Tag Archives: buy-in

Startups as Partners: A Failed Experiment?

I was in New York City recently and found myself talking to the founder of a fintech. His company had recently raised several million dollars from a large investment bank. It raised some questions about how insurers go about partnering with startups.

Things were going really well.

I asked him about progress engaging with the bank as a “supplier.” I guessed that a bank that had invested such a sizable sum would be eager to get its hands on the startup’s technology. I wanted to hear how banks had solved some of the problems around partnering with startups experienced by insurers.

It turns out they have the same challenges.

The founder told me that the first thing he had to do post-investment was to sign a policy confirming that he does not use child labor. His team was currently in the process of filling in a 60-page questionnaire on data security. It was months before he expected to be live with any kind of even limited pilot.

The startup was one of the first to be accepted by the bank’s incubator. Recognizing the process challenges, a technical employee had been seconded from the bank to help the team four days a week. The employee was advising on how to build technology to be compliant with the bank’s requirements. This was helpful – but rather than shortening the timeline had merely made its requirements achievable.

All this oversight “red tape” despite the fact that most of the founding team are former employees of the bank and that one of bank’s senior managing directors was a director (through the investment).

See also: Startups Take a Seat at the Table  

I was surprised by this. On some dimensions, fintech is ahead of insurtech, notably on investment volumes (see page 3 of our presentation to the Slovenian Insurance Association). But it seems that banks suffer from the same challenges engaging with startups.

This made me wonder: Is the startup-as-a-supplier model a failed experiment? How can it be that a bank is willing to invest millions in a startup but then finds it so hard to use its product?

It is too early to know for sure if the model is a failed experiment.

However, it is fair to say that the model is not currently working for most insurers. This blog proposes two changes in the way that insurers could partner with startups – one pragmatic, the other radical.

Design a “startup-grade” governance framework (or “sandbox”)

It is very easy to produce slideware that tells management teams to be more “agile” and launch “innovation pods.” The problem is that an innovation strategy needs to be rooted in detailed operational analysis to be effective.

A vital component is a “startup-grade” governance framework – in other words an onboarding and oversight process that is commensurate with a startup’s resources and the scale and likely risk of any early implementation. For example: What are reasonable information security requirements for a small-scale trial; how does procurement get comfortable with a pre-revenue business?

These are questions that companies tend to tackle in an ad hoc way at the moment. There are two consequences: First, engagement processes are slow, and, second, solutions are bespoke. In other words, companies are not “formalizing” their learnings to speed up future engagement processes.

We believe that insurers with ambitions to engage with startups should design these governance frameworks – sometimes referred to as “sandboxes” – soon after settling on their innovation “vision.” Avoiding this operational detail will slow or kill the startup partnership.

Critical in all of this is differentiating between genuine “red lines” and “nice to haves.” An insurer must, for example, be satisfied that its startup partnership is not contravening the rules imposed by the GDPR; on the other hand, the procurement process could probably be shorn of company-imposed requirements like the need for suppliers to show three years of audited financials.

At Oxbow Partners, we are currently helping several clients develop startup-grade frameworks and the processes that sit underneath.

A new startup partnership model: “buy in-spin out”

A startup-grade governance framework may, however, not work for all companies. Some will simply find it too hard to find an acceptable compromise between their standard compliance processes and the needs of a startup. There is some legitimacy to this outcome: As we have pointed out, the penalties of non-compliance with legislation will mean a “sandbox” is not to every organization’s taste.

This would mean that for some companies the startup-as-a-supplier model will not work. So how do these companies get access to the best ideas, technology and talent?

It seems to me that the point of failure in the current model is that a startup is an outside partner. This is beneficial in some ways – a management team that has incentives to build a business; separation from a corporation to allow for creative and rapid development. But where there are advantages there are disadvantages: Alarm bells might ring in a corporate risk team when they see the words “creative” and “rapid.”

We therefore suggest more attention should be paid to an alternative model, which we call the “buy in – spin out” model. (Some companies are already offering elements of our model, but not, as far as we know, in the form we are proposing.)

In this model, corporations would buy a controlling stake in startups early in their lifecycle and run them as internal development teams. The startup’s objective is to make the technology work for the “host” organization. This simplifies the startup’s objectives, makes the governance framework clearer and also gives the startup access to internal resources to comply with these requirements.

See also: Will Startups Win 20% of Business?  

At a certain point, each side has the opportunity to buy the other out. Either the startup believes that its idea is broadly marketable and buys out the “host” with a consortium of investors (“spin out”). Alternatively, the corporation thinks that the business gives it competitive advantage, in which case it might offer a higher price than the consortium.

Clearly, there are many issues to test before implementing the “buy in – spin out” structure. The most obvious is startup appetite: The startup will have a deep fear of either being crushed by a corporate owner or being tarnished by the host when trying to distribute to competitors.

The solution may not yet be clear, but the problem is well-defined. While there is a lot of activity around partnering with startups, we are yet to see many implementations beyond limited POCs. Insurers need to ensure they are not just defining their “vision” but building an effective operating framework to make it happen.

This article was first published on the Oxbow Partners Blog.

Building Blocks for Risk Leaders (Part 2)

Important things in life are not easily reduced to 10 steps. Nevertheless, this series provides a list of 10 building blocks to achieving long-term success in risk management from someone who has spent more than 25 years striving to carve out the most satisfying career possible, while never losing sight of the attributes attached to the bigger picture. The first article in the series, covering the first two steps, is here. This articles covers steps three and four.

3. Industry Background

Many accomplished risk leaders have come up through the insurance industry, from within brokers, insurers or consultants or from the myriad of industry service providers such as claim administrators, loss prevention providers and actuaries. All of these fields are valuable for providing that broad swath of knowledge that engenders long-term success. But now that risk management is evolving into a much broader discipline, under different labels (e.g., enterprise risk management, strategic risk management or integrated risk management), the question remains whether traditional insurance-based beginnings are still the best preparation for a career in risk management. Or, are there other fields that might provide better starting points?

This new risk management realm requires greater breadth of knowledge to be successful. For example, it calls for greater skills in influencing others. These types of leadership skills are especially critical because success is often a function of securing buy-in and support from senior managers and even board members. But that doesn’t mean that the traditional areas of learning and insurance industry expertise shouldn’t be pursued .

The basic tenants of for risk leaders — risk identification, assessment, measurement, mitigation, monitoring and reporting — are as applicable as they ever were for the effective management of all risks, from A to Z. Gaining expertise and knowledge in many areas of risk management is helpful to developing the broad understanding needed to provide effective risk management advice to the enterprise. Such broad understanding is gained only by spending time in the right trenches, ideally with mentors who can guide the way through politically charged minefields. In addition, time spent in audit, compliance, legal and even process engineering can provide valuable insight into areas where relationships must be developed to understand their priorities and how they overlap with those of risk professionals.

4. Getting Involved Outside the Organization

Leaders of all types do not limit their leadership abilities to only one firm. Generally, good leaders lead everywhere, and leadership skills can help move a risk manager’s interests forward. This means that, while showing leadership internally is job one, demonstrating leadership in the broader discipline or profession is also important to long-term success. Getting involved outside their own organizations allows risk managers to have leadership experiences that broaden knowledge and hone political skills. This is especially true if the risk manager’s own company provides few opportunities to develop leadership skills. Often, these developmental opportunities within the organization are reserved for a few individuals who have been identified as “high potential,” whether accurately or otherwise.

An external development strategy may be hard to execute when the work environment is particularly challenging. It is also heavily dependent on what’s commonly known as “who you know” to connect to key external entities and leaders. So, risk management personnel should consider trade and professional organization involvement, serving on key supplier advisory boards, becoming involved with entities pushing regulatory change, etc. Contributions of value with any of these will enhance both reputation and provide personal brand benefit .