The general view during the recent pandemic induced hit to the global economy was that insurtech funding would become harder to secure. Partly this was due to inflation and interest rates rising. Suddenly, you could get 5% on your money by leaving it in banks,plus the stock markets surged in 2022 which again made riskier investments like backing start-ups seem less attractive.
There is still a keen interest in insurtech and how it deliver better customer experiences, streamline claims and admin, plus offer bespoke products and cross selling to existing insurance brand consumers.
IE asked Rich Tomlinson, CEO at fast growing Percayso-Inform for his insights;
1. Has the finance market got tougher over the last year or so?
After the heady days of 2021/22, the investment market has certainly tightened the drawstrings on their funds driven by a number of well-documented macroeconomic shocks and general trends. This has translated into a much more difficult landscape for those seeking funding, especially for start-ups but I would also say that follow-on funding is also more difficult to secure, or at least is subject to greater scrutiny.
‘Back to basics’ may sum this situation up; in 2021, a ‘good story’ might have gone a long way to getting funding whereas the emphasis now is much more on the business fundamentals of product market fit, client traction, revenue, profit and loss. Fundamentally though, if you have a stable and growing business operating in a growing area with the right team and products, you will still succeed and attract funding if required.
2. Are investors more demanding in terms of profits and margins now, not projected?
Yes, very much so – not that they were not demanding before! In Percayso’s last funding round, we experienced a lot of scrutiny over our current performance, not just promised, but I think this has intensified over the past year as a few businesses have faltered and there is less liquidity in the markets generally.
3. When funding growth ambitions, are backers looking to specific niches within insurance, embedded, travel, motor, claims automation?
Yes, I would say so – it is all about finding product market fit, who is your audience (don’t say everyone!), what is your differentiator and what have others missed that you are uniquely placed to capitalise on.
4. Has pitching changed recently, more drawn out, more details required?
I would say that more solid proof is required at the very least. At the end of the day, there are still plenty of funders at all investment stages from angel through to Series C and beyond, from Family Offices, Venture Capital funds, Private Equity and trade markets that are still looking to deploy capital so it’s not all doom and gloom, but you certainly have to walk the walk more – which is no bad thing!
INVESTORS WANT TO SEE THE NUMBERS
During the golden era of “disruptive” insurtech, it was relatively easy to convince investors you had a wizard idea for changing everything and all it needed were beautiful offices in a fashionable area of London, NYC or Berlin, some red hot web developers, free Danish pastries and ping-pong Fridays. But those days are gone. The profits need to be real, not projected, the target market needs to be identified, costed out in terms of marketing spend and chased down rapidly. In short, inflationary pressures mean that ROI matters more than ever – investors can’t afford to wait and see if something disrupts the market. It needs to make money from Q1.
Here’s some in-depth funding, innovation and growth analysis from David Kimmel, managing partner and cofounder, Insurance Advisory Partners:
1. Harder market for seed capital and Series A/B/C rounds?
Economic factors and diminished venture capital appetite have made funding more scare, with solutions searching for a problem now really struggling. Some Insurtechs grew rapidly backed by aggressive capital, but that game is over.
Several recent A and B rounds faced real issues and the dropping number of unicorns in 2022 highlights the valuation pressures. Now the focus is more on M&A or even closing a business altogether and we will see a lot more market exits this year. Also, IPOs, once the exit for many, will become much rarer in the near term, further concerning investors about ultimate liquidity.
However, those that can demonstrate stability and a real path to profitable growth are still securing backing. Technological innovation is obviously valuable and needed, so investments in high-quality businesses will do well in the longer term. Investors are much savvier than they were a year ago, with market factors unquestionably shining a spotlight on the need for greater discernment and scrutiny.
2. Is crowdfunding a viable option?
We have limited experience but anecdotally, while it has been viable for some, crowdfunding generally seems to have a low success rate. Also, not all money is created equal; crowdfunding tends to lack the benefits of partnering with seasoned investors and VC firms. The Insurtechs that are doing well now all have well connected and experienced investors, so it’s not just about gaining the funding, it’s about what comes with that in terms of expert guidance, experience and support.
3. Investors are looking at real profits vs disruption value
It’s amazing how many Insurtechs followed the early Amazon path, focussing on top-line growth over profitability. The next wave will prioritize profitability and strong underwriting. There is already a shift in the parabola of Insurtech success, with the market moving beyond capturing market share and focusing much more on strong combined ratios and sound economics to achieve disciplined growth.
4. New insurance niches set to grow in 2023-25
There’s a lot of interest in specialty niches such as cyber and also in analytics firms that can bridge the confidence gap in pricing and risk models. Such companies and also MGAs are now being rapidly formed. In the US, for instance, there’s the top five large cyber MGAs, but there are around 25 others gaining respect from investors.
Another specialty area to watch is the flood market, now more of a focus following the Florida storms, with companies possessing superior data and flood models attracting investor interest. With the quantity and quality of data ever expanding and improving, proprietary data clearly has a value, which companies are looking to realise by leveraging that to enable greater accuracy in assessing and pricing risk.
Some of the most successful Insurtechs now are not at all disruptive or competitive and this marks a complete change to the notion of recent years that innovation is disruption. In fairness the more savvy firms always did focus on the economic fundamentals and what makes insurance businesses work better, rather than trying to rival or reinvent insurance. This is the era of harmonious innovation, with specialist, focused and experienced teams building businesses to assist insurers with current difficulties and those likely to challenge the market in the mid to longer term.