May 21, 2019
The Hurdles Facing Innovators
by Paul Carroll
A report by The Insurance Insider last week that AXA won’t contribute more funding to its insurtech venture fund underscores just how hard innovation can be for big corporations, even when you have the sort of all-star cast that a fund like XL Innovate can assemble.
Picking winners and losers among investments is plenty hard—the rule of thumb is that nine out of 10 startups fail. On top of that, corporate venture funds typically have conflicted agendas.
To get top talent, you have to pay handsomely for good returns—Silicon Valley titans like John Doerr and Vinod Khosla set the bar, having become billionaires as VCs. Chasing those returns, the VCs want to be able to invest in anything with great promise. Fair enough. But here’s where it gets tricky.
The corporation typically isn’t just looking for a return on investment. It wants to find a product, a line of business, a business model, a something that could produce a step change for the company or even reinvent the business. Basically, the corporation is looking to be Dayton Hudson, a stodgy family retailer that in 1962 let one of the brothers test an idea for a discount retailer—when I tell you that the name he chose was Target, you realize just how successful he was; his experiment subsumed the rest of the company.
The XL Innovate early investment in Lemonade illustrates the tension. Lemonade is now a unicorn, valued at $1.5 billion to $2 billion, so the fund has generated a spectacular return. Yet Lemonade’s renters and home insurance, even together with its slick interface, aren’t likely to move the needle for AXA’s life and health lines or its financial services.
And XL’s Lemonade experience is for a company being sophisticated about how to innovate. Our chief innovation officer, Guy Fraker, tells of being at State Farm years ago, in the pre-insurtech days, and trying to get the company to invest in Relay Rides. Guy was sure that the peer-to-peer, car-sharing service would succeed, and the $500,000 investment finally happened, but only because a senior executive cut through the review process and expensed it. Guy later learned that State Farm sold its stake in the company (now called Turo) after a year and tripled its money, but it’s not as though that extra $1 million moved the needle for the mammoth insurance company.
Historically, the best insurance companies have been run by financial geniuses, who have figured out super-smart ways to use all the capital they amass. Warren Buffett, for instance, has used Berkshire Hathaway’s insurance assets to finance much of his wizardry. And there’s a lot to be said for the insurance industry’s financial sophistication. The industry financed the recovery from Katrina, Maria, 9/11, etc., and is rebuilding sections of California following the devastating wildfires, all without taking on debt.
But the game is changing, and financial brilliance is no longer enough. The bad news is that the challenges will be tough, as the AXA report shows. The good news is that the industry seems to be coming to grips with the change. A.M. Best’s decision to start rating companies on their innovation capabilities, in particular, will not only provide companies with incentive but will help steer them toward the right path.