Show me the Money - the Top 5 Insurtech Investment Trends to Watch
A. Demand for Insurtech Start-Up Funding is in Seed Stage or Before A Round
After a quick scan of key European Insurtech maps, we have a strong balance for early stage companies (about 95%), or the invisible face of the iceberg. Only 5% of Insurtech start-ups have funding at A rounds or after. The most innovative ideas are still at seed stage because Insurtech investing is still in its early days compared to Fintech. My personal feeling is that Insurtech is 2-5 years behind Fintech in terms of investment trends. For example, if you plug investments in Insurtech in 2015, the amount equals that of Fintech in 2012 (source: CB Insights). If investments continue with the same configuraiton, then it is clear that Insurtech start-up trends will remain. As the Insurance market is big, complex, regulated and poor in digitisation, then it is a great place for start-ups to enter. Therefore, the boom of start-ups will continue in early stage and more important globally.
B. Offers for Start-Up Funding in Insurtech are Predominantly Starting at A Round
When looking for funding, most VCs specialised in Insurtech are looking at A round or later. Most VCs that I know prefer to invest at a later stage. The economics of a 100m fund makes it hard to deploy small tickets per start-up. The exception is when you deal with a micro-fund. Other specialised VCs entering Insurtech are the ones already focusing on Fintech. It is always surprising to see Fintech covering Insurtech becaause Fintech has nothing to do with Health or P&C insurance. I don't think this is a problem specific to Insurtech but rather to the VC industry, where it is usually more competitive amongst VCs to fund a start-up at growth stage than an emerging idea at pre-seed stage.
C. The Worldwide Insurtech Market Faces an Equity Gap between Demand and Offer
The matrix shows that growth stages have many generalists operating. There is competition for the best start-ups because there is usually more funding available than there are investment opportunities. On the other hand, the more you move down the asset class, the harder it is to get funding because seed investment is more risky and hard to locate. The challenge for Insurtech seed investment is therefore to be able to invest in many hubs, and one VC should look to make more than 100 deals in order to have a chance at capturing 1 deal exceeding a 100m valuation at exit stage (source: 500 start-ups). As of today, there is no worldwide seed investor specialised in Insurtech as yet.
What about tomorrow? Well, if we look at crowdfunding, then we see the emergence of vertical portals specialised in health, real estate, music etc. Technology has enabled us to start our own platform with minimum set-up costs. If we believe in the rise of Insurtech platforms then, sooner or later, we will see Insurtech funding emerge similar to crowdfunding or the way Angel List has enabled seed funding with Business Angels.
D. The rise of Insurtech Corporate Venture Capital (CVC): who can address the equity gap?
It may be the insurance and mutual companies themselves as asset managers. As I helped to build one of the biggest Insurtech VCs and the largest CVC in France, I have over time noticed that more and more insurance companies are looking to build or create their own. Initially, our fund was created to prevent disruptive technologies like the Uberization of insurance. However, recently, insurance companies have tended to become partners rather than payers. I see more and more insurers that have used investment to gain more businesses or enter new markets. However, those CVCs have strategic obejctives on top of financial gains. Over the years at Bertelsmann, Nokia and AXA, I have found it difficult in a regulated fund to attain both. Usually, in my view, there is a negative correlation between strategic and financial objectives. I have also observed that early-stage companies provide greater strategic insights and late-stage companies provide greater financial returns.
E. The Rise of Insurtech Special Purpose Vehicles (SPVs)
In a traditional fund with many investments, only GPs decide on investment and, usually, this is for financial gain only. Funds are raised over several months and General Partners (GPs) have control. Insurtech SPVs are set up differently - they are investment holdings, and decisions to invest are commonly made between Limited Partner (LP) and GP, providing a more strategic angle to an investment due to partnership opportunities. It usually takes days or weeks to set up and LPs have control. The Process is deal-by-deal investing. SPVs are evergreen vehicles so there is no 10-year lockup. My view is that insurance companies looking to co-invest with VCs and Business Angels will soon set up these vehicles because they can provide flexibility for insurance to capture innovation, engage start-ups in partnerships and make profitable investments.