Chris, insurance has seen a groundswell of investment in the past few years. How did Drive Capital get started in the industry?
“Investing in insurance has actually been a very counterintuitive thing because the traditional advice in venture is not to invest in anything in a regulated market because it makes it far more challenging to build a business that needs to grow at the rate we typically want to see. So as investors that can invest capital anywhere, we should be choosing the industries that don’t have that regulation.
It’s a longer story, but truth be told we never wanted to invest in the insurance industry. Instead, we wanted to invest in technologies that were enabling the insurance industry.”
How did you and your partners go from that initial strategy to building some of the fastest growing insurance companies in the US?
“Back in 2014 or 2015 we had a bunch of technologies and we took them to the insurance companies, the biggest insurance companies, and said ‘Hey, would you like this, what do you think?’ And consistently we got the same feedback, which was ‘this is amazing, this is the future!’ But when we’d ask ‘Well how much would you be willing to pay for this?’, their response was always ‘Oh, we’d never buy this.’ But why wouldn’t they buy this? They’d tell us that this is Star Trek level technology and adaptation that they’re not ready for because their legacy systems can’t digest the data, they’re too archaic. When we asked ‘How long do you think it would take before you’d be willing to consider something like this?’, they’d say ’10 years’.
So we started to think critically about whether it was possible to build an insurance company within a 10-year window instead of waiting for the industry to catch up. Fortunately we met entrepreneurs like Alex Timm and Alex Frommeyer who are world class founders with big ideas around how to improve insurance. That’s what really led us down this path of investing in insurance startups and we’re thrilled we did it.”
What are these insurance startups in your portfolio, like Root and Beam, doing that’s so revolutionary?
“Companies that can use technology and data to better price risk, and provide better service for their customers, are able to effectively compete with traditional insurance companies. These are better insurance products and it’s customers that benefit. What’s more likely to predict whether you’re going to get into an accident: how many years you’ve worked in your current job and your FICO score or how you drive your car?
Historically the data has not been there or communicating with customers in a way they can appreciate and trust has been lacking. So our startups are able to apply technology and an experience that builds efficiency within the business, enables faster quotes for customers and brokers and provides a better overall service.”
What are some of the challenges to starting an insurance company and competing against major players in the industry?
“The biggest initial challenge if you want to invest in insurance is that it’s not really set up to have a lot of venture capital backed companies. We were fortunate to be a brand new venture without much history yet, so we could amend our governance documents to be compliant with all the laws that regulators needed us to comply with. If we were an older firm there’s no way we could have done this.
Challenge number two is maintaining that compliance. That’s been a solvable piece of the puzzle because we’ve been able to use software to automate a lot of the reporting and compliance aspects.
But now we’re running into the bigger thing. When we were a small company we weren’t taking much market share so nobody paid attention to us. Now that our companies are so sizable that they’re taking market share, we’re running into incumbent insurance companies who are doing everything they can to maintain the status quo.”
As these insurance startups grow, do you think insurance professionals are ready to migrate how they do business or take a risk and work for these novel companies?
“I think what’s been fascinating is that there are a lot of really smart people who work at big companies and a lot of them want to join startups, but they’re nervous because of how they view working at a startup. There’s a perception that startups are scary. My argument is always the same: startups can be scary to work at, but they’re not dangerous. What’s dangerous is to work somewhere that you perceive is a safe place.
It was perceived as very safe to work at Sears, for example. Great company. A brand that’s been around forever. It was scary back then to go work at Amazon. But the reality is that it wasn’t dangerous to go work at Amazon, it would have been incredibly smart, because no matter what happens to that startup, you’re developing skills that you need to be successful. As people appreciate that opportunity compared to the traditional companies, you’re going to see smart people gravitate to new opportunities that train them in the technologies of tomorrow.”