Already, the coronavirus pandemic has taken a big bite out of InsurTech venture capital financings.
Venture capital investments in the sector reached $760 million in the 2020 first quarter, about 50 percent lower than the same period a year ago, according to new data from Venture Scanner.
Such a trend is not unexpected in light of the pandemic-related economic plunge that continues to spread around the globe. A recent article from The Economist explained that many investors are now pulling back from new venture deals in all sectors and working instead to save existing ones, helping portfolio companies cut costs, save cash and get ready for tough times ahead. (There are exceptions. Nationwide, for example, has said it would continue to nurture portfolio companies and explore new investments, and at least one expert has said VCs are concluding some investments already in the pipeline.)
Carrier Management Editor Mark Hollmer interviewed UK-based Venture Scanner Chief Research Officer Nathan Pacer by email about the early venture capital numbers and what they appear to mean for InsurTech investments. Highlights are presented below.
Q: Is the pandemic affecting venture financing for InsurTech startups? If so, could you quantify?
Pacer: We are seeing a significant slowdown of venture funding into InsurTech startups. Q1 2020 saw $760 million in funding, which is a 50 percent drop relative to the recent quarterly funding average of $1.5 billion. Though we are a quarter of the way through the year, 2020 is only at 11 percent of 2019 funding totals.
Q: Can that number be broken down further, such as first/second/later stage rounds of financing?
Pacer: Around 75 percent of that Q1 2020 funding amount went into Early Stage events, which we define as Series A, Series B, and Series C funding rounds. The remaining funding went into Late Stage events (Series D and later), with practically no activity in the Seed [beginning] stage.
Q: Can the venture financing drop be directly tied to coronavirus and related financial market concerns?
Pacer: While it’s always hard to prove causality, I don’t think it requires too much imagination to see how the massive disruptions caused by the pandemic are affecting startups and VCs. Most tech startups and VCs are fortunate enough to be able to work from home, but the effort required to set up remote due diligence processes almost certainly led to fewer deals.
Q: Do you have any thoughts as to whether this will be a shortlived drop, or will numbers continue to plunge?
Pacer: I believe we will see lower funding levels for at least the next quarter, and likely much longer. The double whammy of pandemic-caused social distancing and the potential of a recession will almost certainly weigh on the ability of startups to demonstrate the growth often required to obtain capital.
I should note, however, that funding metrics don’t always correlate with startup disruption. Past recessions have seen the founding of future behemoths, for example Slack, Uber, and WhatsApp were all founded post-financial crisis. Smart VCs know this and are willing to invest into this environment, just at lower overall rates into fewer startups.