CXA Group $25 million Series B shows the maturing of InsurTech and future of Innovation Capital

 

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Closing a Series A round is tough (the “Series A Crunch”), but closing a Series B is even tougher. You have to show great metrics at all levels. Series B is the “show me round”.

So when we see a big Series B round in the white hot InsurTech sector we pay attention.

In this post we look at the trends and insights behind the news that a Singapore-based health InsurTech venture called CXA Group has closed a $25 million Series B round from Facebook’s co-founder Eduardo Saverin’s B Capital Group and Singapore’s EDBI.

This news illustrates 6 major themes:

– Innovation Capital goes where it feels welcome

– Innovation capital goes where there is opportunity and that is shifting to Asia

– Singapore just scored a goal in the Fintech Hubs Global Tournament.

– The UHNWI Super Angels will shake up the “permanent aristocracy” of top tier VC Funds.

– The role of Government in building Fintech hubs

– This could be Zenefits done right

Note on terminology: we refer to Innovation Capital as the combination of cash + connections + know how that has historically been called Venture Capital. For reasons explained later, the historical term – Venture Capital – has outlived its Sell By Date.

Innovation capital goes where it feels welcome

This is not complex. Countries with zero capital gains tax on long term investments will attract a lot of Ultra High Net Worth Individuals (UHNWI aka Family Offices). Eduardo Saverin is an example – a Brazilian who famously renounced his US Citizenship in 2011 to take up residence in Singapore.

What is new is the blurring of lines between these UHNWI Super Angels and traditional Institutional Venture Capital. More on that later.

Innovation capital goes where there is opportunity and that is shifting to Asia

Asia is the 21st century growth story.

This statement wins the “Captain Obvious Award”. What is interesting is the time lag between when the growth shifts and when the innovation capital shifts. For a while, Innovation Capital in the middle aged world (America) and the old world (Europe) knew how to invest and saw the growth shifting to Asia. It was American VC money flowing into Asia. The next iteration, happening now, is when Asian VC money flows into Asia. This deal illustrates that shift.

Singapore just scored a goal in the Fintech Hubs Tournament.

This deal demonstrates that Singapore is becoming a major Fintech Hub, leveraging smart regulation and its position at the heart of the Asia growth story.

The UHNWI Super Angels will shake up the permanent aristocracy of top tier VC Funds.

The lead investor is credited as “Eduardo Saverin’s B Capital Group”. If the PR said “Eduardo Saverin” then this would be classed as an Angel round. Whether B Capital Group has other investors is not that important because a single UHNWI individual or family has plenty of capital to deploy.

For a long time, we had Angels who led the way by investing early and then politely inviting the big funds to invest. This led to what the Ivey Business Journal describes as a permanent aristocracy of top tier funds.  The Super Angels with an institutional fund, such as Eduardo Saverin’s B Capital Group can give that permanent aristocracy a run for their money. Some of the partners of those top tier funds are now also setting up as Super Angels and just investing their own money. Like Hedge Funds that become Family Offices, they no longer manage other people’s money, they just invest their own money. This is partly driven by tax, as people see the political writing on the wall that signals the end of carried interest fees being taxed as capital gains.

This is why we see the term Venture Capital as past its sell by date and prefer the term Innovation Capital. What we normally think of us VC – funding early stage innovation – is being done by Angels and too many VC Funds have become part of the asset management industry  focussed on AUM fees and short term exits.

The role of Government in building Fintech hubs

Co-Lead on the deal was the corporate investment arm of the Singapore Economic Development Board call EDBI. This post looks at the increased role of governments in Fintech regulatory competition as governments calculate the economic return on innovation. Whether direct investment (“picking winners”) is the right way is debatable, but expect to see more government activity in Fintech.

This could be Zenefits done right

CXA is going after the employee benefits industry (pegged at $100 billion in Asia) with a free SaaS platform monetized via lead generation. If that sounds familiar, think Zenefits, the hyper-growth success that hit the speed buffer (for reasons described here).

CXA goes to the next level by helping employers unlock wellness through prevention and disease management.

The health InsurTech opportunity is no longer only about America.

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Small Business Also Needs Insurance & these 4 #Insurtech aim to help

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We have often written about Small Business Finance, both debt and equity. It is a window big enough to drive a truck through. The reason the window is so big is that small business has suffered from the middle child problem. It is neither the youngest child (consumer, where it is easy to get scale in aggregate) or the oldest child (Corporate BigCo, where it is easy to get to scale one client at a time). Serving small business historically had a Customer Acquisition Cost (CAC) similar to a BigCo with a the LifeTime Value (LTV) of a few consumers – an ugly part of the quadrant. In short, judged on the most critical metric of CAC/LTV, serving small business was historically a lousy proposition. This was true if you were serving them finance or software or….Insurance. That is why today we look at the 4 ventures that we found in our Insurtech database that aim to profitably serve Insurance to Small Business. 

The 4 Small Business Friendly InsurTech Ventures

CoverWallet

CoverWallet looks like a Robo Broker and they offer hybrid support, with phone support as well as a digital service. This makes sense as Insurance is too complex and mission critical for a pure digital service. They aim to cut through the complexity by offering Insurance that is tuned to the specific type of business. As they put it:

 “The coverage you need depends on the type of business you run. A restaurant owner needs to be covered against customers possibly getting food poisoning while an accountant needs to be covered against calculation errors.”

FounderShield

FounderShield focus on high growth startups and are based in New York where they can find many of these close to home (although I noted some high trajectory Silicon Valley firms in their customer list). This makes sense on the “get them young” approach to marketing. When you are starting a high growth venture you know you need insurance but want to spend very little time thinking about it. You will sign with whoever makes it easy and as long as they work with you as you grow they can get some big clients for a low CAC. I also noted that they offer phone support.

Embroker

They focus on the application process. This is similar to how ventures like Ondeck and Kabbage won in Small Business Lending – by making a cumbersome process simple. For example, they note how paper intensive the Insurance application process is – the last bastion of the Fax machine.

Insureon

Insureon also focus on the application process and the fact that offering Insurance needs to be tuned to the specific type of business by offering a multiple choice tree structure type application process that reduces form filling time.

All 4 ventures are based in America

This is not surprising. America is a big market and highly regulated. Just looking the range of insurance to conside gives one empathy for a small business owner. You need all of these (while also needing to be 100% focussed on customer acquisition and service):

  • General Liability
  • Workers Compensation
  • Commercial Property
  • Business Owners Policy
  • Professional Liability
  • Errors & Omission
  • Medical Malpractice
  • Directors & Officers

Within America, we noted geographical diversity with 2 from New York and one each from Chicago and Silicon Valley.

If anybody knows Insurtech focussed on serving Small Business that are based in Europe or Asia please tell us in comments. Note, we can see many ventures that offer insurance to Small Business as part of a different offering. We are particularly keen to hear about those ventures that have a laser focus on the Small Business market.

The Zenefits and Health Insurance Elephant in the Room

Health Insurance is different from the types of Insurance that these 4 ventures offer. They are offering Insurance to the business. Health Insurance is something that the business now has to offer to their employees. Both are admin headaches for that small business owner already spending 100% of their time on customer acquisition and service.

We covered the dramatic rise and fall of Zenefits a few months ago. The takeaway is that agents/brokers need to have a reasonable understanding of what they are selling. These 4 ventures may be the tortoises that beat the hare story (not implying that they are growing slowly, only that every venture looks like a tortoise compared to Zenefits in it’s glory days).

We can see ventures trying to get into the space vacated by the Zenefits retreat, such as Gusto moving into Insurance. Meanwhile, the new Zenefits CEO is being as boring as possible by talking earnestly about Compliance.

InsurTech is in its Cambrian Explosion phase, with lots of new ventures being created. It is still early days for InsurTech. Within InsurTech, the Small Business Insurance market looks nascent with a few serious entrants and a big window open but no standout successes yet.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader

 

 

Zenefits joins Uber & AirBnB in regulatory battle as InsurTech grows up

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The Zenefits innovation is brilliant. They give away software to manage employee benefits and then monetize via the leadflow to insurers. That led to a rocket ship growth that reads like a fairy tale until in February of this year we read about the CEO resigning after compliance issues with regulators.

Rocket Ship

The rocket ship story is revealed in the funding rounds:

  • Graduating from the Y Combinator Winter 2013 batch nets them $372,000 and a Seed Round with A List Silicon Valley investors.
  • January 2014 $15m Series A, just nine months after graduating from Y Combinator.
  • June 2014 $66.5 million Series B at a $500m valuation.
  • May 2015, $500m Series C at at $4.5 billion valuation.

Zenefit’s innovation led to the kind of hockey stick growth that you usually only get in fairy tales or naive entrepreneur pitches.

Then, last week on February 8th we get headlines like this in VentureBeat:

Zenefits CEO Parker Conrad resigns, COO David Sacks takes over

The oops moment is just that

To win big, you need to:

  1.  Innovate in a massive market. Zenefits = tick.
  1.  Have deep pockets. Zenefits = tick.
  1.  Execute flawlessly. Zenefits = oops.

At this moment, Eeyore is heard muttering “fairy tales never come true, I told you that this would end badly”. Today’s research note describes why the dramatic news this month is only an oops moment that signals that InsurTech is growing up.

For details on what Zenefits did wrong, go to this Buzzfeed article.

Betting on David Sacks

I read the headline about the CEO resigning rather differently because I saw that the COO turned CEO was David Sacks who had founded Yammer and led it to a successful exit. When I first spotted Yammer I misjudged it. When I learned about their traction I interviewed David Sacks to learn about what he had done. This gave me a deep respect for David Sacks as a business leader.

What Yammer did was build some unexceptional software and innovate brilliantly on the revenue model. It looks like David Sacks will be doing that again. Zenefits get their revenue from lead sourcing rather than subscriptions, but the base idea of innovating on the revenue model is the same.

Reacting to compliance issues

Insurance and Banking work in regulated industries. So do taxis and hotels, but the regulation and compliance in Insurance and Banking is tougher. Our thesis is that 2016 will see the Great Convergence between Fintech/InsurTech and Banking/Insurance which means that Fintech/InsurTech ventures that want to make a difference need to grow up and address compliance properly.

The Zenefits story is the story of InsurTech growing up.

Zenefits is moving fast to address their compliance issue; this is textbook crisis management. They will get past this. The regulator is no longer all-powerful. Regulators get their orders from politicians who get their orders from consumers/voters. If small business and their employers get better/cheaper products (taxis, accommodation, insurance) they will tell politicians what they think and then the innovators (Uber, AirBnB, Zenefits) will have some negotiating leverage. They cannot ignore the rules. Nor do they have to accept everything without question. Regulations do change. That is why it is a negotiation.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.

Market disruption comes from the establishment as well as the startup

By Rick Huckstep

Last week, I wrote about Silicon Valley tech startup Zenefits and how their free to use HR software platform is disrupting the health insurance broker market in the USA. And I return to this subject one week later because, as I was writing and researching the piece on Zenefits, my curiosity grew for a better understanding of the impact of the Affordable Care Act, fondly referred to as Obamacare.

Behind this curiosity was the whole notion that it isn’t just the upstart Fintech new boys that disrupt the financial services marketplace. Just as powerful a force exists in the form of the market reforms from the “establishment” i.e., regulators, politicians, industry bodies,  and the like who have the power to change the way markets behave.

Whilst they can also be the very force that prevents change, which is more often the case, I wanted to explore this notion of establishment disrupting markets and look specifically at the case of Obamacare.

The first thing that caught my eye in the Affordable Care Act is the ‘medical loss ratio’ rule. This rule determines that insurers must spend the majority of their premiums on improving the quality, efficiency and effectiveness of the healthcare services to the tune of around 85% of the premiums. Whilst the aim of this is to reduce the spend on healthcare, it also had some unintended consequences.

The direct intention of this rule is to put an end to the system of inducements and rewards for remove unnecessary tests and procedures and thereby lower the cost of healthcare.

But, as a consequence, what this means in practice for an insurance provider is that they must now redeploy capital within the business before they can return it to shareholders.

Secondly, it also drives a different behavior pattern within the insurance providers. Now we are seeing a much greater interest in the actual delivery of healthcare services from insurers, and especially in the technology that innovates lower cost, better patient care services.

These consequences of the medical loss ration rule has led to a growing number of insurers investing in startups through their own funds and in creating accelerators to support the startup ecosystem.

The size or nature of these investments from the insurance firms are not always publicly available, but one example I saw was with Horizon Healthcare Services, a New Jersey insurance provider who invested $3.7m in the $7m Series A round in COTA.

COTA is an acronym for Cancer Outcomes Tracking and Analysis and they are “the first big data platform designed by practicing oncologists to deliver real-time clinical outcomes data and cost analysis for cancer care in support of healthcare’s new value-based reimbursement model.”

For both the insurance and the healthcare providers, both sides of the supply model share some common goals as a result of Obamacare. The COTA platform addresses this by controlling the runaway costs of cancer treatment without compromising patient care.

Another key feature in Obamacare is the creation of the Health Insurance Exchanges, also known as “Marketplaces”, within each state. These marketplaces are online comparison websites where consumers can purchase health insurance from insurance providers licensed to operate in that state.

The marketplaces will ensure that everyone gets “minimum essential coverage”. They also offer a central place to receive federal subsidies and handle exemptions (such as applying mid year because of moving from one state to another). The marketplaces operate an open season that runs from mid November to mid Feb and health insurance can only be bought during this period, unless it is deemed an exemption.

Which brings me back to where I started with the reference to last week’s article…because number 2 in the Finovate Unicorn list was Oscar and their $2bn valuation.

“Hi, we’re Oscar, a better kind of health insurance company” is the greeting on the front page of the website.

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Oscar is a health insurance company that provides health insurance through the New York and the New Jersey Health Insurance Exchanges or marketplaces. It already has upwards of 40,000 members and claims to have 12-15% market share for individual health insurance in New York. As well as doubling the size of its workforce in the past year. Oscar also has plans to expand into Texas and California in 2015 subject to regulatory approvals in these states.

Their customer proposition is to keep the entire act of buying and relying on health insurance as easy, mobile and as simple as possible.

First and foremost, they are a technology-based business with a mobile app that is designed for the millennials. This is reinforced by the youthful name and the child-like branding to their target audience during the annual enrollment season. The casual and uncluttered tone of the brand appeals to the millennial generation and a mobile tech audience.

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This clearly differentiates them against the established, some might say “stuffy”, marketing from the corporate insurers in this market.

The Oscar app is a modern ecommerce platform that is built on a back-end system that delivers an agile and responsive platform to provide their customers with mobile help from physicians, easy access to records, help in make a claim, and guidance through the healthcare system.

The app organizes medical information on a timeline in reverse chronological order and it uses Google maps to search for healthcare services based on the users needs. It also has a straightforward search and enquiry system for ailments using plain English such as “my tummy hurts”.

Oscar also offers features to encourage preventative measures, such as each customer getting a Misfit Flash fitness tracker that syncs with the Oscar app. The daily goals start easy, at around 3,000 steps per day and they gradually increase over the year to around 10,000 a day. As the user hits their daily goal they receive a $1 credit, up to $240 a year as an incentive for keeping fit and active. In keeping with the branding for the target audience, these are paid back as Amazon gift certificates

One of the common themes with all insurance startups is the imperative to keep the insurance policy details simple and transparent. Oscar is no different and their basic plan provides for free check-ups, generic drugs, flu shots and basic preventative care. They use plain English instead of medical and insurance jargon as best that they can which is a practice that we’ve seen earlier with the likes of Riskeraser and Abaris.

In the recent PWC annual CEO survey, now in its 18th year, the survey reported that 88% of insurers thought that changes in industry regulation would be disruptive over the next 5 years. This was the highest score for any category of disruption and shows that insurance leaders see the threat of disruption coming from the establishment as well as from tech startups.

Examples like Obamacare and also the pensions shakeup in the UK, covered recently in the article about Recordsure, support these findings from the PWC survey.

Obamacare has shaken up this massive, expensive and inefficient industry in the US. Now, all sides of the supply and demand model; consumers, producers and providers alike are changing the way the healthcare market works. It’s not just the startups that are driving innovation and change in how markets behave, the market reforms imposed by the establishment, through regulation and political action are as effective a disruptor!

Which is what Fintech is all about, isn’t it?