Celebrated as one of the 10 largest IPOs of all time, Uber Technologies Inc. floated its stock at a valuation of $82 billion on May 10th. Just three weeks later, the company announced a quarterly loss of $1 billion, citing heavy investment in its new food delivery and freight businesses.
Uber is by far not the only company to IPO with its bottom line deep in the red. Indeed, according to the University of Florida, 83% of all U.S. IPOs in 2018 involved companies that lost money in the 12 months leading up to their market debut. Importantly, the stock prices of the unprofitable companies went on to perform even better than those of the profitable companies (PitchBook).
We are in a growth over profit market. Investors believe that more investment in product and more growth will translate into a dominant market position — and massive profits — in the future.
Reaching a dominant market position is also the ambition of many InsurTechs. The recent funding rounds of Lemonade ($300m), Wefox ($125m), Hippo ($70m) are testament to that.
While strong funding is a necessary condition for attaining that goal, it is far from the only requirement. To become massive (and profitable) businesses in the future, InsurTechs will need to outplay a true unfair advantage in the market over incumbents.
Unfair advantages of InsurTechs
Recently I talked to the founder of a company that provides essential real-time data to optimise underwriting and claims assessment. A large insurer became interested in licensing his technology three years ago. Since then, the founder met with 282 executives of that insurer, in a total of 47 meetings. Still, there is no clear roadmap towards implementation.
Reflecting on his “journey” with that insurer, the founder concluded he would have been better off if he had become an insurer himself and started to underwrite based on his technology!
This anecdote illustrates why there is a need for InsurTechs and the edge they have over incumbents.
InsurTechs use the advantages of modern technology to simplify and speed up processes, underwrite smarter, reduce distribution cost and improve the claims experience. Incumbents could do this too — in theory. As the anecdote above shows, their inflexible legacy organisations and technology are a major roadblock, and working as an unfair advantage for InsurTechs. If and when incumbents finally catch up, it may be too late.
Exponential growth opportunities
Bought By Many (CommerzVentures portfolio) serves as an example for how this story could unfold.
A pet insurer based in the UK, Bought By Many sold its first own-branded policy in 2017. Within less than 2 years it captured a new business market share of more than 10%. It is now Europe’s fastest growing InsurTech (in terms of absolute premium growth).
Despite its rapid growth from a standing start, Bought By Many has achieved a very healthy loss ratio, strong unit economics and exceptionally high customer satisfaction scores.
Its not-so-secret sauce is the digital data it generates across the entire insurance chain: starting with consumer interests and pain points, moving through conversion funnels, to claims behaviour, retention and satisfaction scores.
Bought By Many’s target demographic — pet owners — identify strongly as such. Pet owners are also by far the healthier and wealthier half of the population. Serving their other personal insurance needs, based on what Bought By Many already knows about them, is an exponential growth opportunity several times the size of pet insurance.
The current crop of IPOed companies started at the fringes, and later “crossed the chasm” into mainstream markets — when their growth curves started to tick upwards. Uber started as a service to order black limos — now it is a company redefining urban mobility and logistics. Pinterest was once a moodboard for design bloggers — now it is a social media platform with more than 260 million users.
Tomorrow’s winners in InsurTech will follow a similar path — it is hard to see who could stop them.