I could save thousands of people the time of reading this contract. 

Otto Hanson
So we launched to that and we did a quick beta experiment. Literally inside of a day, we had five different attorneys review the same contract on like, ten key metrics. And it was really simple. It was like, how would you rate this contract on privacy? How would you rate it on limits on liability for this party versus that party? They had these, like, ten metrics, and the results were all over the place. Like, one attorney gave it a five on privacy, another attorney gave it a one on privacy. And we realized, like, oh, one of those attorneys is like a divorce lawyer. They’re not well equipped to comment on the privacy qualities of this contract. So we looked at that data really quickly and like, whoa, we’re going to need hundreds of reviews on any contract in order for this right signal to actually break through the disparity or disparate potential answers. 

 
Otto Hanson
So we scrapped that idea and we took it in house and we decided to try. Like, what if we actually just created our own rating mechanism and brought all of that in house so we could use our own subject matter experts to make sure it’s really high quality and that we don’t have to figure out how to control? For reviewers out there that may not actually be the right people to be reviewing that particular subject matter. Fascinating.

Brett
And thanks for sharing that. That’s always fun to hear examples there. Now, let’s talk a bit more about Term Scout. So let’s begin with how would your customers articulate the problem that you solve? Let’s say that they’re sitting at a bar talking to a buddy, and they say, okay, yeah, I’m using this company called Term Scout, and they’re solving this problem. What is that problem?

Otto Hanson
Yeah. So we have kind of two types of customers. So the first one, a great example is IBM. If were at the bar with IBM’s sales team right now, the guys and gals who are selling IBM cloud services, what they would tell you is, you know, Brett, every time I go to sell cloud services to an enterprise customer, they come back and they take our contract and they mark it up, and lawyers get involved. And when I would have closed at the end of the month and hit my Q Four quota, instead, it got locked into legal for 60 plus days. I missed my quota, and the whole deal got mocked up and the relationship with the client got soured, all because these lawyers came in and marked up the contract to high end and what Termscott is doing for me. They’ve actually worked with our legal team to make sure that our contract is reasonable to help us really benchmark that contract against market norms, make it great.

Otto Hanson
And then they produced all this data that we can use to show our customer, hey, we’ve worked really hard to make this contract good. Here’s a bunch of neutral, independent third party data to prove it. And what we’re seeing is more than 40% of customers are starting to sign that contract without negotiating. A number of our customers are measuring this, and we’re just seeing phenomenal rates of reduction in the instance of customers that are either insisting on using their contract or marking up our contract. So that’s half of what we do. The other half of what we do is actually help IBM’s customers or really any company that’s buying stuff, we help them understand the contracts that their vendors are proposing. So if you were going to buy IBM, for example, you could use Termscout to review their contract. We have an AI only version of this, which is actually free to the public.

Otto Hanson
You can go try it out@termscout.com. And then there’s an advanced version that goes through human QC. That’s a more wide glove service. But what we do is we say, hey, we want to help you understand which of your vendor contracts are good and bad. Essentially the good ones. We want to help you fast track those right to signatures. No need to waste time. There’s no need to send those through complicated legal processes. We can eliminate those quickly. The bad ones, let’s actually figure out how you can most quickly get those to a reasonable place.

Brett
So, to some extent, is this displacing lawyers in a way that would normally review these contracts, or how do you think about that?

Otto Hanson
No, I don’t think so. And this stuff is really complicated, and I think it’s dangerous. We advise all our customers, like, use us with your attorney, not instead of your attorney. And sometimes, though, that means create rules with your attorney. Have a conversation with your attorney to figure out when are you comfortable with me signing a contract? If Turn Scout can prove that it meets all of these requirements and it gives it this rating, then can I sign it? And that’s a conversation for you to have with your attorney. I like to say that AI isn’t going to replace attorneys. Attorneys using AI are going to replace attorneys who aren’t using AI. And that’s, I think, the world that we live in today is if you really want to be on the cutting edge of this stuff, get your hands on Chat TBT. Go play with it. 

 
Otto Hanson
Figure out how you can use it to leverage up or level up in your particular role. Use termscop. We got a free contract review tool that leverages some cutting edge AI to help you do your job better. And that’s the best way to guard against this idea of robots or AI taking our jobs. Nice.

Brett
I love that. And I see on the website it’s a contract database. Can you just explain to us how that database works? What exactly is being collected there, how big the database is, and just any color you can provide?

Otto Hanson
Yeah, a big part of our belief, Brett, is that it should be really easy for people to understand the contracts that they’re signing. And so one of the initiatives that we’ve taken on is today, most B2B software companies, and even a lot of B2C companies, they publish their contracts on their websites. So Salesforce, Microsoft, Google, IBM, you name it, these companies all have their contracts publicly available. So what we’ve done is gone out and grabbed those contracts and reviewed them and rated them and compared them. And we’ve used our most rigorous review level, which is we call verification. A verified contract is a contract that goes through not only AI review, but also human quality control. And so the verified public database that you’re referring to is a database of, oh, I think it’s around probably 1500 public contracts, most of them offered by vendors. 

Otto Hanson
A handful of them are customer forms. So, like Coca Cola’s standard purchase terms that it asks its vendors to sign, for example. And you can go on our platform with a free account right now and go see what any of those contracts look like. You can see exactly what they say. You can see breakdowns in layman’s terms. You can see market data on how common or uncommon every term. In all of those, you can compare them. It’s a really rich tool. And the goal is to help people understand what’s market it’s really all about bringing market data to the masses and making sure everyone can access it.

Brett
And then how would you determine a good contract from a bad contract? Is there like, a certain clause that could turn a contract into a bad contract? Or is it not that binary? Is it like a scale of, like, one to ten, or what does that rating look like?

Otto Hanson
It’s a really good question. A lot of what our business depends on is a proprietary rating algorithm and methodology. And the way it works, essentially, is it looks at everything that matters in a specific contract type. So if we’re talking about a software license agreement, we ask all the substantive questions that a lawyer would ask. We use real lawyers, real subject matter experts to program this into our software. But it’s like, is the vendor indemnifying me for third party IP infringement? Is there a non compete? And each of these things, like, if I agree to protect your confidential information, that’s good for you and that’s bad for me. And so we program that into our software that’s a little bit more, if you’re the customer favorable, if that provision is there. And so basically, we’re looking at like 700 data points. Many of them have these value judgments associated with them, and then an algorithm rolls it up into an overall rating.

Otto Hanson
And so what you actually see as a user is, what percent of this contract do we think favors you versus me? So Google Cloud, for example, has a really customer friendly agreement. It gets a rating of 70% customer favorable on our platform, AWS. The AWS customer agreement that they ask their customers to sign doesn’t perform so well. It’s got a lot more objectively, less customer favorable things in it, more Vendorable favorable things. It receives a rating of I think it’s 70% vendor favorable. So that’s what ratings essentially look like is kind of what percent of the contract favors each party to the agreement.

Brett
Got it. That’s super interesting. And you may have seen in the news there’s been a couple of articles about Chat GPT lately, joking, of course. It seems like that’s all that exists in the media and on LinkedIn especially. So what’s that been like for you, being an AI company in this space? Have you just seen an influx of demand from customers and investors who want to get involved after? When did chat GPT really become big? Maybe two months ago.

Otto Hanson
Yeah, it was middle of November, late November maybe. And yeah, well, look, it’s been really exciting, kudos to OpenAI for releasing something so groundbreaking that it got the conversation just kicked into like 10th gear. So, yeah, we’re kind of secondary beneficiaries, you might say, of the excitement around it. We’re really delighted. We’ve been building bespoke sort of specialized AI for a few years now and on the one hand, we’re super excited to see this breakthrough, the conversational, chat based AI and the improvements underlying the GPT 3.5 updates there. And it’s super cool stuff and we’re even experimenting as we speak with adding some elements from GPT into our product to enhance it even further. And at the same time, we feel even more confident about our own direction and the AI that we’ve built and trained in house, which is really like a different type of model, right?

Otto Hanson
GPT is large language model. We’re taking all the language from this huge data set and trying to predict the next word. And at Term Scout, we’ve actually said, actually, we’re kind of more like a small language model. We want a much smaller data set, but much higher quality signal in that data set. So we’ve custom built a training set that has been hand trained by subject matter experts and has been really effective at answering the types of substantive questions that we know an experienced attorney in the field would want to know the answer would need to know the answer to in order to determine is this contract better for you or for me? So it’s cool. We’re excited. We’re excited to be part of the conversation and we’re excited to see what happens with AI. I mean, generally, yeah, there’s some risks out there, what can it do in the wrong hands?

Otto Hanson
But overall, we tend to be pretty optimistic. I guess I could speak for myself anyways, I tend to be pretty optimistic and I think there’s really a lot of good that’s going to come out of AI and all the sort of tangential technologies that are being built around it over the coming years. Yeah, absolutely.

Brett
I think it’s like everything right, there’s going to be pros and cons that come with it, but you get it’s cool. I think even critics of it, maybe they haven’t spent enough time playing with GBT, but the first time I played with it, I was truly mind blown. My brain still can’t understand how it’s able to do that, but it’s pretty cool technology. It’s really amazing and really exciting to see all the different use cases that are going to come out of it, I think especially as companies start to build on top of it and integrate it into their existing products and services as well. Now let’s talk a little bit about traction and adoption. So are there any numbers that you’re okay with sharing that really just highlight the growth that you’re seeing?

Otto Hanson
Yeah, so we’ve been on a tear lately. It’s been really exciting to see. We’ve got some really exciting aspects of our business that are exciting. Our team, our stockholders, our investors among them. Revenue growth has been solid. I can’t share any numbers there, but we’ve been on a tear. 2023 has been a good year for us. Of course, it just started, but it’s looking really positive. We’ve got a user growth as well, especially that’s been kicking in with the generative AI. We launched some really exciting partnerships over the last kind of six months with World Commerce and Contracting Organization, how to Contract and others. And there’s, I think, an average of 6000 contracts being analyzed on our platform every month right now. So there’s a lot of activity. We like to think we’re putting a pretty big dent in the contracts that are being reviewed around the world. 

Otto Hanson
Although realistically, 6000 a month is actually nowhere close to a big dent, but it’s a number that we’re proud of for where we are as a company.

Brett
Are there any numbers out there about how many contracts are signed per month or per year or is that probably just impossible to gather? 

Otto Hanson
I think it’s impossible to gather, but we’ve tried to calculate it ourselves and it’s in the billions. 

 

Brett
Yeah, I can imagine that’s crazy. 

 
Otto Hanson
Well, nice. 

 
Brett
That’s super cool. And what do you attribute to this growth? Why are you guys on a tear right now? What are you doing?

Otto Hanson
Right, yeah, it’s a great question. I think ease of use is a big part of it. We spent a lot of time focusing on just product and technology and the $7 million that we raised, the vast majority of it has gone to building great products, getting the subject matter experts to make sure that the data integrity is really high. So the customers that use our products, they trust them really fast. We worked hard to build trust into the DNA of the product. We know that if you’re going to rely on us to make a decision about whether or not to sign a contract, that’s a really high trust relationship, really high stakes relationship. And so customers that get in there quickly find out, wow, they actually show their work. If we tell you that X clause is present within one click of the mouse, you can actually see the source language from the contract that proves the veracity of that statement. 

 
Otto Hanson
So most of our group growth candidly comes from word of mouth it comes from. We have one happy customer that shares it. You have IBM who has a certification on their contract. Their customers see it. They see that we’re working together, that we’re helping them reduce contract friction. And they come over and they find out quickly that we’re solving a lot of really important problems. Nice.

Brett
And what about market categories? How do you think about the market category that you’re in? Is this Contract Review or is this going to be a category creation play where you create a totally new type of category?

Otto Hanson
Both. We’re in one crowded category, which is Contract Review technology. There’s a lot of players in this space. I’m not aware of any that are giving away a free contract review AI tool like we are. But there are a lot of higher end contract review products in the B2B space. So that’s one category that we’re in. On the contract certification side, though, we’ve really created a category. And that category is all around using objective data to help people. It’s kind of around helping the owner of a contract help you make your contract great and then give you the data you need to prove that to your counterparty. Like real objective third party data to prove it. And in that particular space, there’s really no one else. 

 
Brett
And if you look towards the future, what do you think is going to make up the majority of the business? Is it eventually going to be the Contract certification? Or is there always going to be this even split between Contract Review and Contract certification? Or is that still TBD? 

 
Otto Hanson
I think it’s both. I mean, our vision of the world is like people need businesses. We need a neutral, independent third party to help us get to contract faster. And what we’re trying to be is that neutral, independent third party for both parties, for both sides of the transaction. Because really we’re bringing an objective sort of data driven approach to this. There’s no subjectivity in it. When two people go to negotiate a contract today, it’s all subjective. But when you bring termscop into the mix, it’s really just, hey, here are the facts. Here’s what this party is proposing, here’s what this party wants, here’s the market data that shows what actually happens here. And if you don’t have both sides of that, the transaction, you end up, I think, over optimizing for one side. And that actually doesn’t help that side. Right. You need to be trusted by both sides.

Otto Hanson
So I think both parts will always be a part of our business. That’s our current hypothesis. Check back with me in a couple of years, Brad. We’ll see.

Brett
Sounds good. And what about go to market challenges? As I’m sure you’ve experienced, bringing innovative tech to market is not easy. What’s been the greatest challenge so far and how did you overcome it?

Otto Hanson
I think building awareness generally is one of the biggest challenges. We live in just a crowded world, business crowded. There are so many companies trying to get our attention, and as one of those companies, it’s hard to break through the noise and get your signal to the right people. As I mentioned earlier, we made a conscious decision to invest really heavily in product and therefore less heavily in marketing. And so we kind of decided to be a product first company. And that means that just getting the word out has been that much harder. Like, we just hired our first full time marketer this month. So that gives you a sense of sort of we’ve been working with. So our big challenges right now, and I think our big challenges have always been just like, how do you get the word out to enough people to grow really fast?

Brett
Makes a lot of sense. All right, last question here for you. Let’s zoom out into the future. Three years from today, what does termscout look like?

Otto Hanson
We hope three years from today, brett that when you in your capacity as an individual or as a business person, entrepreneur, when you go to open up a contract from someone, you have instantaneous, accurate and reliable data that tells you this is exactly what this contract means. This is how good or bad it is for you. Here’s how every single provision compares to market, or similarly, here’s the stuff that’s out of market and in your capacity of the company anyways. Here’s what approvals you would need before you could sign it. And all of that data is served up in an automated fashion in a way that you can trust so that we get out of this world we live in now, where we’re blindly signing contracts, some of which, by the way, are very bad for us. And we’re in a new world where actually everyone has access to really reliable, trustworthy data about the contracts they’re signing at the click of a button.

Otto Hanson
And if we’re successful at making that happen, we actually think that most contracts will actually just move to market, contracts will get better and better, and the world will be just a slightly better place.

Brett
That’s so cool. So it’s essentially helping people prevent getting screwed as a service. If we had to boil it down.

Otto Hanson
That really is what it is. I mean, honestly, that’s what it is today. What we really want to happen is to enable you to actually click a button and fix the contract and propose the counter contract and get it all done with a couple of clicks of the mouse. That’s really where we hope to go.

Brett
And do you envision that eventually, being a consumer play? Like just separating my life, business and personal, even personally, I probably sign like, I don’t know, five to ten, maybe more contracts per year, like a condo lease, things like that. So do you see individuals using this in their personal lives? As well? Or is it more just for the business case?

Otto Hanson
Look, contracts touch people and businesses equally. They don’t discriminate, right? Any person or business that participates in the economy is necessarily signing lots and lots of contracts. So for me, the solution should bridge the gap. It should work for everyone. So, look, today we’re really focused on businesses. That’s our business today. That’s sort of our beachhead. But, no, my hope, all of our teams hope is that this works for people, too. Nice.

Brett
That’s super exciting. I look forward to sending some contracts your way to review and see how the score looks. All right. Unfortunately, that’s all we’re going to have time to cover for today’s interview before we wrap up here. If people want to follow along with your journey as you build, where’s the best place for them to go?

Otto Hanson
Follow turn scout on LinkedIn. We’re dropping lots and lots of juicy market data about what you should be looking for in contracts, what’s normal, what’s not, what companies have good contracts, what companies have bad contracts. Really fun page to follow. Check us out. Awesome.

Brett
Well, thank you so much for taking the time to talk about what you’re building and share this vision. This has been a lot of fun, and this is super exciting. And look forward to having you back on here in a couple of years to talk about all the execution you’ve done on making this vision happen.

Otto Hanson
Thanks so much for having me, Brett. Really appreciate it. Talk to you soon. Yes, talk to you.

Brett
Bye. You.