InsurTech funding

I’ve been involved in the insurtech space since before we coined the term. In fact, I remember the disagreements back in 2015 as to whether it sure be insurtech or instech. Opting for the latter I co-founded InsTech London (now simply InsTech) with Robin Merttens as an insight-sharing and networking initiative for founders, investors and insurance professionals. As a result, I had the honour and enjoyment of engaging with a vast number of insurtech start-ups in the early days of digital transformation in insurance.

As everyone knows, the idea is the ‘easy’ part, and it is execution and fundraising that are the challenge. Watching, engaging with, and supporting start-ups at the various stages of their growth has been both delightful and educational. Of all the investment milestones I consider Series A the most meaningful. From an existential point of view this is where the start-up must convince the broader world it is serious, and its plans will generate revenue. While as a founder you move from having a good idea and inspire others to creating an entity that will take customers’ money and offer them something of value in return.

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The use of digital technologies and data-driven decision-making has become relevant to so many questions: How do I better model my wildfire risk? How can I streamline the claims process? How do a separate the signal from the noise when it comes to the market cycle? While it’s not quite “there’s an app for that” each time, it is absolutely the case that much of the innovation in insurance is supported by tools, solutions, data, and tech from start-ups, therefore understanding the insurtech space is critical for us.

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External observers sometimes comment that insurance seems to be in perma-crisis – if there are no hurricanes there’s a hailstorm; if you avoid pandemics, you get hit by wars; canals are block by ships, juries order monster punitive payments and so on. The truth is that there is always something going on in insurance, because insurance underpins every aspect of our lives and our economies.

As Patrick Tiernan, Lloyd’s chief of markets, stated in his June 2023 market message: “we are operating in a world that has settled on a plateau of manageable chaos”. While executives aren’t fazed by this it does mean that as the world evolves so too do the risk people are looking to protect themselves from, and thus there is a constant stream of opportunity for innovators to engage on.

The inherently conservative nature of the average actuary or underwriter gives the innovators and their nimble start-ups the opportunity to grasp market problems and offers carriers and brokers solutions they mostly struggle to develop in-house.

Just attend any insurtech conference and it is clear quite how many such ideas founders have had. It is critical to have a means of triaging which start-ups to engage with. For many organisations a practical proxy for whether a founder’s idea is gaining traction and worth of attention is how the investment markets have treated them. Thus, as an insurtech, successful Series A funding not only brings you cash but also a meaningful increase in the chance your target clients will engage with you.

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Understanding the space

Having watched the insurtech space’s childhood years it’s natural to consider the mid-2020s as the ‘teenager years’ - full of self-discovery, identify crises and a realisation that the world is far more nuanced and uncertain that it seemed when you were young. The ambiguity around what defines an insurtech was almost endearing in the early years; now it is frustrating, with insurtech leaders having to deal with sweeping statements such as “you’ve seen Lemonade and Root’s share prices – it proves insurtech doesn’t work”. In fact, many people in the space are actively searching for more applicable labels.

Expensive to start / no-fast returns

The early days of insurtech saw a lot of exuberant, naïve investment from individuals, fintech VCs looking for the ‘next big thing’ in finance, and the first round of insurer CVCs, often set up in a rush because everyone else was starting one. Things have changed over the years.

Insurance is a more expensive sector to start-up in than some other industries, with a journey to revenue that can exceed 24 months. Insurance-savvy investors realised this early; many generalists didn’t. This has led to two distinct sets of investors, with the focused insurtech funds realising that Seed investments of low millions were required to validate products and produce the building blocks ready for Series A.

On the flipside, many generalist investors – lured in by the potentially of revolutionising a pedestrian, multi-trillion-dollar industry – drove a glut of capital – led to excess valuations in Seed rounds. They and the founders they backed have been surprised by the challenges of Series A fundraising and the need to take significant discounts. Some non-insurance Seed investors are walking away from additional funding at Series A, putting founders in a poor position to negotiate and leading to ‘fire-sale’ valuations where 75% discounts are not uncommon.

Where a panel was effectively built at Seed Round then expectations have been managed and a lot of the series A comes purely from the same players.

What does this mean for insurers investing?

While previously Series A was the natural point for insurers to make modest investments in insurtech MGAs and SAAS firms that interested them the dynamic has changed. One VC I know is regularly approached by insurers who’ve learnt about interesting MGAs and would like to enter at the Series A. However, the panel set up for the Seed round are happy and able to cover the full Series A.

A key exception would be around distribution. While insurtech MGAs are initially most keen to see investors who can also supply capacity, the capacity becomes easier to access as they prove their success, and the challenge becomes distribution. As such, investors who can support growth through distribution, including into new international markets, are attractive partners.

Series A

Typically, Series A has been a significantly larger cheque than the start-up has had to date and for many founders a larger number in the bank account than they have ever seen. It is also a one-off that won’t be replenished if they don’t progress far enough to justify a Series B. As such, carefully ensuring management of that money has always been a priority for the founders and their teams, with support from their investors, coaches, board advisors etc. This need for a measured approach remains valid, however the shift to a more mature way of operating pre–Series A has made the change far less noticeable then just a few years ago.

In the early “fintech in insurance” days – mid last decade - Series A fund raising was a relatively easy process – the glut of money and general halo effect of some of the apparent insurtech successes meant that large investors without a detailed understanding of the nuances of insurance were willing and able to invest based on the buoyancy of the space and the loud, compelling messages on disrupting a staid and pedestrian industry.

Previously Series A was the first meaningful engagement for a start-up with the investor arena and required a compelling team, a view of likely clients, and a decent MVP. In just a few years, things have fundamentally changed. Now a firm seeking Series A needs meaningful revenue, a clear and significant pipeline of growth, and unambiguously proven operational success. One insurtech focused investor says he doesn’t consider an MGA start-up as “solid” until live policies are being issued and they have found more than one capacity provider.

The expectations around people have also changed. Previously Series A funding was the point that additional people could be added to stop the founders having to “do everything”. This remains true insofar that investors absolutely expect the founder to play a meaningful role in scaling, new market entry etc, so don’t want them focused on compliance returns or doing first drafts or marketing documents. However, increasingly most of the key roles need to already be in place (and proving themselves) ahead of Series A. As such a significant portion of the investment can be on strong salespeople and additional development resources rather than additional ‘back office’ or admin.

With an increasingly clear set of expectations at the point of Series A, seed investors are increasingly open to modest additional funding. Small amounts to cover additional months of operations can mean a specific contract gets signed, or a particular piece of revenue is received, giving evidence that meaningfully impacts the Series A valuation. If the term “demonstrated ability to generate revenue” is key, then equally “we did what we said” is another required proof point. There is now less tolerance for excuses around unachieved commitments and thus may delay Series A funding rounds. Advisors and seed investors will coach founders to not overpromise as they know the potential impact on later funding rounds.

Flight to Maturity

Over the last 2-3 years there has been a real flight to maturity for investors. They are increasingly interested in multiple-time founders as they seek confidence that those they are backing can convert the idea to a source of recurring revenue, and manage the challenges of keeping the start-up going in the long sales cycles common in insurance.

There is a constant concern that first-time founders don’t know how to make tough decisions, and a track record of making tough decision is regarded as important when seeking Series A funding. Evidence of having let go of teams due to one-off pressures and/or been seen to regularly turn-over lower performers as increasingly important for investors looking to back a founder with a high-growth proposition.

This desire to see genuine experience around people management is inevitably biasing interest to older founders, more so than in many other sectors.

Age – and more importantly, the implicit experience that brings – is also relevant when it comes to the sales process into the insurers. With insurance being a traditionally conservative industry, and the buying moving from Heads of Innovations much more to senior underwriters, actuaries, CDOs and the such like, it is vital for the founder to be credible and not come across as a naive about the specifics of the industry. Having meaningful experience in the insurance industry and a clear grasp if the value chain is regarded as increasingly important. Thus founders from outside the industry with ‘risk transfer’ ideas – e.g., suited to a start-up MGA - are rapidly taking on experienced insurance practitioners as they grow their teams

The ‘wedge product’

A question increasingly asked at Series A is “What is you wedge product?”. The wedge product can be a source of revenue to show the business is able to generate money and or a light-weight entry product that can get formal engagement with customers.

This latter point is particularly important with insurers and brokers with slow, often overly onerous, procurement process and detailed information security checks. If the wedge product can (legitimately) by-pass these delays and add rapidly add some value to the user then the engagement with the client for the core product can meaningfully change. The income may be modest, but it allows evidence of the ability to execute and engage with meaningful numbers of real-world customers.

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The need for insurance knowledge

For many years innovators from outside an industry have been feted for the “new views” they bring and for not being burdened by dogma. Insurance initially was no different; Daniel Schreiber, co-founder of Lemonade, emphasised the importance of “milking your ignorance for all its worth”.

What we’ve seen over recent years is that ignorance can be expensive – especially if you need to work with current insurance organisations as sources of capital or as customers of your service/tool/data. As such most insurance-focused start-ups are run by people with insurance experience. Fortunately, this doesn’t exclude non-insurance creativity as many of those firms offering tech solutions in areas such as AI, data ingestion, advanced analytics, are multi-industry so we still have ideas and energy from outside insurance pushing the thinking of our industry.

Investor ignorance may initially appear less relevant for founders, but when that ignorance leads to surprises this is typically an issue.

During the peaks in exuberance so called investment experts rushed in, misunderstanding industry-specific numbers and ratios and seeing decades-old value chains as “an opportunity for rapid disintermediation” rather than a sign of proven business models. Furthermore many were surprised about even valid ideas and changes taking longer than they expected. The regulated nature of insurance – while not an excuse or a barrier to innovation in and of itself – acts as a natural decelerate to many changes, as well as limiting a “move fast and break things” type approach.

From investors who muddled premium with revenue to those who misunderstood the symbiotic nature of the value chain as a source of weakness rather than the industry’s strength, there are many generalists who will not be returning to insurtech any time soon.

Being a founder is busy enough without the need to educate under-informed investors. This is another reason insurtech-savvy investors are an increasingly important part of the investment landscape.

The problems of procurement

The ‘back end’ of the insurance ecosystem is rarely a source of competitive advantage but can be a source of risk. As a result, it is inherently conservative and slow moving. This includes most procurement functions, which are focused primarily on cost management and risk mitigation. These are experienced professionals delivering what their COO and CFO want. It is however a major problem for many insurtechs who are cash and time poor so need to seal deals quickly without the team having to do a dozen presentations and submit documents more suited to far bigger suppliers.

With the importance of contractual relationships and actual cash flow leading into Series A, it is understandably that founders are becoming exasperated about the apparent lack of understanding by potential clients around the need for speed. Understanding these long cycle times, building this into pipeline plans, and realising the importance of relationships to minimise the delays are critical skills. Investors look for evidence that a team has this under control well ahead of Series A.

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There are many such firms. Those picking the route of becoming MGAs or full-stack insurers need capital and reinsurance – right in our sweet spot. Those offering data, models, analytical tools and insights are relevant to both our primary insurance clients and the reinsurers we know so well. Our insurtech team tracks the growing and emerging companies across the globe assessing which bring something of distinctive value to their clients and – to the points above – which are likely to stay the course and grown into integral parts of the insurance ecosystem.

Not only does that allow us to suggest potential partners to our clients but in evolving areas around secondary peril modelling, Climate-ESG, Cyber lets us help start-ups understand where they are in crowded spaces versus having something that might be distinctive.

For example, the topic of carbon credits and thus carbon credit insurance was no-one’s priority a year or two back but is now getting a lot of attention. Building a view on which of the new players in this space have a genuinely compelling offering and strong business plan versus those who have weakly jumped on a new band wagon is important in what is predicted to become a multi-billion $ industry.

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As a closing thought to insurtechs early on their journey I offer the following. In most cases founders are already receiving advice on all the topics above from informal advisors or early-stage investors. If you’re not, then consider how you can broaden you circle of advice and your insurance-savvy network. Winning customers and attracting investments will be difficult if you’re not inculcated with the nuances of the insurance market you are attempting to enter or partner with.