Featured Article

Why 2022 insurtech investment could surprise you

A diverging insurtech market could injure many companies while others remain unscathed

Comment

Image Credits: Nigel Sussman (opens in a new window)

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.


The Exchange explores startups, markets and money.

Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.


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 VenturesJavier 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.

More TechCrunch

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

1 day ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

1 day ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo

Sony Music Group has sent letters to more than 700 tech companies and music streaming services to warn them not to use its music to train AI without explicit permission.…

Sony Music warns tech companies over ‘unauthorized’ use of its content to train AI

Winston Chi, Butter’s founder and CEO, told TechCrunch that “most parties, including our investors and us, are making money” from the exit.

GrubMarket buys Butter to give its food distribution tech an AI boost

The investor lawsuit is related to Bolt securing a $30 million personal loan to Ryan Breslow, which was later defaulted on.

Bolt founder Ryan Breslow wants to settle an investor lawsuit by returning $37 million worth of shares