There were two markets for insurtech startups in 2021: one welcoming and one dismissive. Private market investors poured capital into promising insurtech startups, while the public markets sent the value of recently public insurtech companies down — and then further down as the year progressed.
The decline in the value of public insurtech unicorns was a theme that The Exchange covered throughout last year, noting rising damage as valuations fell from low to lower. And yet when CB Insights dropped its 2021 fintech data collection, it noted that global insurtech venture activity hit a new high in the year. In 2021, insurtech funding reached 566 deals (an all-time record and a 21% gain over 2020) and $15.4 billion in capital (again, an all-time record, and a 90% gain over 2020.)
TechCrunch has discussed the growing gap between public and private tech valuations in recent weeks, as an exuberant venture capital market seemed to move further apart from a late-2021 decline in the value of many technology companies. Much of the losses persisted or worsened in early 2022.
And yet the insurtech market is an even more extreme example of the decoupling we’re seeing more broadly in startup land. How so? Root, which raised a $350 million Series E in 2019 at a valuation of around $3.6 billion, per Crunchbase data, traded as high as $22.91 per share after going public. Today it’s worth $1.82 per share, or $460 million, about half the money it raised while private.
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Other examples are at hand. MetroMile was valued at $540 million during its final private round in 2018, per PitchBook data. The company’s SPAC-led public debut valued the company at around $1.3 billion. Today, after seeing its stock crest the $20 per share mark, MetroMile is worth $1.52 per share and awaiting a new home inside Lemonade, another recent insurtech IPO. Lemonade has seen its value fall from an all-time high of $171.56 per share to $28.92 as of this morning. The company went public at $29 per share.
For insurtech startups, the public-market mess that some of their peers have endured is bad news. Florian Graillot, a seed-stage investor in Europe who puts capital to work in the insurtech space through Astorya.vc, told The Exchange that “there is a growing gap between valuations of these startups and M&A deals done recently in the insurance industry,” citing the recent sale of Aviva France for $3.9 billion.
The company had, per Reuters, “3 million customers and 7.8 billion euros in revenue.” (The deal cleared regulators.) Revenue multiples of less than one don’t get founders’ hearts racing. And there are startups in the business of writing insurance products for which such a low multiple would be akin to a death sentence, from a valuation perspective.
Falling share prices for insurtech startups and worrying acquisition prices for insurance companies could prove a sticky wicket for the companies in the sector that raised so much money last year. But that doesn’t mean that all the news is bad.
Why? Because there are several insurtech models, and only one has seriously been tested by recent IPOs in the startup sector. For example, The Zebra makes its money by providing a portal to other insurance products, which could prove a stronger model than trying to rebuild underwriting itself. And there are other companies in the larger insurtech market, like AgentSync, which are seeing success offering more infrastructure-like services to other insurance players.
The picture that comes into view is sobering, but not entirely negative nor necessarily bad for the folks betting on and building the next generation of insurance-focused tech companies. Ahead, we dive into who is suffering, who may struggle in the future, and who may come out unscathed.
In a follow-up piece in the next few days, we will explore who might thrive in the space in coming quarters. There is good news to be had, which helps explain private-market enthusiasm for insurtech startup shares. But first, the bad news.
Who has suffered
The larger SPAC experiment has failed. The blank-check boom did not take enough unicorns public to put a material dent in the pace at which new private unicorns were created. So from a liquidity perspective, it did not change the game. And for companies that took the SPAC route to the public markets, returns have been a mess.
MetroMile and Hippo, two insurtech startups that rode SPACs to the public markets, are no exception. We touched on MetroMile above, so let’s add Hippo to our register of results. The company’s last known private price was set in mid-2020 when a $150 million round valued the company at $1.5 billion, per PitchBook data. The company’s SPAC deal also saw sharp redemptions before it finalized, leaving the company with less capital than anticipated. Despite that, the deal valued Hippo at around $5 billion.
After trading for $10 per share ahead of its combination, Hippo’s value cratered to $1.91 per share, giving it a valuation of just over $1 billion today.
Mundi Ventures’ Javier Santiso was not bullish on the SPAC route to the public markets. Asserting that he never “believed in SPACs,” he said that too many startups in the insurtech space “tried to use shortcuts” like blank-check companies and have now found themselves in “dead ends.”
Many recent IPOs are taking similar damage, Renaissance Capital data points out. A slim fraction of IPOs are above their offer price, and returns after the first-day close for venture-backed debuts are awful. But insurtech debuts were worse than average, by our reckoning. That’s who has suffered to date. Who is next?
Who may suffer
The insurtech startups that are stuck between private capital and liquidity are those most likely to suffer. The above issues with the public markets are indications that insurtech companies that sell insurance are seeing their valuations revert away from tech multiples and toward insurance multiples — a very different, and much smaller, number.
Our expectation is that this repricing will show up in M&A as well, limiting the other normal pathway for startup exits. Graillot noted this, telling The Exchange that “for a few players [in the space], an M&A exit is not an option anymore based on their valuations.” At least for founders to do well, he clarified.
The “who may suffer” question can therefore be cut along a single axis: Insurtech startups that are more tech than insurance might do just fine, while insurtech startups that are more insurance than tech are going to see their multiples cut until they fit with a whole set of comps they wanted to avoid. More simply, insurtech startups that can retain a tech multiple have a shot at keeping their valuation intact; those that don’t may struggle.
Stephen Brittain at Insurtech Gateway has a theory on what is driving the repricing of public insurtech companies. “The simplest explanation is the maturity” of the space, he said. “Businesses born in 2016 were not built with insurance metrics baked in,” Brittain continued, noting that “they’ve acquired a lot of customers who make a lot of claims,” meaning that their economics are lackluster and thus not as attractive to a potential acquirer.
This is not to say that all neoinsurance providers – those insurtech startups more insurance than tech, say – are going to suffer similar fates to the U.S. set that went public in the last few years. Instead, we’re merely noting that they have an uphill climb ahead of them. Some will do well, we presume. In the sequel to this post, we’ll hear from NEXT Insurance CEO Guy Goldstein, who is bullish on SMB insurance, and Wefox to make the point.
But if we were to make a call on one part of the insurtech market or another, the space where tech margins are possible and economics are easier to vet — for example, what The Zebra is up to — appear more prepared to retain the sort of pricing that makes venture math work out over startups writing their own policies.
Who might escape unscathed
Things look quite different on the other side of the table, and we expect investors to get out pretty much unscathed – thanks to the venture capital model itself.
First, someone’s loss is another’s gain. For every bit of leverage that founders have lost, that’s more power to the VCs, and the impact is already being felt. As The Wall Street Journal reported, “transactions for later-stage private companies can take longer as valuations become a sticking point.”
Why are valuations now getting in the way of deals getting done? Because VC reasoning has changed. “The public market reset is affecting how we think about our private-market entry prices for VC deals,” Bessemer partner Mary D’Onofrio told the WSJ.
D’Onofrio further explained her reasoning in a recent episode of the Equity podcast: “The primary impact that I am seeing of the public market reset, especially as a growth investor, is that my expectations for exit multiples changed. And if there’s a step-function decrease in what I am expecting [in an] exit, it really impacts how you can enter.”
But this change in mindset could give VCs more leverage. Based on what we are hearing, they are now better able to take time to finalize terms and push back on valuations.
VCs getting more favorable terms going forward is one thing, but how about deals they are already in? What happens when the coveted public exit is no longer part of the picture? Well, it turns out that fire sales aren’t bad for everyone.
Venture capital terms explain why M&As are still on the menu despite their lower price tags, Graillot told TechCrunch. “We know how VC investment works, and with preferred participating rights, an exit price lower than the last-round valuation can still generate profits for the funds, not necessarily for the founders.” Ouch.
Hearing of VCs making returns when founders won’t is a good reminder that risk in venture deals is unevenly distributed. Of course, liquidation preference provisions skew this even further, which is why startups with leverage so often push back against such clauses. But it is also more fundamental: Entrepreneurs have one company; VCs have a portfolio.
Having a portfolio means investing at different times under different market conditions, which makes things less clear-cut than for a single startup. “In our case, we built up most of our portfolio during the low levels of liquidity of [the] 2020 COVID year,” Santiso said of Alma Mundi. “These vintages might be surprisingly good. We will see.”
Having different vintages in their portfolio helps venture capitalists achieve the returns they are aiming for. Because no matter how disciplined funds decide to be, they don’t always stick to the plan when the market overall, a vertical or a specific company are hot. Even today, their scruples on valuation might not stand the test of reality.
Which insurtech companies could still warrant huge multiples in 2022? Based on our notes so far, the big winners this year should be those that can prove they are tech companies and/or are enabling the digital transition of insurance incumbents. If they manage to also show exponential growth, they might remain unharmed. (We’ll dive deeper into hot verticals in the second part of this story.)
On one hand, these still-hot insurtech companies could have exit opportunities beyond the realm of insurance M&As. On the other, the kind of rounds they will be able to raise will give them plenty of cash to wait until a better time to exit.
Where’s the good news?
If you are a believer in insurtech — or even neoinsurance startups more generally — there is good news to be found. In the next edition of this insurtech story, we’ll chat metrics, results and optimism from founders in the space that seem to be on a path to material exits.