(Image credit: Shutterstock.)
While a terrible year in many respects, 2020 featured some remarkable news in the insurance technology space, featuring IPOs and huge investments to both traditional system vendors and InsurTech distributors. The year hasn’t been uniformly good for InsurTechs and particularly the smaller providers, as IIR correspondent Stephen Applebaum noted in a contributed article in August of this year. However, the pandemic forced insurers to think about the need to be able to operate virtually, and it also made the case for digital progress more urgently. In this exchange, IIR had the pleasure of another conversation with Joel Albarella, SVP and head of New York Life Ventures, this time about how the pandemic affected the industry from an InsurTech investor’s perspective.
Insurance Innovation Reporter: How has the pandemic affected venture capital? How has it made firms revisit their strategies, and what does that mean for the InsurTech movement?
Joel Albarella, SVP, New York Life Ventures: It’s the reality for venture capital and for the broader public markets as well. What’s happened during the pandemic is that there have been winners among technology companies that are enabling all things digital. You feel apologetic saying that because, obviously, this has been a massively disruptive year for many—for example, unemployment reached levels that we haven’t seen for a very long time, and the number of cases and deaths has been horrific. So, any response needs to be prefaced with an acknowledgement of how much pain and suffering this has caused tor individuals and families. I’ll certainly share that same caveat, especially because New York Life is a company that’s so focused on humanity, a core element of the way we approach things.
Acknowledging that human element, I can answer specifically from a VC perspective. In the early days, we saw a swift focus inward by VC firms. We took a kind of triage approach, to evaluate the strength of portfolios at the startup level given the new context of the pandemic. We reviewed cash positions, stress tested revenues and ultimately cash runways. We even saw some in our portfolio preemptively cutting costs to try to extend runway. The downside worry was that that the economic downturn would persist to the point of becoming a capital crisis, where startups would have trouble raising subsequent rounds of capital.
So that was a focus early on in the pandemic. There were also considerations early on regarding the ability to make an investment decision without a face-to-face engagement. Venture is very, very people-oriented. Obviously, there’s major risk related to execution, and having confidence in leadership is crucial. You have to ask yourself if you think founders are going to be able to win at the end, and you wonder whether you can make that assessment without meeting face-to-face. And early on, we saw a significant dip in in venture capital activity.
Fast forward to where we are today and we see reversion to longer-term venture characteristics. I’ll mention three things that I think give venture capital a lot of buoyancy in this investing environment.
First, there’s lot of “dry powder.” VC funds have no issue raising capital, and that has persisted even throughout the crisis. There’s been plenty of demand on the capital side for the venture space and that has continued to increase. So, investors have capital to make investments.
That’s the demand side of the equation: Venture investors are well-funded.
The next point I’ll make concerns the supply side. The rate of innovation can be countercyclical and there are some exciting trends and tailwinds here around technology broadly. We received even more of a tailwind given the forced sequestration aspects of this crisis as well as all things e-commerce-related becoming such a key focus.
Finally, from a VC perspective, we’ve pretty much all been able to transition relatively seamlessly to 100 percent virtual. I think folks began to realize that many of the initial meetings were already taking place virtually. That initial concern about the need for face-to-face meetings didn’t really play out to be as big of a deal.
IIR: How are the startups themselves are reacting to the pandemic? What difficulties has it raised for them, from where you stand?
JA: On the startup side, there was a similar approach early on—there was a high level of uncertainty as to where the world was going, and startups were trying to operate in a similar triage-like environment. There were a lot of existential questions about “How can we extend our runway?,” etc. I think the lack of face-to-face made it difficult for startups to make their cases to investors.
And, again, from an investor perspective, if you’re investing at the seed stage, you have very little quantitative data with which to make a decision—it’s not like these startups have much quantitative data to hang your hat on. It’s all about backing the team, and you’re writing very small checks. During the later stages, you’re writing much larger checks, but you have a lot more data to work with—there might be audited financials already; there may already be revenue to analyze. You understand a startup’s business model—how they’re making money—and they’re just in the process of scaling. It’s relatively easy to manage that stage remotely. In between the early and later stages, that’s where you’re writing a larger check relative to the lack of detailed data with which to make your decision. But even there, we’ve seen plenty of firms not having too much issue raising A rounds. So, again, the impact on fund raising has been relatively benign.
As far as the sales cycles startups are facing, I think it depends. Large organizations are going through their own internal reviews—they’re looking at their own sales numbers and dealing with challenges related to the health and wellness of their employees. They’re dealing with their own challenges of having their staffs working remotely. So, if you’re selling into a large enterprise as a startup, it’s harder when those enterprises are operating with a high degree of distraction caused by trying to manage through the crisis themselves. There are exceptions when it comes to technologies that are going to accelerate digital and cloud migration. Also, collaboration software, which has been a hot topic for us over the last few months. In short, it feels like there have simultaneously been sales cycles extending for certain technologies and shortening for others.
IIR: How has New York Life Ventures weathered the environment caused by the pandemic? Did your focus on technology give you an advantage?
JA: I think we deserve to toot our horn a little. We embraced this concept of “LifeTech” a while back. At a high level, it represents our singular focus on the opportunity at the intersection of technology and life insurance. We define that very broadly to encapsulate front-, middle- and back-office technologies. That’s served us really well right now because it’s been more of a philosophy about the whole industry being better enabled. It’s the idea of the rising tide lifting all boats, and with that sort of a mindset it becomes a lot less about specific disruption. It’s more about a broader enablement which will be inherently digital.
That was always our philosophy, so we were already thinking about a lot of these trends that have become front-and-center for our industry today. We had a really good pipeline of startups already in place so we were fortunate in that we were able to continue to introduce them into our organization at a steady rate. An important metric for us is the rate at which we drive the testing of new technologies. An important part of our model is bringing startups into our business, connecting with our business leaders internally, and helping to facilitate testing and learning. We measure that in terms of proof-of-concept [POC] testing. During 2020, we actually accelerated our rate of testing new technologies. We tracked toward about 26 POCs for the year. Historically, we’ve had a rate of a POC about every two-and-a-half weeks. We’ve accelerated to closer to one every two weeks. We also had one of our more active investment years and continue to drive top performance.
We’ve seen increased demand around a lot of the trends that that we were already focused on. However, one exception would be remote collaboration and communication, which is a topic we weren’t as engaged with. These are certainly in focus right now. So now we’re looking at opportunities in the realm of the technology of community—how are you going leverage technology to recreate some of that culture and community that you get from being in the same location? We’ve been thinking about what you might call the disruption of place: there’s a relationship to the employer but also to a certain geography.
IIR: How do you think the pandemic might impact New York Life Ventures’ agenda—and that of other investors— over the longer term?
JA: Frankly, it’s going to be very interesting to see how this evolves and what the “new normal” looks like in the wake of the pandemic -what gets back to what it was pre-pandemic and what will remain. I can say that there’s plenty that I’ll do on a Zoom call from now on. I think there are many examples of things that we learned make more sense because they’re much more efficient. I do expect there to be more flexibility in modes of communication. It’s a massive opportunity to think more loosely about where people work, especially if you can figure out a way to make sure you have a good, transparent understanding of productivity and what you’re trying to solve for. I also think there’s a huge benefit to having a culture that gets created around the location, so I think we’ll largely see more of a hybrid between office and remote work.
We’re looking at this macro trend and keeping an eye on tools for measuring performance and productivity remotely. However, the core areas on our agenda have been and continue to be around InsurTech broadly as well as smart enterprise and enterprise technology to drive digital enablement for the industry, enabling our front-, middle- and back-office to increase speed to insight. As you can imagine, there’s a considerable focus on data and analytics. We regard that as huge opportunity for industry, and we think about that agenda sequentially as well. First, you’ve got to get the data organized correctly. Secondly, you need to make sure that you really understand, with a transparent lens, how your analytics are informing decisions, and in turn, how those decisions are going to affect your products and your customers.
Editor’s Note: This story underwent some editing for readability subsequent to original publication.