With so much money invested in the ‘Insurtech’ craze, is there a difference in the business approach between traditional venture capital firms and the growing number of insurance company venture groups? As a startup seeking capital, is money simply money – does it really matter who signs the check?
If the startup is running out of cash, then it doesn’t matter one iota. But looking at the bigger picture, there’s a huge difference. VCs have a simple objective – to maximize value and return for the fund contributors. That sounds obvious but it directs them to seek out big whale investments that offer the best opportunity to exit as quickly as possible with a suitcase of cash. In the recent past the holy grail goal was to take a startup to an IPO on Nasdaq but now the most likely exit is an acquisition by a cash rich company.
VC firms accept that as part of the business model, 80-90% of their investments will fail but the big whale will make enough to make everyone happy. For many VCs the worst investments are the ‘living dead’– companies that do not make an attractive acquisition target nor will they out of business.
Contrast that with the venture group in an insurer company. The likely return on investment possible remain comparatively small for a major carrier. The true objective of a venture group is to find added value through the investigation and exploitation of new technologies. As an example, Liberty Mutual invested in homeowner monitoring apps that help people manage home repairs and maintenance. These apps are extremely unlikely to become major commercial successes but do offer a route into homeowners for the insurer.
Venture groups are not looking for the big whale – but wouldn’t turn one down – and less likely to walk away from a slow-moving investment that fits into a strategic vision. According to Nationwide’s Chief Innovation Officer Scott Sanchez, “the insurance industry is under attack by Silicon Valley venture capitalists. The reality is insurers cannot out invest them and copy their “fail fast” approach—where 90% of invested startups fail and 10% make it big.” Nationwide’s goal is to “get a return on one-third of our investments, break even on the next third and lose money on the remaining.” The Columbus, Ohio-based insurer began its venture fund in January 2016 and did not write its first check until September 2016. Nationwide has made eight investments including Insurify, Next Insurance and Bloom. Even if Nationwide were to jettison the investments that lose money, they will still hang on to 66%, a figure that would be an anathema to a VC firm.
American Family boasts a longer history with its first investment back on 2010. That investment was in Shoutlet, a company with software that helped AmFam’s agents better communicate with customers through social media. Amfam’s venture group monitors 1,500 startups and generally invests in five to 10 per year. See the trend here? Insurer venture groups need synergy, and this takes time – if there is any simple advice for startups – plan a lot of visits, conference calls and frustration and make sure your cash flow is robust enough to complete the task.
Startups have also changed as the insurtech trend has evolved. New companies (and VCs) really did think they could disrupt the low-tech slow-moving insurance industry. In realty traditional insurers make the best partners, they have channels, customers, a need to evolve but most importantly understand the strict regulatory environment and able to manage the risk and capital requirements. Take Roost – a home telematics company – they produce sensors and devices for homeowners that detect issues such as water leaks. The original “direct to the consumer” sales strategy was quickly replaced by an insurance carrier partner program as demonstrated with its recent joint announcement with State Auto who agreed to distribute 10,000 of Roost’s devices free to help differentiate its new homeowner policies.
To summarize, insurer venture groups will be very slow and deliberate, they are not looking for the quick buck but to grow their core insurance business. If you can stay the course, they make great long-term partners. On the other hand, the VC does want the quick buck and will want to see an exit strategy from the first day they invest. They will have no hesitation in replacing the management or selling out to a competitor if needed but will move fast and be better at finding an acquirer.