Finding Genius

by Kunal Mehta

  Some incumbent insurance companies are shifting their approaches to become more customer-centric but it is more difficult for them because it is not in their companies’ DNA the way it is for startups. According to PwC’s Global InsurTech Report — 2017, 94% of respondents in the insurance industry identified customer engagement as one of the two most important trends in their field. Research conducted by Bain in its report Customer Behavior and Loyalty in Insurance: Global Edition 2016 shows that insurers want to have more touch points with their customers and own the customer relationship to foster customer loyalty. Bain points out that compared to other financial institutions, like retail banks, insurance companies do not have frequent points of contact with their customers, a problem which has been further exacerbated by an increase in online aggregators of insurance policies. A customer-centric model helps build consumer trust, which is essential for brands, because as Lekas points out, in insurance, “there’s nothing tangible, there’s only a promise” that consumers will be covered when something bad happens. From a practical standpoint, he encourages consumers to go beyond branding and understand the financial stability and solvency risk of insurtech startups to make sure they can actually pay their claims.

  When Lazar was analyzing insurtech startups at General Catalyst, he carefully studied customer strategies of emerging players, looking to companies with both differentiated and durable advantages and felt that “given the balance sheets and experience of the incumbents, if startups haven’t thought through how they can break through the noise, it’s going to be tough.” He pointed to Lemonade as finding early success in customer acquisition by having unique partnerships with nonprofits, whereby they donate unclaimed money to nonprofits picked by customers. Lemonade’s partnerships with nonprofits resonate with millennials due to their social mission. Lazar also finds that it is helpful to “partner with channel partners or agencies where you can borrow their brand halo. Another way to acquire customers could be in the caliber of team you’ve recruited to showcase that you take underwriting, claims, customer service, and technology seriously.” Lazar also suggests “building into core workflows, such as property management systems to help landlords manage their tenants’ compliance with things like renters’ insurance.” Offering product extensions can also work. For example, Fabric is a life insurance company that offers free wills to help with customer acquisition.

  Insurtech startups can also take advantage of major operational efficiencies in the age of automation. Brian Hirsch believes that insurance agents are becoming relics of the past. Lekas likes to tell people, “you know the agent that you’ve never spoken with or met — that person roughly costs you 15% per year every year for your whole life and that adds up to thousands and thousands of dollars.” Significantly reducing the number of agents enables insurers to pass on some of the savings to their customers. In addition, Lekas believes that Branch’s automated solution will be able to provide superior insights into questions like how much insurance customers should be purchasing. That being said, some consumers prefer to sacrifice some savings and automation to consult with agents, who can provide a level of comfort and understanding when evaluating insurance products. The human relationship can serve to ingrain trust in insurance consumers.

  Lekas believes that insurtech startups that employ automation and optimized algorithms that enable them to pass on savings to their customers are destined to grow:

  “I know that an insurance company with a cheaper insurance product will be an insurance company that will grow because that’s a very obvious consumer desire. I think that there is inherent good in that because if you believe in the economic benefit of insurance, then making it cheaper should make it available to more people so this will be a way to create value for society as well as to grow a really important and awesome business.”

  From a regulatory standpoint, insurtech startups can vary in respect to their sales strategy, underwriting capabilities, control over transactions, and amount of risk they bear. There are lead-generation operators, who help create interest in certain insurance products and send those customers to agents or online agencies. Managing general agents (MGAs) can underwrite insurance policies so they have more power over who to insure. Carriers have their own insurance products that they sell and underwrite. Few insurtech startups have obtained underwriting capabilities but those that do, do so to create a barrier to entry. Lazar said of Lemonade, which is an insurance carrier:

  “Lemonade did consider becoming an MGA and the decision was driven by a desire to control their own destiny. When MGAs start, they’re small and when they’re small that means they’re insignificant to their carrier partners or reinsurance partners. We never wanted a scenario where our executive sponsor could get fired at one of those organizations and the mothership would lose interest in what we’re doing, compromising our business. We also wanted to underwrite policies in a unique way that would not conform to the standards of another carrier, so Lemonade had to file their own papers and get those approved. Entrepreneurs should be leaders on the regulatory front, which can create additional barriers to entry.”

  Security

  Similar to other fintech verticals, data security is a major challenge the insurance industry is facing. Companies in other fintech verticals own customer data such as credit and transaction history. Insurance companies can also have health records and other very sensitive personal information. In 2015, Anthem experienced a data breach, compromising 79 million people’s health records. As insurers aim to collect more data, such as from IoT devices, there are more entry points for hackers. Lekas recommends that insurance companies “treat personal data as if it’s hot to the touch and to automate people out of processes that require them to see or interact with data. It can’t be something you figure out on the back-end; it’s got to start in the architecture.”

  The Incumbents

  More than in other fintech verticals, incumbent insurance companies are working to partner with insurtech startups.23 Insurance companies generally do not view insurtech startups as substantial threats; rather, they still view other established insurance companies as their main competitors. Therefore, collaborating with innovative insurtech startups is only going to benefit them. Startups that are left behind without incumbent partners will lose out on access to billions of data points and will have to slowly and carefully build out their own resources.

  Many insurance companies are forming venture arms to invest in innovative startups. Interestingly, Accenture revealed in its report The Rise of Insurtech that only 17% of the investments by the 75 top insurers were insurtech companies. The remainder were in areas that would help insurance companies become more competitive, such as tools in analytics or data protection. For example, New York Life Ventures has invested in startups such as H2O.ai, which aims to democratize machine learning, and Skycure, a cybersecurity company for mobile defense that was acquired by Symantec.

  Some insurers are even launching their own startups in-house, such as Allstate, which started Arity, a transport analytics startup. MassMutual helped launch a life insurance startup internally, Haven Life, to target millennials. Incumbents are also holding developer contests; State Farm, for example, held a contest to find a machine learning solution that used dashboard cameras to detect and prevent drivers from becoming distracted.

  Incumbents are taking note of innovation and finding ways to actively integrate these solutions into their own offerings. Insurtech startups have the opportunity to find ways to collaborate with incumbent insurance companies or strike out on their own to reach the underserved millennial market as these customers make their first forays into insurance. The opportunity for incumbents and startups to build relationships with each other and fortify one another is massive and those that do will see dividends.

  Concluding Thoughts

  Tackling the financial industry as a startup is no easy feat. The combination of regulations, security risk, and massive incumbents make this a uniquely challengi
ng industry for startups to make headway. However, improving technology, gaining access to more data, and approaching consumers in a transparent, approachable way while navigating the areas of regulations and security are good starts. Working with financial institutions can provide more scale, customers, and capital than any other relationship will, bestowing a tremendous advantage on startups that are able to forge these key relationships. While these relationships are in the early days, they are likely to provide additional strength and resources to startups in pivotal moments such as economic downturns. There will be startups without these relationships that survive but additional support will help catapult select startups even higher.

  Building a startup is difficult. Building a fintech startup is really difficult. But, entrepreneurs need to dream big and run with their vision. I’d like to leave you with these parting words, which Tala CEO and Founder Shivani Siroya said is the best piece of advice she has received: “Be bolder than you think your vision is.”

  Sources & Resources

  1. https://www.cbinsights.com/research/report/fintech-trends-q1-2019/

  2. https://www.pewsocialtrends.org/2010/06/30/how-the-great-recession-has-changed-life-in-america/

  3. https://www.bls.gov/opub/mlr/2011/article/employment-loss-and-the-2007-09-recession-an-overview.htm

  4. https://www.pewtrusts.org/en/research-and-analysis/reports/2010/04/28/the-impact-of-the-september-2008-economic-collapse

  5. https://www.economist.com/special-report/2017/05/04/a-decade-after-the-crisis-how-are-the-worlds-banks-doing

  6. https://www.fastcompany.com/3019849/venmos-social-increasingly-hilarious-payments-community

  7. https://www.nerdwallet.com/blog/corporate-news/nerdwallets-record-breaking-year/

  8. https://www.cbinsights.com/research/credit-karma-ceo-personal-finance-future-fintech/

  9. https://www.cbinsights.com/research/report/fintech-trends-q1-2019/

  10. https://www.forbes.com/sites/ciocentral/2018/07/10/how-fintech-initiatives-are-driving-financial-services-innovation/#11ce28b154fa

  11. https://dealbook.nytimes.com/2013/05/23/banks-lobbyists-help-in-drafting-financial-bills/

  12. Goldman Sachs’ The Future of Finance Part I: The Rise of the New Shadow Bank

  13. https://www.nerdwallet.com/blog/loans/student-loans/student-loan-debt/

  14. https://www.forbes.com/sites/tomlindsay/2018/05/24/new-report-the-u-s-student-loan-debt-crisis-is-even-worse-than-we-thought/#488514b7e438

  15. https://www.nbc-2.com/story/39538437/student-loans-are-hurting-millennials-net-worth

  16. Goldman Sachs’ The Future of Finance Part III: The Socialization of Finance

  17. https://www.thinkadvisor.com/2015/06/09/former-obama-official-advisors-need-to-serve-lower/?slreturn=20190713220437

  18. https://www.forbes.com/sites/michaelcannivet/2018/06/27/the-passive-investing-boom-poses-a-new-risk-artificial-popularity/#70e109503e93

  19. Goldman Sachs’ The Future of Finance Part III: The Socialization of Finance

  20. https://www.cbinsights.com/research/report/fintech-trends-q1-2019/

  21. https://progressive.mediaroom.com/2019-01-17-new-progressive-data-shows-putting-the-phone-down-correlates-to-lower-insurance-claims

  22. https://home.kpmg/xx/en/home/insights/2017/09/will-on-demand-insurance-become-mainstream.html

  23. https://www.pwc.dk/da/publikationer/2017/pwc-fintech-2-0.pdf

  GRACE CHOU

  FELICIS VENTURES

  In a not so distant past, a family of five would often spend a weekend at the local shopping mall. The parents would shop for linens at Macy’s and household appliances at Sears. The children would rush to Game Stop or Toys R’ Us for the latest video game or doll. Together, they would shop for pet food at PetSmart, buy clothes from department stores, and read books together at Barnes & Noble. On their way home, the family visited a Blockbuster to rent a movie and a local bodega to buy their ice cream. Less than two decades later, consumer behaviors and values have drastically changed. Technology has led to a swift downfall of several iconic American consumer companies, while creating massive opportunities for consumer-focused entrepreneurs in the $400 billion US consumer market.

  How does the average person live, eat, spend, save, travel, sleep? Consumer brands are obsessively focused on answering this question and targeting customers with specific products tailored to make their lives ‘better.’ Consumer trends and behaviors are difficult to predict and as technology continues to evolve, so do our brand loyalties and preferences. Venture capital funds have capitalized on changing consumer behaviors since the advent of the Internet and supported lucrative brands such as Stitch Fix, Warby Parker, Everlane, Bonobos, Away, Casper, and Dia & Co, as well as massive companies driving the shift in consumer and business behavior, such as Amazon and Shopify. Given the myriad of opportunities and new brands started every day, developing an understanding of consumer as an investment area is complex and daunting. Grace Chou, an investor with Felicis Ventures (a venture capital fund with investments in consumer companies such as Warby Parker, Dollar Shave Club, Bonobos, Shopify, and Twitch), is an ideal investor to tackle this investment area given her professional experience and unique insight into consumer patterns and behavior.

  Grace joined Felicis Ventures after spending a number of years at Walmart eCommerce, an organization that has evolved formidably against the ‘Amazon threat.’ At Walmart eCommerce, Grace focused on partnerships and investments and developed an expertise in eCommerce and retail. Grace saw the rise of digitally native brands and worked on business model innovations around the world, including the development of Walmart’s investment thesis for India. Internationally, Grace led Walmart’s $50 million investment in Dada (China’s largest on-demand grocery platform) and worked on key initiatives including the Walmart/JD.com partnership. She also worked on acquisitions across a range of technology startups (Adchemy, Luvocracy, PunchTab, Stylr, Yumprint) and transformative eCommerce brands (Jet, Moosejaw, Modcloth, Shoebuy). These experiences have informed a thesis on consumer investing that proves valuable to founders and investors operating within this industry.

  In this chapter, Grace shares her perspective on the concept of the jigsaw puzzle I touched on in earlier chapters. She discusses how diverging factors and forces — the cost of starting a retail brand, buying customer loyalty, the Amazon effect, the retail apocalypse — create a perfect storm for consumer entrepreneurs to build game-changing businesses. She also takes a look at the business models that consumer entrepreneurs have stress tested with venture financing, offering entrepreneurs unique insights and anecdotes on launching the next brand that will win over consumers’ hearts and minds.

  CONSUMER TRENDS AND INVESTING

  Grace Chou, Felicis Ventures

  Recent History of Consumer Technology

  The proliferation of the Internet and mobile phones has been the biggest driver of transformation for consumer products and services over the last two decades. In consumer technology, we saw the rise of eCommerce and direct-to-consumer brands, instant gratification and on-demand services enabled by mobile phones, the impact of social media on commerce and identity, and automated buying and replenishment enabled by subscription services.

  Did you buy that online? The rise of eCommerce and direct-to-consumer brands

  As retail shifted online, Amazon grew quickly to become the dominant player in eCommerce. eCommerce comprised $258 billion of US retail sales in 2018, with Amazon commanding 49% of the online market (almost 7x the share of next closest competitor eBay). The growth of Amazon meant customers became increasingly trusting and comfortable with making their purchases online. In parallel, we also started seeing the rise of direct-to-consumer (“d2c”) brands, as billions of dollars in venture capital started pouring into these companies. Many of these brands have already transformed how shopping is done for entire categories by re-imagining the whole shopping experience — ranging from Warby Parker for eyewear, Third Love for bras, Casper for m
attresses, Glossier for beauty, to many more. With the Internet, new brands could reach customers directly and control the entire shopping journey. The barrier of entry to launching a new brand lowered significantly as it became easy to outsource or leverage software tools for the entire stack needed to launch a business — from setting up a website, creating content, developing products, reaching customers, and other retail operations. By cutting out the retail middlemen, brands also had the ability to change their margin structure by going direct-to-consumer and direct-to-manufacturer, owning every step of their production and distribution process while providing an end-to-end brand experience for customers.

  By going direct-to-consumer, startup brands were able to fundamentally disrupt large incumbents that have historically dominated their product categories for decades. Especially as millennials came to command significant buying power, they resonated with new brands that valued transparency, quality, personality, and emotional connection. By being agile and working closely with customers, d2c brands are often able to bring products to market in weeks — while it can take months, or even years, for incumbent players to do the same. Moreover, d2C brands are able to create authentic relationships with their customers and gain direct access to customer data in ways that incumbent brands cannot (example: why Unilever acquired Dollar Shave Club.) Consumers are no longer passive recipients of pre-packaged experiences. A new bi-directional brand-to-consumer relationship emerged as brands could quickly and thoughtfully integrate consumer feedback and data deeply in the product development process.