Venture Capitalists make their living by getting the timing right on trends. Too early is not good. Too late is not good. Getting it right is hard. That is why the best make so much money. That is also why it is interesting to interview those with that Midas Touch.

There are generalist VC. There are Fintech specific VC. Even more specific is an Insurtech specific VC. We decided to interview somebody leading that market – Sam Evans of Eos Venture Partners.

The Bridge Funding model

Eos see themselves as a bridge between the Insurance incumbents (Insurance carriers, Reinsurance and Brokers) and the entrepreneurs. In VC terms, the LPs (Limited Partners) are Insurance companies. Those LPs expect financial returns for sure and Eos Venture Partners will get paid based on those returns. However the strategic returns are more important.

B2B2C and Level 3 Partnership Maturity

Sam talked about the problems of the B2C model for startups (high CAC and the needs for a big marketing budget) and the problems of the B2B model (long and uncertain sales cycles).

Sam did not call it B2B2C, but that is effectively what the alternative that is neither B2C or B2B is called. This is what we refer to as Level 3 in Partnership maturity in the mega trend we have been calling the “great Fintech convergence” (see this post from December 2015).

• Level 1: Incomprehension. The other party just looks strange and it is hard to imagine a productive conversation. Men are from Mars, Women are from Venus. Incumbents are older white men in suits and ties. Entrepreneurs are Millennials in casual clothes (skewing too male, but that is another story). Of course all stereotypes are wrong but they do impact how we see things.  Whether the incomprehension is based on fear or disdain, the reaction is the same – inertia. Incumbents seek to overcome the incomprehension problem by funding Accelerators and Hackathons. There is still a problem getting that understanding from the few people interacting with the startup ecosystem to the mainstream line of business managers – but it is a start.
• Level 2: Funding. Banks take minority equity stakes in Fintech ventures through their Corporate Venture Capital (CVC) unit. This is the level that most relationships have reached. (Funding while still in Incomprehension mode is clearly dangerous).
• Level 3: Strategic. This is where the relationship drives needle-moving revenues and profits for both parties. This may or may not include an equity relationship; the strategic relationship comes first.

Startups also go through three levels of understanding:

• Level 1: Incomprehension. Incumbents are dinosaurs and our amazing UX will crush them (B2C). Or they are customers and as long as they pay top dollars upfront for our technology we love them (B2B).
• Level 2: Funding. Lets pitch them for our Series A.
• Level 3: Strategic. We want revenue share – that is a scalable model. So we know that means we also have to share risk. We will have a pragmatic discussion about branding.

This is what Sam Evans was referring to when he describes being a bridge.

How Insurance and Banks are different

Banks were slow to react to the threat/opportunity of Fintech. The first answer was Level 2. Clearly this does not scale. Not all Banks can have a Corporate VC unit. Even the best have to work hard to get great deal flow and eventually face the strategic dilemma of which comes first – financial or strategic returns. Big Bank’s Corporate VC unit have to gain the trust of entrepreneurs who might worry that Big Banks want to learn from them and then build in house or buy a struggling competitor. In other words, Big Banks could be competitors or partners. Small Banks don’t have an option to be competitors; they are partners that entrepreneurs can feel comfortable with. Yet it is inconceivable that lots of Small Banks will set up their own Corporate VC unit (or maintain them in tough times when the best ventures are funded).

Insurance incumbents moved much faster when Insurtech came along. This is particularly true of Reinsurance. This is the trend we call Reinsurance As A Service.

4 Investing Themes

Sam identified 4 types of opportunities that they seek:

1. AI in Life & Health using “quantified self” data (wearables and other devices such as wifi connected scales). This exploits the crazy situation today where premiums are based on occasional batch snapshots based on a medical exam. For more, see this post.
2. Commercial Insurance. This has many sub segments such as Cyber and Flood Insurance. Sam gave one example of the latter that resonated and it was very simple. Assessing risk based only on geo code (eg Zip Code in America) misunderstands risk of the house on the river vs the house on the hill. The opportunity windows is particularly open in SME Insurance – see this post for more.
3. Claims Processing. Sam gave us the data that this accounts for 60-70% of the cost. It is also a big UX driver as speed/simplicity of claims process is what gets customers talking positively or negatively about their carrier. This has some hard tech problems, because getting it wrong leads to fraud. For more please see this post.
4. Digital Distribution. Eos is working in partnership with a tech company called Convista who have developed a digital front office solution called One Digital Office (ODO). ODO acts as a distribution channel for Eos portfolio companies and can also be used as the platform to launch new Digital Distribution products. Digital Distribution covers what we have been calling the Robo Brokers as well as simple comparison services (which are scaling fast in blue ocean markets where there are  a lot of de novo customers getting insurance for the first time (India, China, Africa etc).

Bernard Lunn is a Fintech deal-maker, investor and thought-leader. 

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