A number of people have asked me how to build a business in the insurtech space. Mick, who was previously running a team of analysts for an insurance company sent the email below. It’s typical of the kinds of questions that many are asking so I thought it would be helpful to share it along with my response. Mick set up a company recently and is looking for his next step. I’ve changed the names, but the email exchange is original.
Hi Matthew, I hope you're well.
I read your recent article on the insurtech world and found it very interesting. It reminded me to drop you a line. Having launched our technology business earlier this year, we have experienced a number of headwinds (and some of the same challenges you mentioned in your article). We now need to decide what we should be doing next.
It's hard to read anything about start-ups at the moment without Blockchain being mentioned. It seems important and at the same time hard to find an original angle. Do you know others in this space who are looking at Blockchain and catastrophe risk together?
I‘ve been considering applying to Start-up Bootcamp’s next London intake. I get the feeling there might be a large number of applicants so it would be a long shot, but even the process would be interesting so it's likely we'll pitch something. I know you’ve been involved in this in the past – is this something you would recommend?
I've also noticed there seems a lot more partnering/collaboration going on between insurers and start-ups. In the commercial B2B segment there is unlikely to be a real disruption without the heavy involvement of insurers and reinsurers because of the complexities of the transactions. How are the big insurance investors (Like AXA, XL etc.) finding acquisitions to buy with their start-up funds?
Look forward to hearing from you
Thanks for your email. Some great questions.
There is a real shortage of experienced analytical talent from the insurance industry entering the start-up space - but a lot of enthusiastic and smart entrepreneurs looking for ideas and teams. Your choices seem to be to start up another new business yourself - potentially pivoting off your existing business - or hook up with some others already building a company in this space.
You have a couple of choices for funding - either bootstrap - i.e. no external funding – or find investors. The benefits of bootstrapping are that you can be in control of your own destiny, it forces discipline in what you chose to build (clients must need it to pay you money) - and gives you more control of your company, but it takes longer to gain momentum. Most of the larger funding just now (in excess of $5m) is for founders that have successfully built and sold businesses before (most of whom to date are from outside of the insurance industry). XL Capital and Axa Strategic Ventures are two of the most visible companies that specialise in investments in Insurtech. Both are affiliated with very large insurance companies but their priorities are to make money on the future value of the companies they invest in. They have a preference for businesses that are truly disruptive. Even the best investors only expect to get 1 in 10 of their investments right, so they need any business they are considering investing in to be worth at least 10 times more in 5 - 7 years. Businesses that provide only incremental improvements over current practices are very unlikely to drive such growth multiples, and hence fundraising will be a lot harder (or impossible) to raise. Many insurance companies, on the other hand, are looking for businesses that they can bring into their own companies to accelerate innovation - or prevent being dislodged by someone else who gets there first. Funding criteria may be less stringent, and a number of insurers are now creating their own incubators. Returns will be lower, and the insurance companies will expect more control (and probably a significant amount of ownership) but this is already proving a successful entry point for some start ups.
Blockchain is omnipresent, but no company has yet revealed an insurance application for which blockchain is truly disruptive – many of the proposed use cases of Blockchain are only administrative improvements over traditional systems; useful but evolutionary not revolutionary. Everledger’s record of diamond provenance is one example where there is a benefit of Blockchain for the insurance market, but it's a bit niche. I suspect many of the start up blockchain companies around today will end up pivoting to something else, merge or fail.
The people that I have spoken to that participated in Startup Bootcamp for Insurance found it very valuable - there is a lot of exposure to senior executives across many insurance companies, investors, other start ups etc, and Sabine Vanderlinden, the MD, has a lot of energy and enthusiasm. Buzzmove, one of the original SBC cohort, has just announced £6m funding led by the White Mountains Insurance Group.
Applications for the second SBC cohort close on 17th October. Getting a place will be tough (there were over 1,000 organisations or individuals interested in the first one) but the team are excellent and there are over 100 mentors on the programme. Definitely worth you exploring the options, even if just to have a chance to get to know the expanding network of people in this space. SBC take 6% share in the company in return for 4 months of support and €15,000 seed funding.
You ask how investors find their investments - they have a lot of people approaching them (Axa Strategic Ventures had over 1,000 approaches last year) as well as employing scouts to find new businesses. Most funds, even those focused on the insurance space, have only invested in a handful of companies - generally at Series A and occasionally Series B. Take a look at Crunchbase to find the investors, who they are investing in and for how much. Many investors are starting to tentatively expand beyond fintech and into insurtech. Commerzventures, for example, part of Commerzbank has made only one insurtech investment so far but is looking to make more. Their whitepaper on their views of this space and investment philosophy is worth a look.
This article was first published on Linkedin.