As we’ve explored in recent blogs, insurtech founders face significant challenges in raising seed capital. The ingredients of; pre-revenue, pre-product market fit, and the complexities of the insurance industry, often combine to be a deal breaker for investors. It’s no wonder that we see more insurtech founders bootstrapping their venture (81%), for longer (30%> 12 months), with tenuous runways.
Below I have put together some points that come to mind for founders seeking guidance on successfully raising a seed round.
Why Raise Money?
Interpreting Figure 1 is quite intuitive. Startups use more fuel (capital) to launch. The undeniable force of gravity might be represented by the barriers to entry experienced by startup founders in achieving market-fit, though, given the investment in fuel, the ensuing velocity can take founders, with the right approach, to great heights. If you’re a startup founder, you’re by definition driving a company that is designed to grow rapidly. Leveraging external capital is a key ingredient.
Founder dilution is important to manage, for both the founders and investors. Sustaining high levels of skin-in-the-game creates more certainty of the founders’ sustained efforts.
Tips for founders in retaining more equity.
- It can be helpful to establish and maintain a detailed milestone and capital raising plan through multiple horizons. Identify the milestones that correspond to value uplift proof points. Channel your focus of achieving these proof points as quickly as possible. Speed is key in retaining more equity.
- Don’t raise more than you need. Theoretically, if you raise frequently, as you’re hitting value uplift proof points you’ll sustain less dilution. Keep in mind however that raising capital can be time-consuming, so you don’t want to go too frequently.
- Ask your board, existing shareholders and investors for help in attracting new co-investors and closing bridging rounds where needed.
- Curate a group of prospective co-investors and keep them across your milestones and achievements as you move towards your next raise. Ask them what would help de-risk your startup as an investment. Bringing investors into the conversation early can give them confidence and be part of your startup’s journey.
The investor’s lens.
Market risk: seed investors are often looking for a founder who is positioning a new product or service to either drive a market shift or align with a market shift. It’s key in making this argument to show the market shift drivers, how the customer will win, and how your early identification of this shift gives a cheaper CAC and/or early mover advantages. If the investor can buy into this vision, the next step is team risk.
Team risk: this is about demonstrating that your founding team are uniquely positioned to capitalise on the market shift. You have a competitive advantage of x, y, z that will enable you to win over others. You have a track record of execution and complimentary acumen required to win.
Product risk: demonstrate a clear and painful problem that customers are willing to pay money to solve, and how your solution is the customers desired solution. What traction or market indicators have you acquired to validate this?
Scale risk: Series A money is generally used for scaling, however seed investors will be seeking confidence that the founders have a compelling handle on distribution and scaling. A competitive distribution advantage is essentially a ticket to play. Why are you able to acquire customers less than market? In terms of scaling, what metrics define success? Given that you’re playing the insurance (risk) industry, every unit of energy focussed on growth, needs to be equally offset by energy towards risk. What risk metrics will also define success?
How much to raise?
There are a few interdependent variables to consider here: burn rate, milestones, runway, dilution. As touched on earlier, the amount you raise will be determined by your valuation, which is determined by the value uplift proof points you have achieved.
As a general rule, a Seed round will see the founders give up between 10 – 20% of the company.
It is important to present your milestone and capital raise plan that demonstrates what you believe you will achieve from the raise (milestones and value uplift).
The 2 most common options for financing is Equity and a SAFE (simple agreement for future equity).
The holy bible for founders is no doubt Venture Deals, by Brad Feld and Jason Mendelson. Thankfully, the rules of the startup financing game are now quite universal, thus you’ll have less barriers to overcome when dealing with the various players.
YCombinator’s SAFE is super simple and has a few key benefits.
– Quicker to execute, thus less time spent fundraising at the seed stage
– Simple terms, easier to understand and less legal costs
– Defers discussions on valuation to the next priced round when theoretically a valuation will be more objective to determine.
Often investors prefer equity rounds as they are cleaner. Each party knows when the deals are signed how much equity they have. Though an equity round means setting a valuation of the company and as such, a per-share price, and subsequently issuing and selling shares of the company to the investors. Legal counsel is key to ensuring you have favourable terms. Making this process easier is the widely accepted AVCAL/ AIC template documents that are considered well balanced.
Looking for investors?
Here is the latest Fundraising in Australia – Open Source List.
The latest insurtechs to successfully raise early-stage funding.
Here is our September investment update on interesting insurtechs who have recently closed an early-stage funding round.
Source: Crunchbase, EY
For founders, it’s all about speed, and in the land of insurtech, barriers are high and therefore it’s not easy. Having a partner that can help bring forward your milestones by 6 – 18 months will be hugely beneficial for a startup. If you have a brilliant or bonkers idea, we’d love to hear about it.
“With the support of the Insurtech Gateway team, we estimate that we reduced our time to market by at least 50%, if not more.” – Co-Founder, Benjamin Hay, Collective.