We saw an article in the September edition of Best’s Review. It’s called, “The Billion-Dollar Question: What’s the Allure of Investing in Insurtechs?” The author starts by explaining what he calls VC math:
As a venture-stage investor, the goal is to deliver five times the returns on the money entrusted to me, within 10 years or so. That’s five times overall, not five times on each investment. Success in venture capital hinges on asymmetric risk. When I write a check, I expect one-third of the investments will crater—a total write-off. Another one-third will be mediocre, returning the principal or a bit more. Success of the fund will depend on a handful of winners in the portfolio. The operative question is not how many losers I have; rather, it’s all a function of the magnitude of my winners. If I have a few investments that deliver 50 times, my losing bets will be forgiven and forgotten.
So far. so good. The VC takes calculated risks in hopes of rich rewards. But this part seemed a bit confusing at first:
Many in the venture community do see insurance as an industry full of vulnerable incumbents. Much of that arises from the lack of widespread technology adoption … and an over-reliance on legacy technology. Many see an even bigger opening as the natural result of legacy culture: Successful companies often struggle to anticipate and adapt to competition from new entrants … until it’s too late. Consider the current environment—a huge market plus pent-up technology plus a belief that incumbents will be slow to respond. Taken together, these create the conditions to support the 50 times outcomes required by VC math.
At first we wondered why, analogously speaking, a VC would back a new producer of wheels for an industry reluctant to buy them? To clarify the analogy, the author’s statement might have read like this: