Insurtech companies have been among the biggest victims of the public market sell-off, especially those that went public in 2021. Notably, Metromile saw its valuation decline over 85% and was subsequently acquired by peer Lemonade, and it hasn’t been alone in losing a lot of value and being eyed by peers and incumbents.
All this M&A activity and repricing in the public insurtech cohort left us wondering about their private peers: Are the same trends at play and to what extent?
Investors across North America and Europe agreed that while insurtech has suffered as investors sought out more profitable sectors, the sector is still alive and thriving (see 10 Biggest InsurTech Funding Rounds in 9M 2022).
I do not believe the insurtech market to be dead, because it is still a multibillion-dollar market. Short term, it might be more difficult to raise at valuations we have seen before the public market adjustment, but with a strong business model and an experienced management team that understands the market and growth KPIs, it is possibleHélène Falchier, partner at Portage Ventures
According to TechCrunch, while leagues behind fintech as a whole, insurtech startups have still attracted a significant amount of investment over the last few years — $43 billion between 2016 and 2022, according to a recent report “The State of European Insurtech 2022”. That level of interest can’t have vanished entirely, but there will definitely be winners and losers.
David Wechsler, a principal at OMERS Ventures, is clear that some private insurtechs will struggle to raise their next round of funding, but the downturn is not as bad as the doomers and gloomers make it out to be (see InsurTech Market Will Reach of $165 bn in 2032).
We are simply seeing a reality check happen. If the last round was done at too high of a valuation, the market will force it back in line. Unfortunately, there are many companies that should not have raised as much as they did, or perhaps don’t have sustainable business models. These companies will struggle to survive.
In the absence of easy funding, the insurtech private market seems ripe for M&A, several investors pointed out. As insurtech valuations have become more realistic, many companies are probing, looking for M&A opportunities. “I believe the next 12 to 18 months will have lots of interesting deals really invigorating the ecosystem and creating a lot more excitement for investors to come back in and at the correct prices.”
The public-market insurtech sell-off has clearly trickled down to private deal-making
The decline in valuations of the first batch of insurtech IPOs has changed the rules: Investors are more focused on proof of sales traction and time to profitability. Late-stage insurtech funding is now a lot more variable — everyone won’t get a trophy, as they did in 2021.
Good companies with strong leaders who are converting revenue to a path to profitability are continuing to get funded at mutually acceptable valuations.
Earlier- and later-stage valuations will continue to decrease. However, this may be simply a product of deals working through the system. In other words, many of these deals are done or well underway and are yet to be announced. Strong companies that raised at realistic valuations over the past one to two years will not feel as great of an impact. There will even be up rounds.
We are simply seeing a reality check happen. If the last round was done at too high of a valuation, the market will force it back in line.David Wechsler, principal, OMERS Ventures
Unfortunately, there are many companies that should not have raised as much as they did, or perhaps don’t have sustainable business models. These companies will struggle to survive (see How Big Data & AI Technology Helps InsurTech?).
Insurtech IPOs don’t seem to be on the cards for 2022
If startups are focused primarily on a trade sale, they need to be disciplined about how much capital they raise in order to deliver a good outcome for all.
VC return expectations might deliver valuations that a founder perceives as too low.
That might mean some insurtechs could go for alternative funding sources that are less sensitive to exit valuations, including strategic investors, who are looking to gain non-monetary rewards as well as investment returns (see InsurTech Sector Overview 2022).
Regardless of what founders aspire to, not every startup gets to IPO even in the best times. And not all trade sales are at disappointing prices, as Adobe just showed with the Figma deal.
Selling a business can be a great outcome for both entrepreneurs and investors. However, the absolute dollars paid tend to be less than an IPO. As such, entrepreneurs need to raise capital accordingly.
If your business plan requires a tremendous amount of capital, you are limiting the number of potential acquirers. Entrepreneurs need to be thoughtful in showing how a capital-efficient model can result in building a business that is attractive to acquirers and paint a realistic picture of who those acquirers might be.
Legacy insurance companies or private equity funds?
These two sets of buyers are solving for different use cases, so both are likely acquirers of different insurtechs.
Smart legacy insurance companies are looking for insurtechs that have great technology but not enough customers or premium volume to get the most value out of the technology. The legacy insurance companies will look to leverage technology that they wished they had created across premiums that they already know how to sell.
For later-stage insurtechs that raised a subsequent amount of money at a high valuation, an M&A exit is unlikely without a price cut.Clarisse Lam, associate, New Alpha Asset Management
PE funds will look for insurtechs that can keep growing and can benefit from the classic PE approach of leveraging operations and bolting on other acquisitions.
The mantra in 2022 is definitely “how and when can you get to profitability,” in contrast to 2021’s approach of “if you’re not growing the top line by over 5x, you’re not really trying.” DTC insurtechs with high CAC [customer acquisition cost] and no proprietary source of leads have a tougher time finding investors today.
I have always liked B2B insurtechs with recurring revenue models, and now other investors are focusing on these opportunities as well.Martha Notaras, general partner, Brewer Lane Ventures
But startups still need to make sure they are focused on markets that can deliver substantial revenue growth in order to achieve the profits that are now required.
Which insurtech business models have the most in-market traction today?
There are several MGAs and technology-driven, full-stack insurance carriers that have built impressive premium bases, including in newer risk categories like cyber. Venture investors have recently become more selective about investing in MGAs before they achieve scale. This caution reflects current public-market trading, as investors project forward to exit.
I see investor enthusiasm for B2B insurtechs with a recurring revenue model. Many of these startups are delivering efficiency and cost savings to traditional insurers, and those existing insurers have become more receptive to bringing in startups to solve difficult operating problems.
How does the insurtech landscape in emerging markets compare to developed markets?
In emerging markets, insurtech is following the path of fintech, where we are seeing fast followers of models that have worked elsewhere. The pace of innovation and funding outside of the U.S. has picked up significantly in the past three years.
Historically, European insurtechs have had less access to funding than U.S. startups. I am starting to see insurtechs that started in Europe are targeting problems that are relevant regardless of geography. Some of these are getting impressive traction.
How much have early-stage insurtech deals slowed in 2022?
The reality of falling back to pre-COVID levels brings up a really good point: 18 months of rising valuations does not represent sustainable reality. So the doom and gloom overstates the issue.
That said, deals have slowed, and insurtechs that have raised in this environment are either stars or have adjusted their valuation expectations to the new rules in the market.
The other factor that is constraining external fundraising is existing investors providing bridge financing either in the form of convertible notes or round extensions.
In some cases, this is postponing the inevitable. But the positive view is that the startup’s existing investors have faith in the vision and want to extend the runway until new investors get excited by the company’s prospects.
Deals are taking longer in 2022 because investors are doing more thoughtful due diligence. Investors no longer hearing stories of startups getting term sheets following a 30-minute conversation.
This year feels like a time when investors are embracing due diligence, and I think the resulting investments will be a lot stronger as a result.
How do you feel about insurtech companies innovating beyond technology?
We have certainly moved beyond Insurtech 1.0, where it was enough to digitize an insurance transaction with an improved customer interface. Now, insurtechs are looking to use technology not only to distribute insurance more effectively but to change the product and the risk profile of the product.
This feels like the natural path of evolution, and it’s why the insurtechs today are even more compelling investments than the pioneers.
How is the insurtech sector responding to the climate crisis?
You’ve hit on an area I am particularly interested in — the intersection of climate and insurtech. Yes, I have seen some innovations on climate. Insurtechs are offering parametric insurance, which can make difficult risks insurable.
Others are tracking climate risk and finding ways to neutralize climate risk that are not just cosmetic, like carbon offsets.
Investors hope to see more insurtechs addressing these truly hard problems. Today’s combination of technology, very granular data and access to processing power create the conditions for some strong startups.
Insurtechs are going to have to be part of this effort; existing insurers have the will to change, but I think insurtechs will deliver the actual solutions.