This report is courtesy of Ascento Capital, a New York Investment Bank that is focused on the technology sector. Ben Boissevain and John Daum, Managing Partners, are veterans of the investment banking, technology and insurance industries.
This report dedicated to the small companies under $100 million in enterprise value who are often overlooked in the InsureTech sector. Smaller companies have more choices on how to fund their growth. Many CXO’s of smaller companies need to decide if it is the right time to sell or to continue to fund their company’s growth. This report will review the funding and M&A transactions in 2018 to better inform CXO’s of smaller companies in the InsurTech sector.
II. Funding Transactions in 2018
For InsurTech companies under $100M in enterprise value, there are several choices of funding: (i) venture capital firms, (ii) private equity firms, (iii) minority strategic investment from an incumbent insurance firms, or (iv) non-insurance strategic investors such as Google. Each source of funding comes with its own benefits and risks.
As the following chart shows, funding for the InsurTech sector in 2018 is slightly higher than 2017 on an annualized basis.
Venture capital is very active in the sector, with traditional VC firms such as RRE Ventures, Bessemer Venture Partners and NEA active in the space. The quality of the VC firm that invests often dictates the quality of the M&A or IPO exit in future years.
Private equity firms are getting more active taking either a minority or majority stake, i.e. DFW Capital Partners majority stake in ReSource Pro L.L.C., the New-York-based InsurTech company. Private equity firms tend to invest much later than VC’s and typically require positive EBITDA, although with so much capital available to invest, PE firms are more flexible these days.
Incumbent insurance firms are investing and acquiring more in 2018. In previous years, incumbents typically invested in InsurTech companies to monitor the sector versus buying InsurTech companies. However, for the InsurTech startup, receiving a strategic investment from an incumbent insurance company can prevent competing insurance companies from acquiring the company in the future. This is one reason why more M&A transactions rather than strategic investments will occur in the future.
Non-insurers like Softbank, Google, Salesforce and Amazon continue to invest in InsurTech. For instance, Amazon recently invested in Acko, a Mumbai-based start-up focused on auto and bike insurance; Google Ventures currently has 8 investments across InsurTech, including Collective Health, Gusto, Clover, Oscar, Lemonade and others.
Finally, we review the record level of InsurTech deal activity experienced during the second quarter. Funding volume increased 248% to $985 million across a new high-water mark of 64 transactions in Q2, while the $289 million of early stage funding volume and 27 technology investments by (re)insurers during the quarter each also represent record levels.
Selected Financing Transactions in 2018 ($MM)
III. M&A Transactions in 2018
Private equity M&A continues to be active across Insurtech categories, examples include BV’s acquisition of Risk International, Stone Point’s acquisition of Mitchell and AKKR’s, and the acquisition of ITC. Technology will spur M&A, as insurers seek to gain competitive advantage by acquiring InsurTech firms with advanced capabilities, rather than develop technology in-house.
As detailed in Deloitte’s The State of the Deal: M&A Trends for 2018 acquiring technology assets ranks number one as a strategic driver of M&A activity. Also using technology helps efficiency and helps cut costs. Some estimates show that as much as 80% of premiums can be lost in distribution using traditional insurance models.
As the InsurTech sector matures, expect to see more M&A consolidation with buyers from incumbent insurance companies, other InsurTech companies that are in adjacent spaces and FinTech players with similar functionality for other customers, e.g. compliance software companies for banks acquiring compliance software companies for insurance.
Selected M&A Transactions in 2018 ($MM)
Many InsurTech companies under $100M choose a parallel path, explore an acquisition and in parallel seek an investment. Optimally, a company will have a choice of a funding term sheet and a letter of intent from an acquirer. This provides the Board of Directors with a choice at the end of the process on a growth path forward.
V. Contact Information
Please do not hesitate to contact Ascento Capital for confidential discussions on your company’s corporate finance strategy.