According to a Willis Towers Watson, Quarterly Insurtech Briefing for Q4 2019, published January 2020, “In 2019, $ 6.3 billion of global insurtech investment went toward streamlining the quote and binding process.” Investments show no sign of slowing down as insurance companies continue to embrace insurtech partnerships and acquisitions to accelerate innovation and the digitization of insurance to meet rising customer demands.
On this episode of the “AI Wisdom – Talking Innovation in Insurance” podcast, host Ron Glozman, CEO, Chisel AI speaks with Martha Notaras, Managing Partner at Brewer Lane Ventures about the secrets to securing VC funding, which insurtechs are positioned to thrive, and 2021 unicorn predictions.
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Convincing a venture capital firm or venture capitalist (VC) that your business idea has strong growth potential and will yield positive returns can be daunting. In this episode, we discuss with Martha the three key criteria that every VC considers when deciding on the ideal investment along with the key attributes that VCs look for in founders and why these attributes are important to the overall success of the organization.
When it comes to the team, VCs want to know: Is the right team around the table, do the people possess the knowledge of how to run a company, are they knowledgeable about the technology, and do they have a clear understanding of the insurance problem that they are trying to solve.
VCs are willing to make bets on technology that is likely to work to solve a problem – that demonstrates a clear value proposition and that addresses a real insurance problem that exists today. Choosing and investing in the right technology is critical.
3. Total Addressable Market (TAM)
Is the TAM, or total addressable market, large enough and is the target audience looking to solve a big enough part of the problem? VCs are interested in understanding the underlying potential if the big problem is solved, how big a company could they become, and do they have the right people in place to scale the company. All three criteria are tightly interwoven as VCs want to ensure that the team they are investing in has the aptitude and capabilities to build the company in a scalable way – along with the ambition and drive to take full advantage of market demand to capture the whole size of the market.
To hear more trends on insurtech investments, M&A activity, and insights on what it takes to successfully secure VC funding, click play to listen to the full episode (listening time: 41 minutes) or read the transcript below.
Ron: Hello and welcome to “AI Wisdom – Talking Innovation in Insurance.” On this podcast we talk to business and InsureTech leaders about how artificial intelligence is transforming the way we buy and sell insurance. I am your host Ron Glozman, Founder and CEO of Chisel AI and a strong believer in the power of AI to help people work smart and enrich their lives. So, let us get into it.
Over the past five years, Insurtech investment has fueled a significant uptick in the availability of Insurtech solutions. Just over the last month, for example, Lemonade has more than tripled its market cap, which is one of the most well-known public Insurtech companies. But since 2015, more than 1,000 Insurtech companies have launched, fueled by over $11 billion in venture investment. Most of that is made up of early-stage investment primarily in the seed and Series A stage, taking up about 60% of the number of Insurtech deals that took place in 2017.
I'm very excited and pleased to have with me, Martha Notaras, Managing Partner at Brewer Lane Ventures, somebody that I look up to and respect very well, join me today as we talk about the secrets to securing VC funding from somebody who's worked in the industry and knows probably more than most people and talk about what it takes to thrive in 2021 as well as any predictions she might have for unicorns. So, stay tuned for an exciting episode. Martha, thank you for joining us.
Martha: My pleasure, Ron, I am looking forward to it.
Ron: Can you please tell us a little bit about yourself?
Martha: Sure. I have been investing in insurtech since 2015, having done extensive investing before that. But really, insurtech took off as a market in 2015, so the timing was perfect. I was with XL Innovate for the five years that that fund lasted and then moved on to Brewer Lane, which is investing in both insurtech and FinTech, which are really contiguous market spaces. At Brewer Lane, we are focusing mostly on Series A and B, really across the full spectrum of insurtech, we think about carriers, we think about distribution solutions, as well as data and risk plays. One of the other areas that we are also focused on is tech solutions for incumbents, for people who are in the market but there are so many better ways to do it versus the way that you might have done it over 100 years ago.
Ron: That's so true. I love that. As an insurtech investment pioneer, I would love to get your thoughts on the evolution, you mentioned 2015, but maybe even on a more micro-scale the last two years, what can you tell us about the volume of investments as far as insurtechs?
Martha: Yes, I think that one of the things that I always wonder, and as you know, I put together some predictions at the end of each year, but I always wonder, are there enough good ideas left in insurtech? I am really happy to say that there are. We have not solved all the problems that exist in insurance. People still primarily do not love buying insurance and even some of the basics in terms of understanding risk and underwriting appropriately in order to deliver better profits to shareholders are still areas that there is a lot to do. I have been really pleased to see that there are both new insurtechs coming in, getting seed and Series A funding and then of course, you see sort of the established players like Next and Hippo, and obviously, you know, Hippo got a huge capital investment from MS&AD, which is a traditional player. But nonetheless, I think that what you are seeing is there is money available across the entire spectrum for good ideas.
Ron: What did you see happen if you look back at the last three quarters for 2020 with COVID being a major impact? What did you witness?
Martha: Well, I think that in the first 60 days, sort of starting mid-March, the phrase that you heard a lot was, “We are open for business,” and you heard that from the VCs. What they really meant was, “I'm not doing anything until I can see...I get some level of visibility.” But there was really a big change after two months. I think part of it was people getting comfortable dealing over Zoom. I think part of it was a level of understanding that there were still parts of the economy that were very much marching forward. So, you ended up in a situation in 2020 where there were those two months of, oh, my heavens, what is going happen, especially for people who had established portfolios. Then everyone just seemed to have a whole lot of time available to think about investments and valuations really skyrocketed throughout the year of 2020. I certainly have not seen that those have calmed down much in 2021, either.
Ron: I know that prior to Brewer Lane, you were a partner at XL Innovate, you mentioned that in your intro. I think that was when you and I first met. One of the investments was actually Lemonade, which I mentioned earlier, which has had a killer start to the year. Were you surprised at all by Lemonade's recent IPO, which at this point was I think a little bit over a year, maybe almost two years ago? Do you think we will see more Insurtech IPOs in 2021?
Martha: So, I definitely knew that from the moment that we met Daniel, that he was somebody special. Could I have predicted that he would get to IPO in about four years? I am not sure I would have been quite so bold, although I think he probably was.
I think one of the things that they did right was they did put the customer at the center. And so, because they were putting the customer at the center of everything they were doing, they rejected a lot of the easy steps at Lemonade that they could have taken.
So, instead of starting as an MGA, instead of starting with someone else's core-tech, they said, “You know what, we're not going be able to deliver the experience we want unless we build it ourselves.” What that meant was they were maybe a year in development in stealth, although an interesting definition of stealth when they were constantly teasing the market about what they were going be doing. I think that some of those early decisions that Lemonade made about who they were and what that meant about how they build the company really determined the success that they had that they were able to bring to the market.
Ron: Do you see any other IPOs that you can talk about publicly? Maybe they are the ones that you personally are involved in? But do you think we will see more Insurtech IPOs this year?
Martha: Absolutely. I think that one of the things that obviously we are seeing right now is a lot of SPACs. And I think you know, that Metromile went public through a SPAC very recently. Obviously, the Root IPO was a little different from the Lemonade IPO in terms of the actual outcome, but we shouldn't ignore the fact that Root's current market value is about 10 times its gross written premium. So, while the IPO might not have been as clear a success as some, the market is recognizing that a tech-driven insurance carrier is, in fact, attracting a very significantly different multiple versus a traditional insurer. I think as long as that arbitrage exists, you absolutely will see a lot more both transactions and IPOs. I know that there are some SPACs out in the market right now that are actively looking for Insurtechs, some of those may end up being rolled up and then placed in a SPAC, some of them may be big enough to go into a SPAC.
I definitely think we are going to see continued activity on the IPO front in 2021. My suspicion is there will be quite a few of those IPOs that occur via SPAC.
Ron: You mentioned the premium or the multiple that a traditional carrier gets versus is a technology-based, sort of, carrier. Where do you see these insurers making the biggest technology investments? Do you foresee these investments continuing through 2021?
Martha: You mean in their own businesses?
Ron: In their own business to try and become more like Root and all these companies like Lemonade, etc.
Martha: I do think that...and this is something I think the pandemic has accelerated. I think that insurers are spending more time thinking about what their core-tech needs to look like in order to take them forward. I think that, historically, there has been a certain amount of avoidance about core-tech of I have something that kind of works and as long as I keep the popsicle sticks and the duct tape together, it will keep working. I think that as insurers move to a remote workforce, we are forced to do so, and as they confronted the need to go more to the cloud, as well as the need to interact more digitally with their customers, I think that a lot of insurers really spent time thinking about how to rework their core-tech.
As an example, one of our portfolio companies is Socotra. I think that they have really seen an uptick in insurers who want to work with a cloud-native core-tech solution because they know they do not know how to do it internally. So, I think that that is one of the kinds of technologies.
I think the other thing is that insurers have gotten a lot better at figuring out which problem they want to solve. And instead of saying, “I’ve got 10 problems, and I'll go work with two insurtechs for each problem, and then I'll call them experiments,” I think, instead, you are seeing the business units of insurers saying, “Okay, what is the most likely startup I can work with that is going to solve my problem?” Then they are really willing to invest the business time in order to make it work because it's no longer ticking off an innovation box, but rather they're really looking to improve their own bottom-line performance. When you have that kind of mutual advantage between the startup and the traditional insurer, I think that is where you really make progress.
Ron: I love that. So, can you tell us a little bit about how, as a VC, you identify and decide on the ideal investments?
Martha: Yes. Ron, how I think about it is really team, tech, and TAM. So, do we have the right team around the table? And that would include people with knowledge of how to run a company, knowledge of the technology, and knowledge of the insurance problem that they are trying to solve. And then are they applying technology which is appropriate to the solution?
For me, as an insurtech investor, I am not looking to make bets on deep technology where there is a lot of technology risk. I am primarily looking at people who are looking to apply technology that is likely to work to solve a problem. So, early on, for example, like Cape Analytics, there was a lot of work to do on the machine learning front to train the models. But I think that it was absolutely clear that it was an appropriate technology to use to translate aerial information into digital information. I think that that concept of choosing the right technology is important.
Finally, TAM, and when we think about the total addressable market, are people looking to solve a big enough part of the problem? And if they solve that big problem, how big a company could they become? And then you almost flip back to the team. Are they going to be able to scale the company? Are they building the company in a scalable way? And do they have the ambition to reach up and take advantage of the whole size of the market?
Ron: I love that, it is like starting at the roots, and then working your way up. Would you say that there are, looking at it from a 50,000-foot view, specific trends that you are starting to see when it comes to insurtech investments? You touched a little bit on, like, core systems, you touched a little bit on deep tech, what are some of the trends you are seeing?
Martha: I would say that there are still a lot of distribution investments to be made. Distribution has a very wide catchment, one of those areas, is things like aggregators. Somebody who sits on top, of as a layer, to give the user the most choice, almost like a broker. So, I think that there is some businesses like that that are distribution, but then also there are MGAs where they are focusing their attention on a new market area but using paper that is provided by traditional insurers so that they only have to do half the job, they don't have to be a full carrier from day one. So, I think that some of those companies still continue to soak up a significant amount of the investments.
I think the other thing that we are seeing is people who are looking very much as this is a subset of distribution in some ways, they are looking very much for new occasions to buy insurance.
This is the trend that a lot of people are talking about in terms of embedded technology, embedded insurance. This has also been a trend on the FinTech side. But when we think about embedded, we are thinking about, are you doing something else where there is a trigger that would make it an appealing time to buy insurance?
So, if you think about this, you are buying a product on Amazon, that is a natural time to buy an extended warranty. You are buying a house. In order to get a loan from your bank, you have to have insurance, so that is a natural time to buy insurance. So, I think that there are some very natural triggers. I think that the entire market is trying to figure out how to make money out of those triggers, and how to make both people buy more insurance or buy more of the insurance that you are selling because you are coming at them at a time when they're more open than usual to buying insurance.
Then in terms of other technology and I know, Ron, you are all about AI, we definitely see insurers being much more open to figuring out how to use artificial intelligence to augment their underwriting capabilities, as well as their claims capabilities. Very much thinking about what additional data can they get? What insights and patterns can they recognize that maybe a human does not recognize because a human sees maybe 100 transactions, but AI can see all 10 million transactions? I think that that knowledge that AI can build and augment, I think is really resonating with insurers.
Ron: That's right, we should get you to be the spokesperson for us. So, we are going to take a quick 20-second break to tell you where you can learn more about insights and information about insurance innovation. We will be right back.
[If you liked this episode of AI Wisdom, subscribe to our blog, Writing the Future: AI in Commercial Insurance at www.chisel.ai/blog for feature articles, interviews, opinions, and more.]We are back with our featured guest, Martha Notaras. Let us jump right into the next question. What do you think are some of the key attributes for Insurtech founders? And what do you see as important, or how important is insurance experience and subject matter expertise?
Martha: I think that the important thing for an Insurtech founder is either to be someone or to find someone who has been in insurance but is not of insurance. This is somebody who understands how things work now, but does not wake up every morning thinking, wow, things are working really well in the incumbent space right now. So, someone who has always been perhaps amazed, as I continually am, how could it really work this way? Why has nobody fixed this? There is a better way to do this. And I look at other areas in finance, for example, and that problem has always already been solved. Why haven't we solved it in insurance? So, someone who has knowledge but a level of discomfort or dissatisfaction with the way that things happen now.
I think that very early on in the Insurtech movement, we met with people who were only from the technology space and they would often say, “Well, I don't understand why it has to work this way.” And then they would hire someone from insurance, and they would be at a much more sophisticated level where they would be able to say, “Yes, so there are regulatory issues we have to face, and the way we deal with those regulatory issues is going to determine whether we have a sustainable company.” So, it is annoying, but we do it. Then once you have met those regulatory hurdles, for example, you become one of the people who is protected by that regulatory moat.
So, it is not necessarily a bad thing. But I do think that having somebody with insurance insight is very helpful, in fact, is essential. But it is not the only skill that you need, there absolutely has to be the ability, both to understand how to bring technology to the problem. Also, one of the characteristics that I believe all founders need to have is the ability to build a good team, and preferably a place that people really enjoy working and bringing their best selves to.
Ron: I love that last one, I think that is so important, and that's so true. In your opinion, what are the ways that AI and other technologies will impact the insurance industry in the coming half a decade to a decade?
Martha: I think right now, we are just at the edges of what can be imagined here. I think that if we look at the way that AI is being used right now, there are certain fairly straightforward pieces of that technology that can be used in things like ingestion. If you think about an insurance application, especially on the commercial side, you are very often working with really unwieldy sets of documents.
I think that we will see that AI can streamline some of those things and automatically either input only the relevant pieces of information, even from, sort of, dumb documents like PDFs, but also, AI can start analyzing and providing the derivative information directly in at the front end. That then speeds things up in terms of the process, but also, it should enable better underwriting.
I think if insurers are willing to combine AI with human knowledge, then I think you can really push forward better underwriting and a better understanding of your risk. So, when we think about better underwriting, sometimes that means an understanding of your risk appetite that you are willing to take, and sometimes it means I am willing to take that risk, but I want to be paid more for it. I think that there is a continuum between the risk that you are taking, the price you are getting paid, and what claims experience you end up having, and how that compares to your overall finance experience.
Ron: That's right. I think oftentimes, from an outsider's perspective, they think of insurance a bit as a commodity where there is no differentiation, they're all like goods. But a lot of companies have different risk appetites and I think that is really the opportunity here is to fine-tune and find a place where you feel comfortable between, as you talked about, the size of premium you collect, the risk that you're taking, and the eventual claims and losses that you're going to experience. I would love to hear a little bit about what gets you out of bed in the morning and what inspires you about investing in Insurtech. I know you talked about FinTech as well. So, what inspires you about investing in these two areas?
Martha: Well, I think that one of the things that is particularly important around Insurtech is there are so many more problems to solve. I really feel like we are just at the beginning of Insurtech as an investable asset class. I think one of the things that's kind of interesting about FinTech is we are already in at least the second wave of FinTech, and yet there are still problems that have not been solved. I think that those are, really, for me, one of the things that is exciting is that there is still a lot of greenfield that is available of problems to be solved.
I think the other thing that's just exciting about investing in the venture phase of companies lives is the exposure to entrepreneurs who are so much alive and creative in thinking about how to solve problems, and how to identify which path to go down, which is the most effective path that will drive success for the company as opposed to there being so many issues that needs to be solved, really trying to always come down to those first-order issues of solving them and building the value of the company.
Ron: So, speaking of entrepreneurs, if there's people out there who are looking to fundraise, you know, let us help them out. What are some of the common pitfalls that you see entrepreneurs make when they are trying to secure funding for their big idea?
Martha: I think that the thing that is probably most important in terms of talking to venture capitalists is making sure that you grab their attention early, but also that you explain the problem and your solution in a clear enough way that they can get a hold of it. So, on the internet, there are a whole bunch of 10-page template decks, and they think that one of the reasons that those work is because it is a way that VCs are used to receiving information. Also, there is very much a step by step, what problem are we solving? How big a problem is it? And why is our solution better? So, I think that if you clarify down to a very simple message, you can grab someone's attention in an elevator pitch situation, as opposed to, “We know you're really smart and you can tell us about all the details, but can you tell us the high level, so we know whether we're interested in asking about the details?”
Ron: That’s right. The elevator pitch is such a great example, especially because oftentimes when you are networking, my experience has been that you literally can be like 90 seconds with someone like an elevator ride. You have to be able to be eloquent and succinct and convey all the points you just talked about in that 90-second span. Speaking from experience, one of our investors, I remember I met him for five minutes because we had some scheduling issues and we could not...we were supposed to have a much longer meeting but it was five minutes, and long story short, he's invested more than $6 million to date. So, it is definitely about that first impression and getting their attention quick.
Martha: Also, I would not be afraid to go out...to know that you're going to have to talk to a lot of people. You want to organize the people that you want to reach but this is definitely a numbers game and what you are selling will not appeal to every VC, but it doesn't mean that it won't appeal to any VC.
Ron: Exactly. For sure. It is all about you only need one. That is the funny thing. You can get 200 “no’s,” but you only really need one “yes.” So, what happens when a company does not thrive as fast as planned and does not meet the expectations of the investors?
Martha: Well that never happens to any of my companies, Ron, so I would not know.
Ron: Right, for sure. No, hypothetically, what happens?
Martha: I think that there what you have is a situation where you need to be radically honest around the board table that if the company, for example, falls off the venture growth track. You have to understand whether this is something you can recover from by, for example, going after a different set of customers. Or whether this is a situation that perhaps there has been an underestimation of...or an overestimation of the size of the market. So, you have solved the problem, but then you just don't have enough. Now, there the question is, are there additional markets our solution is good enough for? And so, I think that those are certainly major strategic questions that should be going on at the board level. That is one of the reasons that you want to make sure that when you're working with your board, you keep that conversation at a high enough level so you can have those kinds of conversations.
Then I think if the company is not going to grow at a venture-type rate, then I think you look for other alternatives over time. That could be an exit that is earlier than you had in mind. We certainly have seen Insurtechs buying Insurtechs within the broader market. You often will see situations where you have essentially acquihires where either an established player or a startup hires an entire team and really does not give much money for the assets of the company but provides that team with the opportunity to essentially become part of a new team, and presumably, their equity opportunities then are with the new team. So, I think that there, sort of, are some off-ramps.
Then I think the other thing, in terms of established companies, is sometimes there is value to the team because of the team being a set of people that perhaps an established company would not have been able to attract altogether. So, I think there are options. But I think it requires a very honest assessment and approach. I think that the hardest thing to do is to have that conversation early enough so that there's sufficient value when you make a transaction. I think it is just like having to get rid of an employee, most of us wait too long.
Ron: One thing that we have seen a lot of recently is M&A both from incumbent insurance companies acquiring insurtechs and with insurance companies merging with other Insurtech companies. You know, most notably, we can think of, like, Bold Penguin, and Risk Genius, and then later the same year being required by American Family. So, do you see this consolidation trend continuing? And what do you think are the main drivers behind it?
Martha: So yes, I do think we will see more of that. I think that one of the reasons that we will see insurtechs investing, buying out other insurtechs that I think that they may mutually realize they are not solving a big enough part of the problem so that they would be stronger together to go out and solve a bigger part of the problem. Sometimes it can just be team building and I think that the Bold Penguin-Risk Genius example was quite an interesting one because essentially Bold Penguin bought the product line of Risk Genius and wanted to repurpose it, wanted to be able to look at existing policies while Risk Genius already knew how to do that. The added benefit to Bold Penguin was they got 10 or 15 data scientists ready-made as a team. I think that was the kind of structure where you are both buying a capability and an ongoing team seems like we'll see a continuation of that on the Insurtech buying Insurtech.
I think for the carriers or the insurers, the insurer participants, the other people who have bought significantly have been brokers. Aon bought CoverWallet for a very attractive outcome. I think that brokers in some ways tend to be a little more tech-forward than some insurance carriers. So, they probably have their mind open that way and also, they are already segmenting the market in the same way. They knew they needed an SME solution; they went out and looked at all the SME solutions in the market and started picking those things up.
So, I think that what you will see is established players looking at this two ways. First of all, I have a problem, can I solve that problem by going and buying someone? And second of all, I have an innovation problem, I know I cannot create it on my own internally, how can I buy in a solution that brings me forward on digital evolution so that I am not trying to solve new problems with old approaches?
Ron: So, without naming names, unless you want to, where should investors look for the next Insurtech unicorn?
Martha: Well, I have to say that so far, there is no doubt that carriers have been very attractive, tech-enabled carriers. On one hand, you can see an argument that says, well, is it worth actually paying such a high multiple for the level of gross written premium that these carriers have? But I think that one of the things, there are probably some other metrics to focus on. One of those is the number of policies, the number of customers, the amount of premium that is being generated per person. So, the technology leverage that these companies are getting is really massive and that is one of the reasons that they're attracting very serious valuation. So, I think we will continue to see tech companies that have decided to be insurance carriers attract a lot of interest.
Then I guess there is also their next-door neighbors which are MGAs, which are really providing the tech and the distribution, and many other of the capabilities but they're writing on someone else's paper. I think that you are seeing a lot of interest in those as well, and partly for the same reasons. First of all, to invest in an MGA in some ways is to take an option on becoming a carrier because it is the next logical step. On the other hand, I think that you also have at that point the technology, you have the customer relationships, and some of those things are really key in terms of delivering value versus many would say that, in fact, the insurance paper is the most commoditized offering there as opposed to the delivery and the customer interface.
So, I think that that's going to be one part of it. I think the other thing that we are going to see continued interest with large exits is going to be some of the core-tech that are solving really big problems. If you look at the success of Duck Creek, obviously Guidewire is also out as a publicly traded company. I think that we are going to look at the next versions of some of those companies.
Ron: Totally agree with you. So, as we wrap up, is there one piece of wisdom that you can offer to insurtech entrepreneurs looking to raise their next round?
Martha: I think it is all about having a clear roadmap in your mind of where you are today and what the building blocks are to get to not just the next step, but the vision beyond that. I think that really being able to communicate what your end goal is, and then draw the map between where you are and the end goal. If you can practice that in front of the mirror, I think that is the kind of thing that really excites investors.
Ron: Love it. So, Martha, where can people find out more about you and Brewer Lane Ventures?
Martha: Sure. It is brewerlane.com and I am certainly on LinkedIn. We have a whole team that is looking at good investments. We would love to hear from people who are looking to raise As and Bs in Insurtech.
Ron: Awesome. I am sure they'll reach out and, we'll put the details in the comments in the description section. Thank you so much, Martha. Stay safe, everybody. As always, if you want to learn more, you can check us out on LinkedIn or Twitter and we'll see you in a couple of weeks.
Martha: Thanks, Ron.
Join us next time for more expert insights and straight talk on how AI and insurtech innovations are transforming the insurance value chain. See you on the next episode!