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Climbing ‘Capital’ Hill The best strategies for investment success
How has the investment landscape changed over the past 12 months and how should investment strategies change as a result?
These were questions I asked to a selection of our Future50 America insurtech finalists, as well as investors, to gain valuable insights into not just how the next year might look for the market, but also how up-and-coming insurtechs can navigate these changes and still see success.
To give you some context, since launching Insurtech Insights in 2018, our vision has always been to surface exciting, talented insurtechs who are reimagining the future of insurance to help drive the industry forward. As organisers and hosts of the largest in-person insurtech conferences around the globe, Future50 was a natural initiative for us. We collaborated with 20 incumbent insurer C-level execs, as well as our market intelligence partner Sønr, to curate a carefully selected list of the most exciting insurtechs from around the world.
For this issue, I focussed on our USA cohort to provide insights on the current opportunities and challenges in seeking investment.
It’s no surprise that the past couple of years have seen a shift in the funding landscape across the market. Yet, despite the disruption, global investment in the insurtech sector reached record levels of $8.4billion in 2020 – up eight per cent from the previous year (approximately $7.8billion) – only to increase again in 2021 to $16.8billion; more than the amount invested in 2019 and 2020 combined. 2021 wasn’t just the best investment year in insurtech history, but we also saw 23 ventures reaching unicorn status. However, as we come to what we hope is the
Bradley Collins, CCO at Insurtech Insights, canvassed Future50 America insurtech finalists and some friendly VCs to come up with the Top 6 Tips for navigating a changing investment landscape
end of the pandemic and a return to a ‘new normal,’ we see a different investment landscape compared to two years ago.
According to data collected by Venture Scanner and analysed by the Deloitte Center for Financial Services, before the pandemic, investment was largely concentrated across a handful of insurtechs, focussed on changing individual problems within the insurance market. During and immediately post-pandemic, we saw an explosion of insurtechs offering digital transformation across the entire insurance value chain; from claims to sales, operations, risk, and – most importantly – customer experience.
Top-performing, high-growth companies were still raising sizable rounds at strong valuations, but it wasn’t as favourable a market, compared to the previous 12 months. Companies that were and are underperforming or growing modestly were and are finding it more difficult to raise.
In the past six months, the landscape has changed again; with high-interest rates and inflation, the cost of capital is increasing and this has resulted in investors being more prudent and calculated in their choices when investing in startups. Their caution is reflected in the fact that rounds are taking longer to close and the bar is higher for companies to raise. There is still concern about overpaying for deals and whether we are at the bottom of the market yet.
Climbing ‘Capital’ Hill:
The best strategies for investment success
VCs are no longer price takers. Valuations are down, particularly in the public markets and growth stage rounds. This is a result of the current macro economic environment with a return to more sensible valuation multiples, and greater focus on sustainable unit economics.
Large insurtech venture capital firms like FinTLV that have driven up valuations in the last few years and significant funding rounds from certain VCs have now slowed down or stopped altogether. That said, valuations at most stages are still higher than 2020.
THE STATE OF INVESTMENT: US v EUROPE
Aside from a few notable exceptions, including wefox’s recent $400million raise, led by sovereign wealth fund Mubadala Investment, US funding rounds still tend to be bigger than in the EU, with more available capital, a larger market overall and higher valuations. We are still seeing $25million-plus Series A rounds in the US, which would be a typical growth round in Europe.
Top-performing, high-growth companies are still raising sizable rounds at strong valuations, but it’s not a favourable market compared to 12 months ago
There are major differences between US and European investors to be aware of, if you’re seeking capital. For a start, the language used in legal investment documentation differs between the US and Europe, so legal teams that understand those differences become an asset.
If you’re a European-based insurtech, the good news is that US investors have gradually become more keen on investing in European startups, but they tend to prefer convertible notes while European investors are happy with equity investment.
Make sure to get acquainted with each investor group’s investment thesis, too, as they also tend to be sector and market specific. European investors want to see clear product-to-market fit more than their State-side counterparts. Their preference is to invest in real products that have demonstrated traction with users.
They tend to be more careful in the way they invest in early-stage ventures and seek to validate more proof points than US investors. Investment size is often a fraction of what US investors are prepared to invest in startups.
Bear in mind that, in the UK, investment is heavily driven by government support and tax incentives. These are the EIS (Enterprise Investment Scheme up to GBP £5million) and SEIS (Seed Enterprise Investment Scheme up to GBP £150,000), which allow investors paying taxes in the UK to benefit from tax advantages.
THE CHANGING PERSPECTIVE
2022 is clearly the year of readjustment. As the requirement for investors to yield returns to their limited partners increases, those that invest this year will focus on younger startups able to provide fair valuation estimates.
Scaleups that were able to raise funding with above-market valuations will likely need to readjust estimates if they require urgent investment funding. Indeed, we’ve already seen that happening elsewhere in the financial technology space. A dramatic example is Klarna, whose valuation moved from $45.6billion in 2021 to $6.7billion at its last $800million fundraise this year.
It’s safe to say there are austere times ahead. The US, which passed an Inflation Reduction Act in August, is still running at around four times its usual inflation rate of two per cent. With the Bank of England base rate at 1.75 per cent at the time of writing and inflation estimated to reach at least 13 per cent in the UK, investors on both sides of the Atlantic will evaluate business models with strong principles and well-defined unit economics to ensure that growth estimates are based on a fair rationale. Valuation estimates will need to be reasonable and have alignment with future growth forecasts.
For startups that raised significant amounts of money in 2020 and 2021 on shaky fundamentals, the current environment may become extremely painful, if not life-ending. Startups that can handle this ‘return to reality’ will be stronger because of everyone’s renewed focus on sound fundamentals.
“We’ve always focussed on building a fundamentally sound business, and know that can lead to slower growth than our peers,” says Douglas Ver Mulm, CEO of Pennsylvania-headquartered Stable Insurance.
“But, given the emergence of the reinsurer’s veto [the ability of your reinsurance partner to dramatically increase ceding premium or stop supplying risk capital altogether], this is now the only approach an insurtech can take if they are focussed on longevity.”
DISTRIBUTION IS KEY
Technology such as application programming interfaces (APIs), artificial intelligence (AI) and machine learning (ML) are a clear driving force for digital transformation between insurtechs and insurers. Insurtechs that are leveraging these most effectively, may see a higher rate of interest from investors. We see APIs being used to streamline quoting and sales in traditional, embedded and bundled distribution plays.
Among our Future50, Fenris Digital – which raised £2.7million from VCs in early 2021 – is serving agencies, brokerages, carriers, and financial services providers of auto, home, life and small business commercial insurance with its APIs.
“We use machine learning with our vast enrichment data and deliver a suite of predictive algorithms to optimise outcomes at key points in the insurance customer lifecycle,” explains CEO Jennifer Linton.
“Our APIs are used to streamline quoting and sales in traditional, embedded, and bundled distribution plays. And we orient around the applicant or policyholder for these insights, across all products in both commercial or personal lines.”
Laura McKay, PolicyMe
The current cost of living crunch has spurred Canada-based PolicyMe on its mission of leveraging tech to deliver simple and affordable insurance to more families.
“To do so, there are a few key areas that we’re looking to prioritise: product expansion, unlocking new distribution channels, expanding into new markets and growing our team,” says co-founder Laura McKay. “We are particularly interested in embedded channels for life insurance.”
PolicyMe raised seed funding in the grip of the pandemic and launched its first digital insurance product exactly a year later, in April 2021.
“Now we are entering a period of uncertainty and have had to make tough strategic pivots that enable us to be more efficient and focussed,” says McKay.
“More than ever, it’s important to practise disciplined and strategic decisions that allow us to optimise for profitability, unit economics and an extended runway.”
SO, WHAT’S THE ADVICE?
The economic environment for raising a round dipped south in Q2, and it became much more difficult to raise, even at compressed multiples, for many founders.
“The trend for founders should be wisdom in decision making, focus on building winning, trustworthy, and reliable teams,” says Sabine VanderLinden, CEO of Alchemy Crew, which works with insurers on corporate venturing.
They should find ways to extend the runway, and, if possible, reach profitability instead of counting on another big cheque to spend, too, cautions Ben Bergsma, a principal at Munich Re Ventures.
Sabine VanderLinden, CEO, Alchemy Crew
“Capital conservation is what I’m preaching to my portfolio companies at all stages,” he says.
“Given the challenging fundraising environment currently, it’s important to be efficient with your capital base, which usually translates to lowering your operating expenses wherever possible.
“Extending runway should be the number one priority for CEOs right now. VCs don’t want to invest in companies that will burn through a new funding round quickly, so demonstrating a focus on the bottom line is important.”
Fenris Digital’s Linton believes any insurtech boss looking for capital needs to be creative in their strategy.
“Some fellow founders have run multi-pronged processes where they bootstrap harder, pursue a raise with prior investors and new investors, while also exploring an early exit by acquisition. It's a numbers game, so keep on swinging, listening to feedback, and iterating your pitch to attract the right investor.”
Product knowledge, value and placement is by far the most important focus for the insurtechs I interviewed. Investors are no longer giving out large amounts of funding before seeing product-to-market fit.
It’s a numbers game:
A multi-pronged investment strategy might be best
Ben Bergsma, Munich Re Ventures
TOP TIP$ FOR A $UCCE$$FUL RAI$E
Proposition is key – understand how your solution fits into the complex insurance world
Get the right team in place from the beginning
Align every dollar spend with ROI
Have a clear, focussed fundraising strategy from the start – don’t forget to build a Plan B and Plan C
Find ways to extend runway, and if possible, reach profitability instead of counting on another big check to spend
Find investors that can make good advisors
“The days of raising $20million on a few policies or a pilot project are gone,” confirms Ver Mulm of Stable Insurance.
Whether creating an insurance product or selling technology into a carrier, insurtechs need to demonstrate their understanding of the multiple complexities and risks in their insurance space and their ability to solve the challenges relating to these. It also requires an understanding of markets and their individual needs for solutions or product placements that can set you apart and make you favourable to investors.
Douglas Ver Mulm, Stable Insurance
Product fit is an important fundamental that healthtech startup Sani demonstrated a good grip of when it pivoted from data have a fundraising plan and start earlier, is the advice from James Tootell, Investment Director at EOS Venture Partners.
“Make sure you understand the milestones and proof points you need to hit to raise your next round. If possible, raise more than you think you need and extend runway,” he says.
Increasingly, investors want to see a plan to profitability/breakeven rather than a loss-making plan to the next funding round. Make sure you have a Plan B and Plan C if going out to raise capital soon i.e. internal shareholder round, venture debt, reduced cash burn.
“It is not always easy for a founder to know where to focus his/her attention. It will be key during scaleup stage to surround yourself with those who can take jobs away from you so that you can focus on what you are good at doing,” says Alchemy
collection and analytics to providing healthcare insurance in Brazil in 2020.
There, only 23 per cent of the population has private health insurance, and the rest rely on an overstretched and underfunded public healthcare system. This means 160 million Brazilians do not have guaranteed access to good quality health care services because they can’t afford it.
“The company will grow around three times in 2022 and we want to set the fundamentals to keep the growth pace in the years to come,” Vitor Asseituno, president and co-founder of Sami, tells me.
And it’s not just about the product or solution you are offering. Focussing on building the right team from your earliest stages will pay dividends as you grow.
“Our employees at Nayya are extremely mission-driven. A team that works hard, sticks to company values, and pulls toward a common mission is critical for success,” I’d go as far as to say as we can navigate risks just as well as a carrier, but with a much more capital-light operation, thus creating more value for our investors.”
believes Sina Chehrazi, co-founder and CEO of Nayya, a New York City healthtech working in the area of employee benefits.
“Our advice to other insurtechs is to develop a team that has their heart and mind in the right place so that you’re working towards your mission daily, and to find where your product truly thrives in the market by uncovering the human need behind your technology.”
Insurtechs, especially those focussed on distributing their own product, also need to find a group of insurance-focussed investor champions. That level of expertise is significantly more valuable than money and gives any future investors confidence. It’s something Stable Insurance has proved particularly adept at.
“We’ve assembled an investor team of current and former underwriters, actuaries, brokers, claims experts, insurance carrier executives, reinsurer executives, and insurtech executives,” says Stable’s Ver Mulm.
“This team of superstars gives Stable the ability to navigate pricing, operational, regulatory, and reinsurance/capital risk as if we were a much larger organisation.
FROM SEED TO GROWTH
It is important for startups to ensure they take the time to refine their proposition, based on well-articulated, user-led assumptions and backed by proven evidence to lay before investors that will all ensure the long-term sustainability of business models.
Funding rounds are taking a lot longer to close for most growth-stage companies, so
James Tootell, Investment Director, EOS Venture Partners
Crew’s VanderLinden, who has some last words of advice.
“Marketing is crucial for growth, so create systems to ensure that marketing is not seen as a cost centre, but as a value-creating engine,“ she says.
“When scaling fast, cash tends to be available, but expenses pile-up, too. Hold count on every dollar spent and keep them aligned with ROI.”
A changing landscape:
But insurtechs can still keep investors on-side
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