Is venture capital your angel investor?

Venture Capital basics

“As a decade of growth in venture capital investment falters amid uncertain economic conditions, one thing remains constant: VCs will keep searching for companies that do business in a way that’s never been done before.”– CB Insights.

Venture-backed insurtech startups are continuing to gain traction in the insurance industry. But what is venture capital, how can it help and who should use it?

venture capital funded mobile phone developmentIf it not for the VC industry, we’d likely be using a public telephone to call a taxi, via a 13 number to get home after an evening with friends. We’d have no Twitter or Instagram to keep us entertained in the back seat, and any random questions that arise as we gaze up to the sky, would need to be answered by flicking through our Encyclopedia Britannica collection in our home library. How bleak!

Venture Capital is not all about shared economies and social media.

There are more noble outputs from VC backed startups and many centre around risk and loss prevention.

Tesla is playing a role in helping avert a mass-extinction event by fast-tracking our transition to renewable energy. Deep Genomics is developing an AI approach to drug development; because biology is too complex for humans to understand much more than we already do. Memphis Meats is creating delicious and healthy meats for our consumption by harvesting from cells instead of animals to alleviate pressure on the world’s forests.

New and exciting startups continue to develop at record rates, driven by record VC funding which has increased 13x over the 2010 – 2020 decade. VCs are enjoying increasing billion-dollar exits, fuelling the cycle.

The impact of COVID-19 and an ensuing macro downturn is clear but VC funding is looking decoupled from the economic realities of our post-COVID-19 world. This is not completely surprising given that VC investments are considered long term i.e. 5 – 10 years, making them more resilient to short term market cycles.

A start-up by definition is a company that is designed to grow fast and, most often,  speed comes from using venture capital.

Venture capital firms get their money from LPs (Limited Partners) which include investment banks, (re)insurance companies, university endowments, or wealthy individuals. These LPs invest money, forming a fund, managed by a team of partners. Partners within the firm are tasked with deploying the capital into startups in exchange for equity, while also getting involved in management i.e offering strategic value to the startup.

Venture Capital deals & participation 2020

It’s a high-risk, high-reward game with 2 of every 3 venture-backed startups failing. As such, VCs require a few to go big. Each VC has its own investment appetite, covering stage of investment/ startup maturity (from pre-seed to Series C, D and beyond) and vertical (e.g. fintech). Many chose a niche in terms of stage and vertical. One of the most successful VCs firms in Silicon Valley is Andreessen Horowitz, who has a portfolio that includes the likes of Facebook, Lyft, Pinterest and Slack. Andreessen Horowitz is stage agnostic though seek startups across the consumer, enterprise, bio/healthcare, crypto, and fintech spaces.

Chris Dixon, General Partner at Andreessen Horowitz describes a principle that underlies their investment thesis as the Babe Ruth Effect; despite Babe Ruth holding the record for most strike outs (1,330), he also held the record for home runs (714).

The Babe Ruth effect describes Frequency vs Magnitude.

According to Dixon, great funds with a 5x or greater return rate tend to have more failed investments compared with a fund with 2-3x returns. In other words, great VCs willing to fail more frequently to achieve the high magnitude wins.

Venture Capital fund performance

Through the lens of the founder, venture capital is a great option compared to debt. Given the competitive nature of the industry and VC’s desire to differentiate, founders gain more value than pure capital. For example, VCs will usually take a board seat and offer strategic insights, plus VCs can ‘open doors’ to key stakeholders and in-turn help founders hit key milestones en-route to value uplift proof points.

Venture capital has transformed our lives and will continue to do so.

“Venture capital-backed Apple and Intel. It funded Google, Amazon, Facebook and Tesla before any of them turned a profit. In principle, venture capital is where the ordinarily conservative, cynical domain of big money touches dreamy, long-shot enterprise. In practice, it has become the distinguishing big-business engine of our time” – Nathan Heller, New Yorker.

Find out more about the VC sector performance in Australia CLICK HERE

Below is our customary list of interesting insurtechs who have closed early-stage funding round through August.

Trusty.care   (USD)
$1.5m (USD) Seed
Trusty.care is turning health insurance brokers and financial advisors into the HR department for retirees

Wrapbook (US)
$3.6m (USD) Seed
Wrapbook provides digital profiles that facilitate onboarding, paying and insuring project workforces compliantly.

Elma(EU)
€ 3.1m (series unknown)
Elma makes healthcare access a patient-centric and totally personal experience using technology, and running an insurance business.

Blog data sources: Crunchbase, CB Insights, Chris Dixon