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February 13, 2018

Improving chances of overcoming startup hurdles

Summary:

The bankruptcy filing of an insurtech startup has drawn some recent attention, so here is our two cents:

In the world of startups, the fact that Human Condition Safety filed for bankruptcy in March 2017 would generate a headline something like: “Venture-backed startup filed the first bankruptcy of the day,” or perhaps “the first bankruptcy of the week.” Ho hum. 

In an era of accelerated development times, rapid testing and iteration of products, thousands of very smart people launch with solid practices, just as Human Condition Safety did in 2014, when its founders thought they could use artificial intelligence and wearables to simulate work environments and help employees learn to be safer. These startups often find a name client, as the company did with Bechtel, and attract real money, as Human Condition Safety did when it raised $18 million at a valuation as high as $90 million. Then the founders discover that reality is much different from theory. 

This isn’t a negative. All sorts of studies have found that more than 90% of startups fail. The failures are a feature, not a bug, for the innovation ecosystem. The failures don’t show that the founders are stupid, bad people, etc. They just show that people are being appropriately ambitious about important problems with potentially huge payoffs.

The failure rate for startups does raise a question that is worth some attention: What do best practices tell us about picking viable early-stage companies? In other words, can we do better than the standard failure rate?

Stats and research completed through our Innovator’s Edge platform strongly suggest the answer is yes.

Innovator’s Edge is populated by more than 40,000 early-stage firms in 175 countries, with 7% of the firms qualifying as insurtech. (The remaining 93% are entrepreneurs with the potential to redefine risks we take as a given today.) Among all startups in the platform, 2017 funding transactions totaled nearly $345 billion. Research on the platform shows that insurers don’t limit involvement to investing. Participation includes mentoring, adopting, promoting and buying, as has happened with WeGoLook, Snapsheet, AppBus, Pypestream, RiskBlock, RiskGenius, Jamii, etc. Any additional involvement by insurers improves success rates.

The platform also shows that insurance-based venture investors appear to place more faith in the founding teams longer, and therefore tend to avoid replacing founders. Nor are they investing in teams that are looking for a quick exit. Changing out founding teams with executives selected by investors is a tactic of last resort, which fits with research we’ve done that found that 70% to 90% of a decision to support an early-stage company should be based on the team. Early-stage firms tend to lack experience at scale, but that’s what insurance companies do well–allowing for the sort of partnership that can produce great success. 

Let this story of a bankruptcy that took place nearly a year ago serve as a reminder on the risk/reward equation at work with insurtechs. The risks are high, so firms will fail. Get comfortable with that reality. However, when a startup with a solid team and a decent idea finds a good fit with an insurance investor that has clarity about the job to be done, the rewards are spectacular. 

Have a great week.

Paul Carroll
Editor-in-Chief

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About the Author

Paul Carroll is the editor-in-chief of Insurance Thought Leadership. He is also co-author of Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years and the author of a best-seller on IBM, published in 1993. Carroll spent 17 years at the Wall Street Journal as an editor and reporter; he was nominated twice for the Pulitzer Prize. He later was a finalist for a National Magazine Award.

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