The Insurance industry is ripe for disruption. Insurance is a heavily regulated industry, capital intensive and consists of complex products. In Commercial Insurance, for example, products vary for different types of businesses and in many cases, there is overlap between different coverages. For these reasons and more, the industry has remained relatively untouched by innovation.
Going indirect and using an agent for every Insurance product is part of the reason why margins are so high in Insurance and can reach 60% in Life and 45% in Commercial Insurance.
Interesting to see the correlation between the move to online service that already started to happen in Auto Insurance and how it affects the margins for this sub-sector.
Existing Insurance companies talk about digital technology as incremental changes such as consumers’ ability to self-serve online (for example, changing an address) or enabling their agents with iPads. These changes do boost efficiency, but are not revolutionary in nature. They overlook the widespread disruptive change happening in the industry and, as such, we believe that the true source of disruption will stem from technology startups.
Insurance Technology, or InsureTech, represents a large market, which makes it attractive for VC investment. In the US alone insurance is a $1.2T market. Yet, little VC money has gone into the industry and in the 15 years from 2000-2014 only 0.5% of VC investment was dedicated to InsureTech companies. However, in the past three years this number has started to grow significantly.
A key challenge in Insurance is building a trusted brand. While consumers dislike the experience they have with Insurance companies (in a recent survey of Relative Satisfaction Utility score, Insurance received one of the lowest scores), they will still be wary of moving their money to startups until they have confidence in the startup’s ability to be there when something goes wrong.
That’s why we believe that consumer facing InsureTech companies need to control the entire insurance experience and not simply act as a broker. This is a more daunting task that requires exceptional execution and more funding, but the few who do it right will become truly big players.And finally, we believe that Israel can play a significant role in this market. Israel already has a substantial eco-system in Fintech and cyber/fraud, which are both essential cornerstones in building Insurance offerings. Looking at the most funded Insuretech startups reveals a startling picture: of the 15 most funded Insuretech companies, 5 are Israelis or have an Israeli founder. It is also heartwarming to see that several Israeli startups are going for a big play with end user offerings. Good examples of this are Next Insurance and Lemonade that have raised sizeable rounds and going for a full service Insurance.
Insurtech report 2017 - download here:
For years there was a common belief amongst venture capitalists that participating preferred is always better for investors.Here’s a brief overview of the various liquidation preferences investors may ask for:
VCs have one common goal - they all aim to increase shareholder value. Luckily, many Israeli entrepreneurs share this dream as they want to build long-lasting companies. This alignment of interests between VCs and entrepreneurs is crucial to make sure all shareholders are working to achieve the same goal.
The problem with participating preferred is that it creates an inherent misalignment of interest between VCs and entrepreneurs.
Take for example an entrepreneur, who raised $21M and is subject to participating preferred plus interest rate . This entrepreneur is now faced with a decision whether or not to sell the company for $80M. The shareholders agree that the company’s potential could be much higher in 2-3 years, but the company would have to raise another $20M in order to reach said potential.
Luckily, there is a late stage VC who is eager to invest in the company at a reasonable valuation (i.e. - $120M pre money). The decision, therefore, should be simple - on the surface this a good opportunity to increase the value of the company at a reasonable price. But here is where the participating preferred misalignment kicks in. For the entrepreneur, raising another $20M means that upon an exit, he/she will have to pay back the investors $41M plus interest before seeing any profits. If the entrepreneur suspects that the chances of substantially increasing the value at exit are not high enough, he/she will be hesitant to bear more risk. In order to match the entrepreneur's current return, the next potential exit would need to be at least $200M, in order to compensate the extra dilution from the D round and the added preferences. As such, many entrepreneurs at this stage will decide to sell the company and reduce their personal risk. The loss of potential value for all shareholders in this scenario could be huge, by far exceeding the potential profit stemming from the participating preferred.
Cloud computing is an area we find especially exciting. It has brought enormous change to the world of applications and it would be no exaggeration to say that most of the innovation in IT over the past decade has been enabled, catalyzed, or caused by cloud computing. Currently, we are in the midst of a microservices revolution, one that has, until now, been championed by containers. Through our investment in Aqua Security over a year ago, we have witnessed first hand the rapid growth this market is experiencing, and believe it will continue to proliferate enterprises across the globe. We are now on the cusp of another revolution in cloud infrastructure: the move to serverless computing.