Is insurance too complex to disrupt?

by Laura Cain on July 11, 2016

Investors are bullish on insurance. After witnessing the disruption of banking, revolutionizing the insurance industry appears both lucrative and attainable. There are a multitude of parallels between banking and insurance; they are massive consolidated industries that have failed to innovate since the 80s. Incumbents are shackled to outdated IT systems which cannot support functions that have become expected by consumers, such as online applications, instantaneous decisioning, and singular account management.

However, insurance is in many ways a completely different beast than lending – and arguably much more difficult to disrupt. Beyond state-by-state regulation and large capital requirements, the dynamics behind consumer purchasing behavior provides significant challenges.

Insurance is sold not bought. When weighed against other financial priorities, consumers will often forgo insurance to address immediate needs. Additionally, when hedging against potential losses, consumers express a resistance to testing new carriers and products, as doing so introduces new risks. Insurance products are therefore extremely sticky, and consumers extremely brand sensitive. In sectors with long term products, in which a consumer plans to receive benefits decades out (life), or sectors with mandated insurance, in which markets are saturated (auto), attracting and acquiring high-value consumers will be both difficult and expensive for new entrants.

Consumers with the most incentive to switch insurance carriers are often high cost customers. Individuals with pre-existing health conditions are most likely to search for new insurance products, and drivers with poor driving records are likely to search for auto insurance carriers which heavily weigh other underwriting criteria. Cherry picking the best consumers will be extremely difficult, as bad risks are the most likely to shop for new insurance and both customers and incumbent insurance carriers have an information advantage.

The potential losses of bad insurance policies also far exceed those of loans. While reinsurance is a potential option, securing deals in a cyclical market may prove problematic. An insurer with bad timing could experience catastrophic losses and be unable to recover. For example, a homeowners insurance company that has not sold enough policies to be sufficiently diversified could be wiped out if a natural disaster hits within the first years of operation.

With these points in mind, we remain cautiously optimistic regarding the insurance sector. We believe there are numerous opportunities to innovate within the insurance sector, albeit certain sectors will be easier to disrupt.

Among P&C, life, and health insurance, we believe P&C insurance will be most easily disrupted. Policies are of lower value and have shorter durations, requiring the insurance carrier to take on less risk. Additionally, there are numerous data sources that are underutilized in the underwriting process. Unlike life and health insurance, improvements can be made with minimal action taken by the customer.

In the P&C insurance sector, we have seen several recurring themes. Summarized below are the areas we find most intriguing for investment.

Insurance Comparison Aggregators

Auto insurance has paved the way in moving the insurance application process online. Naturally, comparison sites have popped up in the space. Serving as a lead generation platform, insurance aggregators generate revenue when a customer purchases a policy.

However, with huge marketing budgets, insurers have incentive to heavily spend on direct marketing. Progressive, State Farm, Esurance, Allstate, and Nationwide provide car insurance comparison tools which directly compete with and startups such as Coverhound. By circumventing agents and brokers, the margin on each policy skyrockets – providing incentive for the insurer to digitize the sales process.  Given the strength of market leader auto insurance brands, it is both reasonable and beneficial for carriers to provide comparison tools and own the entire sales process.

We believe however, that customers value and trust unbiased third party sources, and that new startups in the space have the potential to gain significant traction. Given current market dynamics, to remain competitive in the long term insurance aggregators will need to develop their revenue models so that they are less dependent insurance carriers.

Insurance Comparison Sites:

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P2P P&C Insurance

P2P insurance is essentially reciprocal insurance. Those seeking insurance form small groups online, and claims are paid out by the group. While cutting out agents and digitizing the application, underwriting, and servicing has the potential to reduce the insurance carrier’s load factor significantly, reciprocal insurance has proved to be a difficult model to maintain.

Only a few auto insurers operate under a reciprocal insurance model, including AAA, USAA, and Farmers insurance. The model restricted the ability of companies to raise additional funds and secure reinsurance contracts. Diversifying groups and maintaining incentives for good behavior will be key for insurance startups in the space. We believe P2P insurance will be successful in the microinsurance space, but will be confined to low-premium policies.

P2P Insurance:

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P&C Connected Devices

Connected devices have the potential to revolutionize risk management within the insurance sector. Beyond detecting losses (such as a car crash), sensors can be used to prevent losses (such as alerting drivers regarding weather conditions in the location of a parked car).

However, adoption of standalone hardware solutions has been slow. Without proper incentives, customers have shown a resistance to sharing behavioral data (driving history) and to purchasing preventative solutions (sensors to measure pressure in water pipes).

Although the applications are somewhat limited, utilizing mobile device sensors shows great potential given the penetration of smartphones in the US. We believe products with a short lifespans will lead IoT’s disruption of the insurance space. While house gas pipes are almost never replaced, stoves and heating systems are replaced with higher frequency, making them more attractive entry points to install sensors.

Connected Devices:

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Thomvest Research: Insurance Industry Overview

by Laura Cain on June 22, 2016

For decades the insurance industry has lacked meaningful innovation. Complex regulation, low-margin products, and intense capital requirements have shielded incumbent insurance companies from disruption. Tied to outdated processes and systems, these companies are often focused on maintaining the status quo rather than improving their underlying business models.

However, insurance companies and investors alike have taken note of the disruption that occurred in lending. Once seen as impenetrable, the banking industry is now facing unprecedented pressure to innovate, which stems from the exponential growth of well-funded alternative lending startups. While a culture of change has yet to be fully embraced by incumbent insurance carriers, carriers are actively monitoring the startup space – standing up innovation departments and corporate VC arms.

This shift towards innovation among incumbent carriers is creating opportunities for technology companies in the insurance space. By piggy-backing off of established insurance companies through partnerships, the barriers to entry are significantly reduced.


While insuretech has become a major area of interest among VCs, we recognize that few investors in the space have comprehensive knowledge of the industry. To better understand the complexities and opportunities in the space, we have compiled the research report posted below. The report provides an overview of the auto, homeowners, life, and health insurance sectors. We hope you find the presentation insightful and welcome comments and questions.

To download the full presentation click here.

Insurance Industry Overview from Thomvest Ventures

Thomvest Research: Understanding the Native Advertising Ecosystem

by Nima Wedlake on May 19, 2016

As investors in the digital advertising space, we’re always interested in new approaches to delivering brands messages online. Over the last several years, native advertising has clearly emerged as one such approach. The ad format — which follows the natural form and function of the site or app where it is placed — is common on social platforms (e.g. Facebook’s News Feed ads) and media sites like Buzzfeed and Vice. Many studies have shown that native ads perform better than traditional display advertising, often yielding higher CPMs for publishers and better performance for advertisers.

More recently, we’ve seen a wave a startups build the infrastructure to buy and sell native ads programmatically. What was historically a very high-touch, direct sales process between brands and publishers to create custom “branded content” is evolving into something that more closely resembles the display advertising ecosystem: automated, real-time buying of native ad inventory across thousands of publishers. Many refer to this as “programmatic native”.

Programmatic Native Spend

Although programmatic native is still relatively nascent, spend is expected to increase rapidly over the next several years and will likely surpass other forms of programmatic ad spend in the US by 2020. To better understand this emerging ad format, we’re publishing a research report on native advertising that covers the following:

  • Who are the market leaders across the native advertising tech stack (DSPs, SSPs, exchanges)?
  • Who are the primary buyers of native inventory (brands, direct-response advertisers, etc.)?
  • How does the native ad format perform vs. other ad formats?
  • Who are the primary sellers?
  • How do we expect the market to grow in the next several years?

We’ve embedded the research report below, and you can download directly here. Some key takeaways from the report:

Native is not ‘display 2.0’ — it’s a novel format with unique advantages and challenges

While native ad units often yield better user engagement, the process for deploying native ad campaigns is unique to the format. The creative process, pricing model, success metrics, and user experience with native advertising programs challenge traditional display advertising execution patterns, which has likely resulted in slower than expected adoption of the format.

Native works best in mobile environments, where banner clickthrough rates are near zero

We expect much of the growth in native advertising spend to be funneled into mobile; according to IHS, native will account for 63% of all mobile advertising spend by 2020. Additionally, Facebook has reported that 83% of impressions on its mobile-only Audience Network are in the native format & that native ads perform 6x better than traditional banner ads.

The rise of ‘programmatic native’ has been limited by slower adoption on the buy side

According to Business Insider, advertisers will spend $5.7B on programmatic native by 2018 — but large buying platforms have been slow to integrate native into their offerings. We expect the multi-channel demand-side platforms to accelerate integrations with native vendors in the back half of 2016.

Thomvest Native Advertising Overview from Thomvest Ventures

What’s happening in late stage AdTech? A look at fundraising and M&A

by Nima Wedlake on April 11, 2016

There has been plenty of discussion recently about a downturn in the advertising technology (adtech) sector. This gloomy outlook has been fueled in part by lackluster performance among public adtech companies, which in turn compressed valuations in private markets and likely delayed IPO plans for later stage adtech companies.

While the choppy IPO markets are certainly not specific to adtech (we’ve yet to see any technology companies go public in 2016), the prospects of public adtech companies have certainly dimmed overall sentiment in the sector. Specifically, some of the early adtech companies to hit public markets positioned themselves (incorrectly) as technology platforms with predictable revenue, when in reality their businesses were largely contract-based and tied to media spend. This led to a misalignment in investor expectations, and ultimately a loss of faith in the entire sector.

But what the headlines don’t capture is the level of innovation that’s occurred within the digital advertising ecosystem over the last several years — specifically, the value of programmatic buying, real-time bidding infrastructure, and accurate, actionable data to inform targeting. We’ve witnessed a dramatic shift in how ad inventory is bought and sold — two-thirds of US digital ad spending is now transacted programmatically, according to eMarketer. This shift will continue to drive opportunity for startups in the sector.

It’s also important to recognize that adtech companies continue to operate in a sector that is growing rapidly. Digital advertising in the U.S. is expected to exceed $66 billion in 2016, surpassing television as the largest media category. And in our last research report we covered the advertising opportunity specifically on mobile, which is expected to grow by 30% annually through 2019. So while the pace of investment dollars into the sector has slowed slightly, there remain many promising adtech companies that continue to scale their business and raise capital.

To help illustrate this, we’ve compiled data on late stage adtech financings over the last several years, as well as a summary of M&A activity in the sector. Here are some of the highlights:

Late stage financings: Investment in late stage ad tech companies (defined by Pitchbook as “usually Series B to Series Z+ rounds”) peaked in 2014, both in terms of number of deals and total dollars raised. While we saw a drop in the number of companies raising capital in 2015 (41 vs. 64), the total amount of capital raised dropped only slightly (down 12% YoY to $753M). What this tells us: investors are placing bigger bets on fewer companies, usually those that have reached sufficient scale, are profitable (or approaching profitability) and have a defensible technology advantage. Late Stage AdTech Financings

Adtech M&A: We saw a huge spike in the number of adtech acquisitions in 2014, including Datalogix (acq. by Oracle for $1.2B), Brightroll (acq. by Yahoo! for $640M), and LiveRail (acq. by Facebook for $500M). While the total number of acquisitions was down in 2015 (69 vs. 103), it was the second-most active year for adtech M&A over the last decade. Notable transactions in 2015 include Verizon’s $4.4B acquisition of AOL, comScore’s $770M acquisition of Rentrak, and Twitter’s $530M TellApart acquisition. Note: We used the excellent M&A tracker from AdOpsInsider, excluding publisher, agency, and martech acquisitions from this analysis.

AdTech M&A

We’ve embedded our complete findings below and you can download the presentation here.

AdTech Late Stage Deal & M&A Analysis (Thomvest Ventures) from Thomvest Ventures

Looking ahead

While we don’t expect the IPO markets to fully reopen for adtech companies (or the broader tech sector), we do expect the pace of adtech acquisitions to rise in 2016. A few key drivers of M&A:

  • Compressed valuation multiples of public adtech companies make this a buyers market compared to years past.
  • New buyers of adtech are emerging that are looking to better monetize their unique data assets or audiences. We’ve already seen some noteworthy acquisitions in 2016, including the $360M acquisition of Tapad by Norwegian telecom company Telenor and the $1.2B buyout of Opera Mediaworks by a Chinese consortium led including Qihoo 360 & Kunlun.
  • We believe the “marketing cloud” vendors (think Adobe, Oracle, Salesforce) will start to move more aggressively into adtech. Media buying capabilities at large brands are increasingly moving in-house, which presents an opportunity for these vendors to expand their adtech offerings.

On the venture side of things, we expect total capital invested in late stage adtech companies to keep pace with 2015 levels. We’ve already seen several large financings in the first quarter of 2016, including MOAT’s $50M raise and PlaceIQ’s $25M funding round. Companies with a unique advantage — be it data, technology, or platform integrations — will continue to find bullish adtech investors.

Cybersecurity No Longer Needs to be Damaged by Flawed Architecture

by Jonathan Barker on March 30, 2016

As Buckminster Fuller, the great American architect, systems theorist, author, designer and inventor put so aptly: “We are called to be the architects of the future, not its victims.”  Unfortunately, the current cybersecurity solutions being deployed today are typically victimized by the old architecture on which they ride.

Thomvest is keenly aware of this underlying problem and so we were excited by the solution offered by Skyport Systems, leading to our investment in the Company’s $30M Series C financing together with Google Ventures, Cisco’s VC arm, Intel Capital, Northgate Capital, Instant Scale, Index Ventures and Sutter Hill Ventures.  Put simply, Skyport has re-architected the x86 hardware (Intel-based CPUs that started being manufactured in 1978) and software stack into a trusted compute platform with embedded security.


Skyport’s platform brings together zero-trust computing, virtualization and a full stack of security technologies that makes managing and deploying a company’s workloads cost-effective and fast.  This new architectural paradigm is comprised of: 1) a secure architecture that substantiates architectural integrity from the ground up, 2) a hardware-enforced security policy and forensic logging at the application edge, & 3) abstracts security execution from application execution.

The traditional architectural environment typically forces companies to either build a perimeter around their environment, which results in lowest common denominator protection within that perimeter, or bring the security solutions close to the application of concern, which impacts the performance of the application itself.

For applications, Skyport creates a full micro-segmentation DMZ that proxies all traffic from layers 2 through 7 into the application and as such, there is no need for agents to manage or deploy.  In fact, there is no need to change an application or the OS at all. Because of these capabilities, Skyport’s remote management systems allows a company to manage its branches without proxies, firewalls, MPLS or other approaches.

For those readers who are unfamiliar with the layers referred to in the previous paragraph, they are related to the Open Systems Interconnection model and are listed in the table below:

7 Application Layer Message format, Human-Machine interfaces
6 Presentation Layer Coding into 1s and 0s; encryption, compression
5 Session Layer Authentication, permissions, session restoration
4 Transport Layer End-to-end error control
3 Network Layer Network addressing; routing or switching
2 Data Link Layer Error detection, flow control on physical link
1 Physical Layer Bit stream: physical medium, method of representing bits


One can compare the power and ease of Skyport’s ground up zero-trust compute approach to the Xbox’s technology, which was built to play videogames in a networked and secure way.

“By strictly restricting the apps that could run on the platform to XBox-formatted games or apps, it could keep the delivery mechanism from having too many edge-cases or permutations which allowed the system to be more streamlined and stable. By including hardware that was specifically designed for the system, there were never compatibility issues. By networking the consoles into a purpose-built and console-specific management regime, the platform could stay patched, updated, and easily accessible and interoperable with other consoles, apps, and services which were designed to operate in the XBox environment. By tightly restricting the types of access that were permissible within the network, and building software security into all of the apps and consoles, malicious behaviour was reduced, and by building security into the hardware itself, it was entirely eliminated.” [Source]

We believe that Skyport is a first mover and in a great position to win in the Hyper-Secured marketplace – an integrated system that seeks to combine the disparate elements of the IT stack (networking, compute, storage, and security) in a single form factor under a common management interface.

The use cases for Skyport’s technology include securing systems that must operate in the DMZ of a data center and are fully exposed to the Internet, systems that deliver key infrastructure resources – such as Active Directory and other directory services that house key credentials, and systems that must be deployed in the field in untrustworthy locations such as branch offices in foreign countries. Skyport focuses on verticals that are particularly security- and privacy-sensitive, including financial services, healthcare, high tech, energy, retail and government.

The Hyper-Secured Opportunity


Per a September 2015 Guggenheim Securites LLC report – The Missing Link: Hyper-secured Infrastructure:

“While the market opportunity for this kind of system is clearly not ‘every server,’ we believe it could easily come to represent 1% to 3% of unit volume, but delivered at 3x to 5x the traditional server price. This could represent a market with between $1.5 billion and $7.5 billion in revenue, and gross margins in the range of 70% to 75%. This 1% to 3% figure is based on addressing servers/applications that are internet-facing, remotely deployed, branch offices, high value systems, control point systems, SCADA industrial control, urban infrastructure, etc. Many of the systems in use today are running on outdated versions of Microsoft Windows that are past their support period; however, government and commercial organizations do not have the budget or time to rewrite and re-qualify them onto modern operating systems. With increasing public focus on the security vulnerabilities of government agencies and critical infrastructure, replacing legacy servers with hyper-secured infrastructure represents a relatively painless solution to a problem that has been neglected for far too long.”

We believe that Skyport has developed a highly secure, novel, comprehensive and cost-efficient way for governmental entities and companies to deploy their workloads.  And as such, we believe that the team at Skyport is helping enterprises to literally re-architect their future in a trusted manner and thus to avoid becoming victims of future attacks.  We’re excited at the chance to partner with the team at Skyport and look forward to helping them deliver on this promise.

Which Online Lenders Will Survive the Next Recession?

by Laura Cain on March 9, 2016

Most people think of online lenders as a homogenous group of companies with the same upsides and risks. When analyzing the potential impact of a downturn, many analysts and investors lump Lending Club, Prosper, OnDeck, Kabbage, SoFi, etc. into one group. On the surface, this makes sense. All these companies raise loan capital from outside investors, had small or non-existent loan books during the last recession, and rely heavily on technology to facilitate the loan process.

However, this simplification is wildly misleading when predicting the outcome of a downturn. Just as the last recession had a vastly different impact on Bank of America than on Lehman Brothers, each of the online lenders will fare differently during the next recession.

This is not to say that times will be better during a downturn. In a fear-driven market, investors’ risk appetite will decrease and the total available capital on the platforms could shrink. Default rates across the board will increase, putting dual pressure on these online lenders. While the growth of online lenders will be stunted, profitability will be determined by the loan products, sources of capital, and risk culture of the firm.

Loan product flexibility

One of the most important aspects to consider is the average duration of a loan that a company originates. Lending Club’s loans typically have a 3-5 year duration, while Kabbage’s loans average closer to 3-6 months.


Loan duration is extremely important because it enables the lender to have the flexibility to respond quickly to changes in the market. If a lender of short-duration loans sees a tick upwards in default rates, within 3-6 months the lender can recycle loan capital, implement tighter underwriting criteria, and raise rates. A company with a short-duration loan book could operate as a balance sheet lender and completely turn over its loan book 2-4 times a year.

On the other hand, long-duration loans typically lock in an interest rate over multiple years. This introduces higher interest-rate risk. If default rates rise, the deployed capital cannot be recycled nearly as quickly. The performance of the loan book will rely on the online lenders having provided enough cushion to absorb the losses from increased interest rates and rising default rates.

Investors recognize the risk that comes with longer duration loans. With “untested” underwriting models, when investors sense a weakening of the market, it is possible that student loan and mortgage lenders will have more difficulty securitizing and selling off their paper than SMB or personal lenders. A reduction in the ability to securitize loans limits the lenders ability to originate new loans – slowing the business and reducing the company’s ability to adjust to market conditions.

Sources of loan capital

Hedge funds seem likely to be the most problematic source of funds for online lenders if markets turn. Hedge funds are often heavily leveraged and could pull their money off the given platform with signs of a weakening economy. Online lenders that rely on hedge funds could then find it difficult to secure new capital to fund their loans.

In contrast, consumers tend to be slower to react. On P2P platforms, many consumers reinvest their funds automatically and are not expected to flee the market at the first signs of trouble. A lender who secures a significant portion of funds from consumers will have several months lead way to respond.

Risk culture

While all online lenders tout their underwriting as being cutting-edge, the company culture towards risk is extremely important. During good economic times, lenders often become lax. A lender which has prioritized growth over loan quality will undoubtedly experience greater default rates when times change.

Small distinctions in metrics used to track a borrower’s financial health can indicate how conservative an online lender’s practices are. For example, when evaluating at a borrower’s cash flow, some lenders take into account all debt payments for which the customer is liable (mortgage payments, auto loan payments, etc.), and some do not. The lender with the most conservative view of the customer will be most adept at detecting potential problems.

Exponential growth is not necessarily a good thing in online lending. Before scaling, a lender should have several cohorts of data to prove out their underwriting models. Practices such as allowing the sales team to offer discounted rates should be taken as red flags that the company is operating under a short term vision.

How online lenders are preparing

The smartest companies have been preparing for a downturn since inception and have prioritized reaching profitability. Recently, many online lenders have lowered their growth targets, implementing stricter underwriting practices on their longer duration, higher value loans.

In a recession, we expect that conservative lenders will remain profitable in contrast to many of the portfolios that banks held before the Great Recession. Portfolios that remain marginally profitable 1-2 standard deviations from the mean during normal times, will likely be able to provide returns to investors in bad times. The loan capital for conservative investors will not disappear, as the risk vs. return profile will still be deemed attractive. As investors, we continue to be bullish on companies in the space that adapt and evolve their lending criteria as the markets tighten.