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Carrier vs. MGA. U.S. vs EU. Specialty niche vs. traditional insurance lines.

There are many things that distinguish one InsurTech from the next, including financial metrics like internal rates of return, but representatives of venture capital firms say that founders who clearly can communicate a long-term vision are the ones that stand out when they put their funds behind.

Speaking at the InsurTech Spring Conference 2021, co-hosted by InsurTech NY and InsurTech Hartford in early March, Matthew Jones, a principal at Anthemis revealed that his firm will soon announce investments in two “amazing businesses” with differing paths to financial return.

“One company that has moved incredibly fast over the last six months, and one that has moved forward somewhat slower over the last two to three years,” he told David Gritz, co-founder of InsurTech NY and moderator of the panel, “Investing for the InsurTech Unicorn Crop of 2025.” Gritz had asked Jones to identify his firm’s most successful investments from an IRR perspective.

“Investors can appear turned off by insurance because of how they think about IRR,” Jones said. In other words, it can take a lot of money up front and take a long time for the returns to emerge,” he said, adding that in cash terms, “the multiples on invested capital can be very good” in the insurance technology space.

Explaining what attracted Anthemis to its two soon-to-be-announced investments, he said, “Their founders could communicate an extremely strong and compelling vision of where they wanted to take that business in the long term and what they would need to do to get there.”

“They were masters of their business.”

Focusing in on the question of finding future InsurTech unicorns, Gritz noted that 2020 was one of the best years for minting unicorns, many of which started up circa 2015. Also observing that the unicorns of 2020 tended to be full-stack carriers, he asked whether the carrier business model is likely to pervade the 2025 cohort as well.

“The successful companies are really starting to defy the stereotype of ‘Oh well, they’re a carrier’ or ‘they’re an agency.'”

Adrian Jones, HSCM

Adrian Jones, a managing director for Hudson Structured Capital Management, said HSCM is seeing the better InsurTech companies “taking a horses for courses approach.” Those InsurTechs are saying, “‘We can provide data and software. We can be an agent. We can be a broker. We can be a carrier. We can do all of the above, and it just depends on what market we’re targeting and how.'”

“The successful companies are really starting to defy the stereotype of ‘Oh well, they’re a carrier’ or ‘they’re an agency,'” he said, noting that in the U.S., among the roughly 20 public InsurTechs “you see all the above”—a trend he believes will continue.

“It’s less about the business model that you used to approach the business and more about what market are you in and can you serve it effectively,” he said.

Avoiding World Conquerors

Chris Campana, an associate for Avanta Ventures, the venture capital arm of CSAA Insurance Group, a AAA insurer, said he honed in on one particular market recently—the cyber market. Prior to being a VC, Campana worked as an casualty actuary, a role that gave him a deep appreciation for uncertainty and risk, he said. “When you think about these two characteristics, uncertainty and risk, and you try to map them back to an area within insurance where both are maximized, you find yourself within cyber insurance,” he said.

Cyber risk, he said, is highly dynamic, hard to classify and even harder to quantify. “These fundamental challenges naturally translate to opportunity,” he said, explaining what led Avanta to invest in Cowbell Cyber, a cyber insurance MGA serving the small to medium-sized businesses.

“They’ve done a really nice job at leveraging their technical understanding of a company’s cybersecurity posture and feeding risk insights [into] underwriting and pricing models, which in fact, allows them to classify and quantify cyber risk in a really elegant and effective way,” he said.

HSCM’s Jones also sees the attraction of slices of a market. “We’re looking for…markets where entrepreneurs who are a little bit crazy, but not a lot crazy, who understand tech, who understand insurance, find a way in and then expand from that,” he said.

“I’m much less interested in companies which say, “I’m going to go conquer the world—and by the way, insurance is a $5 trillion business. I really hope that I don’t hear a $5 trillion business anymore because it’s not. Insurance is a game of niches,” said Jones. HSCM’s portfolio includes title insurer States Title, and Corvus Insurance, an MGU using AI-driven risk data for commercial lines like cyber.

“I look to back entrepreneurs who say, ‘I can really dominate a particular niche and produce a much better product for consumers there—and from that, then, I can expand. That, to me, is the formula for success in insurance,” Jones said.

Like the others, Campana said the success of a startup “really starts with the people.”

“What’s their purpose? Understanding a person’s motivation behind starting a company helps us to understand if they’re an entrepreneur who’s going to run through walls or one that gets discouraged when things get really hard—and they almost certainly will.”

“Understanding a person’s motivation behind starting a company helps us to understand if they’re an entrepreneur who’s going to run through walls or one that gets discouraged when things get really hard—and they almost certainly will.”

Chris Campana, Avanta Ventures

“It’s also extremely important for investors and founders to share the same values. This is really a long relationship. It’s a long dance. It’s a partnership that could last 10-plus years, even. So alignment, not only on the direction of the business, but also on the values of the individuals becomes extremely important in driving success.”

Addressing a specific question from Gritz about how to spot high-growth targets among Silicon Valley tech companies, Campana listed some questions to ask that get at competitive advantages. But ultimately, he suggested that the differentiator hinges on the answer to one of his questions: “Is your value proposition obvious and truly solving a customer’s pain point?”

Matthew Jones echoed Campana when Gritz asked how the Anthemis principal gauges future success given that his firm often participates in seed funding and Series A rounds, before there is revenue data to judge an InsurTech’s growth potential.

“The first step, really, is for us as Anthemis, as the investor, to have our own investment thesis. So if you’re playing in a certain line of business, in a certain geography, we should, in advance of that conversation, really have our own opinion on where we think the opportunity is….

“It could be in a certain part of the value chain. It could be a part of an insurance technology stack… We’re always doing research on what those opportunities are [and] we’re asking, ‘Do we think this is a real problem?’ [or] ‘Is it a real pain point?'” he said, repeating Campana’s idea.

“If so, is it a big enough problem for people to get excited about and for other investors to join in down the line?”

Tech AND Insurance—Not OR

Beyond that, “It’s about the team,” Jones continued. “Does the team have the necessary mix of experience and expertise to navigate the challenges ahead because building a business is hard. And building an insurance business is really hard.”

“Can the team convey that vision credibly and with passion? If they can, then we’re excited and we’re having a conversation.”

Drilling down on exactly what he looks for in a team, Jones said InsurTechs need to show his firm a mix of technology and insurance experience. “You need both. If you’ve just got the insurance, you’re not a tech business. If you’ve just got the tech, you’re going to get in trouble very, very quickly.”

Coming back to his early comments about betting on founders, Gritz asked how VCs identify the great ones among those that are “full of hot air.”

“Show us that you understand your near-term execution challenges, but that you’ve also got that long-term vision for the business,” Jones said. “I have a lot of sympathy for founders that have to try and walk that line. It is hard, but once we’ve got a picture around those…things, we like to think… we can piece together whether we think something’s worth investing in.”

EU vs. U.S?

Another question that arose during the half-hour session was one about why there are more U.S. InsurTech unicorns than European ones.

Matthew Jones said that U.S. InsurTechs have a real advantage in that they tend to go “national by default almost,” in spite of the challenges of multi-state regulatory system. European founders tend to build their businesses for certain regions.

“Show us that you understand your near-term execution challenges, but that you’ve also got that long-term vision for the business.”

Matthew Jones, Anthemis

In Europe, “we do have quite substantial cultural differences between borders. If you look at the insurance penetration rate, for example, the Swiss and the Germans love buying insurance,” and the proportion of people that buy through an agent or a broker or buy online or via aggregators “varies enormously by country.”

In addition, he said, “I think what the U.S. does particularly well is fostering just a culture of entrepreneurship, including fostering ecosystems where successful founders back new founders. This is going to take some time for us to replicate here in Europe,” he said.

Finally, “there tends to be, probably, a little bit more planning and thinking in Europe versus doing in the U.S.—and I encourage our founders to maybe shorten those board decks. Make them a little bit less reflective and more about what we’re actually to do next.”

Asked about advice for surmounting the regulatory hurdles in the U.S., Adrian Jones said, “There’s really no way around it, unfortunately. You need to go in, you need to understand the regulation,” reporting that he simply starts by “reading the insurance code” in places where U.S. InsurTechs that HSCM backs are operating.

“I personally am not a fan of businesses that say, ‘Well, if only we could change this regulation, then we’d be golden,'” said HSCM’s Jones. “Ultimately, the question is, How do you make regulation your friend? How do you use it in such a way that it actually can help to create a defensible business for you— because actually, that’s what a lot of the incumbents have done.”

He went on to suggest that “just about every [InsuTech] out there is doing something which is really fundamentally good for consumers and for society.” So, when they push back on regulation, they do so to support their missions to serve consumers’ best interests.

“But ultimately, unfortunately, you have to understand the regulation the way it is, work with it, play that game, before you can change it,” he said.

When To Go Public

Focusing on the U.S. market, and specifically on the public InsurTech carriers experiencing market price volatility and some significant stock price drops, Gritz asked how those fluctuations might impact the future of unicorns.

“You have to go public when the time is right. I think that’s one of the lessons to draw here,” Adrian Jones said. “If you go public before you really have a good handle on how your company is going to perform financially quarter by quarter, you are putting yourself at risk [of] a perception [developing] in the market that people don’t believe they can trust your earnings, they don’t trust your forward projections, etc.”

“I’m not saying that’s the case for anybody now, but it is a risk,” he said.

Jones added that he believes there’s a lot of value in “being part of a venture where…people on the board who understand what it’s like to build a young company….

“I hope that founders would think very carefully about, perhaps, retaining venture and private equity ownership for longer, without necessarily rushing out until they and until the company are ready. When you’re ready, by all means, do it and do it as well as you can. But public markets are really unforgiving.

Keeping Up With The Joneses

Anthemis Principal Matthew Jones is authoring a series of VC Viewpoint articles for Carrier Management. His latest articles are “The Insurance Carrier Is Back in Fashion” and “Solving the InsurTech Dilemma: Should I Stay an MGA or Become a Carrier?

HSCM Managing Director Adrian Jones is a former guest editor for Carrier Management. He co-authored a series of articles about the pre-IPO financial results of InsurTech carriers Root, Lemonade and Metromile in 2018 with IoT Observatory Founder Matteo Carbone.

“I would encourage any CEOs before they decide to make that leap, talk with a few public company CEOs and ask them what it’s really like. And then make sure that you and your company are really ready and well-prepared.”

Separately, at a different insurance virtual presentation early this year, a webinar presented by Cambridge Mobile Telematics, Steve Chirico, a director at rating agency AM Best painted a picture of just what public company CEOs are up against. Speaking not specifically about InsurTechs but about obstacles to innovation for established public insurers during the session titled, “P&C in 2021—Innovation, with Forrester & AM Best,” Chirico said, “Short-term focus in the enemy of innovation, and too much emphasis on current earnings.”

Explaining how he learned that lesson, the rating agency analyst recalled what he witnessed when he attended a large insurance stock analysts industry event. “It was amazing to me the pressure applied by these stock analysts to these CEOs, who were talking about things like, ‘Why don’t you issue more debt because that makes your cost of capital go down,” and ‘Why don’t you sell this division? While it’s profitable now, we can monetize the earnings.'”

“It was all short-term thinking,” Chirico said. “No one asked a question about what is your five-year strategy to improve your products and services and have a sustainable competitive edge. Not one asked that.”

“I now appreciate—and I saw it with my own eyes, the pressure that these CEOs are under. They have to walk the razor’s edge answering to all stakeholders.”

Concluded Chirico: “Too much of a short-term focus, where you’re looking for IRR payouts and you’re managing your business to the short term [means] you’re going to miss out on the long-term investment in innovative strategies that will affect the long-term viability of a company.”