A few months ago, any fast-growing company would have loved being compared to WeWork: a business that exploded into a multi-billion dollar international success in less than a decade, with a much-hyped IPO on the way. Today that story is unfolding very differently, with public recognition of its ongoing operating losses, a delayed IPO, and a founder entangled in scandal.
Ignoring the scandalous parts of the story (which do not apply to any insurance industry startups as far as I know), a key financial factor in the WeWork saga is its counterintuitive positioning as a tech company rather than a real estate company.
Tech companies have big margins on each sale, a revenue scalability that is theoretically decoupled from operating costs, acceptance of big operating losses long before profitability, and valuations that are often 5-10 times revenue. Real estate companies, on the other hand, have low margins, a revenue growth that is closely tethered to expenses, rational expectations of profitability, and much more modest valuations.
In some worrisome ways, this disconnect between investment approach and business reality mirrors the InsureTech startup scene, where companies that are really insurers or brokers are being valued as if they are software companies, with similar expectations for rapid, high-margin growth.
For example, Lemonade, a carrier startup, raised $300M with a valuation of $2B (notably led by SoftBank, also a key investor in WeWork), despite premiums in the low millions and a mixed history of loss ratios. One might expect an investment like this in a technology company, but Lemonade is not a technology company. Lemonade makes excellent use of emerging technologies to power its business, but nonetheless its business is selling insurance. And insurance, like real estate, has low margins, premium growth tied to both expenses and claims losses, closely monitored loss ratios, and valuations pegged to premiums rather than huge multipliers on revenue. In order to recognize a return on that investment valuation, Lemonade would not just need to grow, but it would need to become one of the largest insurers in the US.
Another interesting indicator of this industry investment problem is the trend of startup carriers now augmenting their business (or pivoting their business entirely) by selling their software platforms. InsureTech carriers and brokers have recently announced they will repackage the platforms they built to support their own insurance sales in order to license that tech as a core system for other insurers.
It’s certainly the case that these companies are proud of the systems they’ve built and are realizing an opportunity to gain additional profit. But it’s also possible that these startups, many with large VC investments at technology-company valuations, have realized that selling software is a business they are much more comfortable with than selling insurance.
This is not intended as a critique of any InsureTech startup carrier. These companies are trying and doing great things, and they are pushing the industry to rethink the insurance products it sells and how it sells them.
But taking investment from a VC or PE firm means accepting a shared vision for growth; startups should be careful that the financial model of their industry path matches the expectations of big money firms who are used to the different margins and multipliers of Silicon Valley tech companies.
Add new comment