Why Startup Investors Are Putting More Money Into Insurtech – Crunchbase News
Insurance—an industry known for veteran brands and a cautious approach to risk—might seem a strange fit for the move-fast-and-break-things ethos of the startup world, but that hasn’t dissuaded venture capitalists from scaling up.
So far this year, investors have put just over $6 billion into U.S. insurance and insurtech-focused startups, per the latest Crunchbase data. With just over two months left in the year, that’s already 32 percent over the tally for all of 2020.
The activity is on all fronts, including large seed and early-stage financings, giant late-stage rounds, and a few exits from the first set of venture-backed insurance unicorns. As the space matures, it’s gotten easier to convince investors that there’s opportunity for returns.
“An entrepreneur no longer has to answer the question: Can someone build a billion-dollar company in insurtech?” said Caribou Honig, a partner at SemperVirens Venture Capital and co-founder of the Insuretech Connect conference series, who points to a spate of public offerings in the space this past year. Although not all have performed well post-debut, several still maintain multibillion-dollar valuations.
The question now is: What can you build next?
Looking at recent funding data, it appears popular approaches include upstarts focused on narrow niches of the insurance marketplace as well as those that provide incumbents with the tools to stay competitive in a fast-moving market.
Funding has been rising for years
For the U.S. insurtech and insurance startup sphere, venture funding has been steadily climbing for years. From just topping a billion dollars annually five years ago, insurtech investment is now several multiples higher than that, as illustrated in the chart below.
While investments were split across 240 companies, a handful of ultra-large rounds moved the needle on funding totals this year. This includes late-stage rounds for health plan provider Collective Health, which raised $280 million; entrepreneur-focused Next Insurance, which pulled in $250 million; and cyber insurance provider Coalition, which secured $380 million in two separate financings this year.
Growth in U.S. funding comes as global investment in the space is up too, which we look at in the chart below:
Niche offerings gain traction
For U.S. startups, one of the standout trends in recent quarters is the rise of niche-oriented insurance startups. This includes companies marketing to a narrow insurance customer base, be it coverage for gig economy drivers, cyber insurance or small trucking businesses.
Honig describes the trend as a second wave of insurtech and insurance startups, following an initial wave that mostly began scaling up in the mid 2010s. While the first wave went after big segments with broad solutions “this next wave is starting with more narrow opportunities,” he said.
The trend toward niche offerings is reflected in the largest early-stage financings. These include Headway, a mental health care provider; Buckle, an auto insurer for drivers at Uber and other gig economy platforms; and LeaseLock, which offers an insurance product for tenants and landlords that can be used in lieu of security deposits.
Beyond niche offerings, another common investment theme is around tools to help incumbents keep up with the latest technology.
“What we’re seeing is that almost every stage of the insurance workflow is attracting founders to try and change and digitize or improve it,” said Kyle Beatty, managing director of American Family Ventures, the startup investment arm of American Family Insurance.
Companies that have secured larger rounds this year with business models around supporting incumbents include Sure, a provider of SaaS infrastructure and APIs for insurers; Arturo, a developer of aerial imagery analytics used by insurers; and TrustLayer, an automated insurance verification provider.
Public offerings have not gone that well
But while insurtech SaaS startups are raising capital, it’s primarily the public-facing, upstart insurance platforms that are producing exits. They’ve had some ups and downs.
That’s striking since usually when an industry is seeing both exits and lots more venture funding, the startups that already went public did pretty well. That hasn’t been the case for insurance and insurtech.
Over roughly the past year, at least four venture-backed U.S. unicorns hit public markets: health provider Oscar, auto insurers Root and Metromile, and property insurer Hippo. All are down sharply from their initial offer prices. Metromile, the laggard of the lot, has shed more than 80 percent of its value since peaking in February.
Honig attributes some of the less-than-stellar aftermarket performance to the possibility that these offerings were priced for perfection when they hit the market. Public investors tend to be wary when it comes to risk businesses, he said, noting that “whenever a risk-bearing business has even the smallest hiccup, markets are particularly unforgiving.”
Risks and rewards ahead
Among major industries, insurance stands out as probably the only one in which both buyers and sellers hope no one ever needs to use the core product. While being covered in a disaster is nice, it’s always preferable not to have one in the first place.
For insurers, meanwhile, staying afloat requires forecasting risk accurately enough to cover any incoming claims. For upstarts in the field, this is a particular challenge given the lack of claims history upon which to base projections. But those who get it right do well.
“The main challenge is to balance growth and underwriting rigor,” Beatty says. For those who can grow both quickly and sustainably, a plentiful supply of venture dollars is waiting in the wings.
Illustration: Dom Guzman
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