InsurTechTop9 Roundtable: 3 questions every start-up wants to ask a VC
Picking an InsurTech winner is easy with the benefit of hindsight. But in practice, it is anything but! And when an investor’s money is at stake, picking a winner becomes all that much harder. For this month’s InsurTech Insights, Rick Huckstep talks with fellow investors from the InsurTechTop9 Club about picking winners and the emergence of the insurance Corporate VC.
The Rise of InsurTech
Followers of #InsurTech and the InsurTechTop9 on social media know the story by now. First there were software vendors, IT suppliers and corporate buyers of technology. Financial institutions spent a pretty penny with corporate technology firms for, what was essentially, legacy IT. Then came Fintech and everyone got excited about disruption and innovation in banking.
This lasted about 5 years. Then attention turned to insurance and the phenomena known as #InsurTech was borne.
Investment dollars flipped from banking into insurance with over $2.6bn invested in InsurTech in 2015. Further evidence that InsurTech is still in its emerging phase is in the latest Venture Scanner InsurTech Report, where they show that 50% of InsurTech investments were Series A rounds.
The quarterly insurance briefing from CBInsights reported the InsurTech funding level as $271m for the first quarter of 2017. This was spread over 38 total transactions with 25 of them being made by insurers.
In case you missed it, let me repeat that stat. Of the 38 investments in Q1, two thirds of these InsurTech investments were made by insurers!
And they are making these investments through their own venture capital arms, otherwise known as Corporate Venture Capital, or CVC for short. The infographic below shows the latest list of insurer-backed VCs, aka CVCs. I’m extremely grateful to Shefi for providing the image which you can find here on Coverager.com.
The reason I point this out is that this is a relatively new phenomenon. It’s a consequence of the rapid and massive impact of InsurTech on the incumbents as they try to find a way to embrace innovation, digital technologies and different ways of working. After all, their traditional sources of innovation, the SIs and software vendors, have failed to drive new tech and new ways of working since the birth of the Internet age 20 years ago.
The InsurTechTop9 club of leading InsurTech social media influencers
To discuss the challenges of investing in InsurTech startups and the rise of the CVC and increasing levels of venture capital into InsurTech, I gathered together some of my fellow investors from the #InsurTechTop9 Club for a virtual roundtable discussion.
For those unfamiliar with the InsurTechTop9 Club, we are a group of active InsurTech commentators on social media. Between the 9 of us we have 146k Twitter followers and another 177k following us on LinkedIn.
Introducing the InsurTechTop9 X-Factor Judges!
For this virtual roundtable discussion, four experts from the InsurTechTop9 joined me, all with different perspectives on investing in InsurTech start-ups.
Representing the Corporate VC, we have Minh Q Tran and Florian Graillot from AXA Strategic Ventures. For the view of an Institutional VC, Spiros Margaris joined the conversation. And who better to understand the intersection between the startup, the insurers and the investors than Sabine VanderLinden, the global leader for Startupbootcamp InsurTech.
Let’s get started and ask the 3 questions to the InsurTechTop9!
Q1: The rise of the Corporate VC
Rick: With the emergence of InsurTech and new digital businesses, we’ve seen a rush for insurers to set aside sizeable sums of shareholder’s cash and create their own VC arm, so called Corporate VCs. What is your view of the CVC and how it might differ to the approach taken by an institutional VC?
Minh: The CVCs fall into two camps. The first camp make investment decisions based on a financial return and are run very much along the lines of a traditional institutional VC. These are set up as completely separate entities outside of the insurer’s balance sheet. The other group of CVCs make investment decisions in InsurTech that is based on strategic objectives, not solely on a financial return.
AXA Strategic Ventures is in the first group, to make financial returns first. But we also select start-ups that could be good partners for the AXA Group. This could be a straight forward customer-supplier relationship. Or, it might be a distribution partnership for an AXA insurance policy using an InsurTech solution. Or it could be to provide reinsurance when the startup wants to launch an insurance product themselves. But our first priority is to make investments for a financial return.
Florian: When you look at the CVCs in the market, there is a real trend amongst them towards a strategic partnership approach to investing, moving away from the investment return model of the institutional investor. Some insurers are even looking at their CVC as part of their R&D function looking into new tech and business models. There is no way an internal R&D team can compete with the current levels of innovation from InsurTech.
The key here is that the insurers have taken action early. If you look at Fintech, it was several years before the banks started to take Fintech start-ups seriously. Insurers will not make that same mistake with InsurTech.
Minh: Another key point about the CVC approach is that we are entering the investment cycle much earlier. The institutional VC typically invests in series A+, but the CVC’s are getting involved in the pre-revenue seed round or A- stage. This is a big shift and shows how seriously the CVCs are taking the opportunity. InsurTech has changed the agenda for the insurance exec.
Spiros: Personally, I am no fan of the CVC model. Corporate thinking and interference will always get in the way, they can’t help themselves. Right now, everyone wants a piece of the (InsurTech) action and this is driving a lot of corporate behaviour. But there is still a short-term perspective from the CVCs, shorter than from an institutional investor. Let’s see what happens to the CVCs in 5 years time, when the current cycle of funding needs renewing. My view is that many of them will not run the course!
Sabine: CVC or institutional VC? For many of the InsurTech start-ups, it doesn’t really matter to them which one they go after. What is far more important though, is getting access to “smart money”. With the big shift towards partnering between insurers and InsurTechs (whether B2B or B2C), the startups want access to insurers, their expertise, and their know-how. At the moment, this gives the CVCs an edge.
This is why our work at Startupbootcamp is well received. We have an excellent network of partners who are not only potential clients for the InsurTech start-ups, they also recognize that they may invest too.
We help the InsurTechs to understand the objectives of the insurer investor, whether they are investing for strategic partnerships or financial returns. Understanding this is much more important for many startups than worrying about which type of investor is interested in them.
Q2: Picking the InsurTech winners
Rick: When it comes to picking winners, everyone has their own approach, their own strategy. How does it differ between a CVC, an institutional VC or an accelerator when it comes to selecting the chosen few from the many?
Spiros: This is all about making a personal judgment. Of course I use objective analysis to look at a firm, but I am also a consumer. When a startup shows me their tech, I look at it as a consumer. Would I use it, would it add value to me, is it better than what I have today?
I have built a big following on social media and have startups coming to me all the time. I don’t need to look at 1,000s of startups to find the one’s I want to work with. They usually come to me.
The first thing I do is listen to their story. If I can believe it, then I look further. If I don’t like the story, it ends there. Next, I look at the people. Can they execute the plan for the business? It is only then that I start the due diligence process.
You see, it’s all about the story and the people. The start-ups won’t be perfect. There will be gaps in their team, their plan, their product. But this isn’t a reason to be discouraged. The key question is whether the gaps can be filled. If I believe in them then I can use my resources and network to fill the gaps. Which is more than just raising money. It sometimes means bringing in new talent, advising the entrepreneurs how to sell the product and understanding the importance of brand.
Sabine: This is super important for us! We are investors ourselves and make investment decisions based on our ability to provide early stage funding, resources and expertise. We work with a group of corporate partners and our choices must be in their interest too.
At Startupbootcamp, our objective is to talk to many startups. We talked to over 2,500 startups in 2016 (100% increase from 2015). We pick on average 10 startups for each cohort and take a 6% equity stake in each agreed participant. In return, we accelerate their business and push them to complete in 3 months what would otherwise take them a year to do on their own.
When we select a startup we look at the team, their business plan, the idea, the timing of that idea and the way they spend cash. While not against sole traders, we never pick a startup with includes just one founder. We want teams. And no matter how good an idea is, if the timing isn’t right, we cannot pick the team. How they spend money is really important. They need to be keen and hungry at this stage in their development!
Minh: For AXA SV, we are looking at investment returns first, strategic value second. However, we want to see innovation, new uses of tech and market disruption when we look at investing in InsurTech.
When we look at start-ups we look at lots of factors to assess their impact on the insurance industry. We usually take a minority stake in the startups we select and this means that they can build their business without being tied to any one insurer. This is important because we don’t want a conflict of interest for other insurers to work with the InsurTech.
Source: Lendit CBInsights InsurTech 2017 report
Q3: The future of InsurTech, VCs and the insurance industry
Rick: Finally, given your unique insight and perspective, how would you sum up the impact that InsurTech will have on the insurance industry?
Spiros: The insurance industry is going to change relatively quickly because of InsurTech. The reinsurers are going to move up the value chain. They are the best at understanding how to manage risk capital and provide underwriting capacity. With all the investment focus on distribution at the minute, this will squeeze the carriers.
At the minute, it is Munich Re who are have moved the quickest in this area. I like what they are doing and their courage to take on risks by investing in promising InsurTech start-ups that could be the next industry leaders. The reinsurers should try to avoid overanalyzing InsurTech business models but take a leap of faith by investing aggressively in the sector to make use of the fantastic opportunities.
Sabine: I don’t see any going back now that InsurTech is here. Legacy technologies are suffering tremendously as we are operating in a fast transaction and experience-based marketplace. Digital and omni-channel are the way to go! The issue for insurers is not whether to work with an InsurTech platform, but how too.
Many insurers are still not ready to do this because of internal constraints. At the same time, they also expect things to happen too quickly. Let’s not forget that it took Uber 8 years to become what they are today. Insurers must accept that it takes time to get all the right pieces in place to excel: many of which will come from startup-corporate partnerships. But when those pieces are placed right, then things will move much faster than most insurers are used too. This is the strength of InsurTech.
It is also important for Insurers to learn how to work with start-ups more effectively. Collaboration and partnering offer greater chances of success than acquisition, simply because startup businesses need the freedom to operate.
(Note from Rick: Sabine makes a great point here. Acquisition is a different ball game to investing. One to watch is the acquisition of Simply Business by Travelers for $490m and it will be interesting to see if an InsurTech can survive inside an incumbent. )
Florian: InsurTech is the new source of innovation for the insurance industry. Some insurers are looking at their CVC as part of their R&D function looking into new tech and business models. There is no way an internal R&D team can compete with the current levels of innovation from InsurTech.
Minh: I agree with Spiros. It is the reinsurers who are partnering with the InsurTech platforms, giving them underwriting capacity and taking the regulatory burden. In time, it will be the reinsurers and the InsurTechs in partnership who will own the customer. It is when this happens that you get your Uber moment!
The author, Rick Huckstep, is an InsurTech thought leader, advisor and speaker. He is the Chairman of The Digital Insurer and a founding member of the InsurTechTop9 Club.