I was in New York City last week and found myself talking to the founder of a FinTech. His company had recently raised several million dollars from a large investment bank. It raised some questions about how insurers go about partnering with startups.
Things were going really well.
I asked him about progress engaging with the bank as a “supplier”. I guessed that a bank that had invested such a sizeable sum would be eager to get its hands on the startup’s technology. I wanted to hear how banks had solved some of the problems around partnering with startups experienced by insurers.
It turns out they have the same challenges.
The founder told me that the first thing he had to do post-investment was to sign a policy confirming they do not use child labour. His team was currently in the process of filling in a sixty page questionnaire on data security. It was months before they expected to be live with any kind of even limited pilot.
The startup was one of the first to be accepted by the bank’s incubator. Recognising the process challenges, a technical employee had been seconded from the bank to help the team four days a week. The employee was advising on how to build technology to be complaint with the bank’s requirements. This was helpful – but rather than shortening the timeline had merely made its requirements achievable.
All this oversight “red tape” despite the fact that most of the founding team are former employees of the bank and one of bank’s senior managing directors was a director (through the investment).
I was surprised by this. On some dimensions FinTech is ahead of InsurTech, notably investment volumes (see page 3 of our presentation to the Slovenian Insurance Association). But it seems that banks suffer from the same challenges engaging with startups.
This made me wonder: Is the startup-as-a-supplier model a failed experiment? How can it be that a bank is willing to invest millions in a startup but then find it so hard to use its product?
It is too early to know for sure if the model is a failed experiment.
However, it is fair to say that the model is not currently working for most insurers. This blog proposes two changes in the way that insurers could partner with startups – one pragmatic, the other radical.
Design a “startup-grade” governance framework (or “sandbox”)
It is very easy to produce slideware that tells management teams to be more “agile” and launch “innovation pods”. The problem is that an innovation strategy needs to be rooted in detailed operational analysis to be effective.
A vital component is a “startup-grade” governance framework – in other words an onbording and oversight process that is commensurate with a startup’s resources and the scale and likely risk of any early implementation. For example: what are reasonable information security requirements for a small scale trial; how does procurement get comfortable with a pre-revenue business?
These are questions that companies tend to tackle in an ad hoc way at the moment. This has two consequences: first, engagement processes are slow and second solutions are bespoke. In other words, companies are not “formalising” their learnings to speed up future engagement processes.
We believe that insurers with ambitions to engage with startups should design these governance frameworks – sometimes referred to as “sandboxes” – soon after settling on their innovation “vision”. Avoiding this operational detail will slow or kill the startup partnership.
Critical in all of this is differentiating between genuine “red lines” and “nice to haves”. An insurer must, for example, be satisfied that its startup partnership is not contravening the rules imposed by the GDPR; on the other hand the procurement process could probably be shorn of company-imposed requirements like the need for suppliers to show three years of audited financials.
At Oxbow Partners, we are currently helping several clients develop startup-grade frameworks and the processes that sit underneath.
A new startup partnership model: “Buy in – spin out”
A startup-grade governance framework may, however, not work for all companies. Some will simply find it too hard to find an acceptable compromise between their standard compliance processes and the needs of a startup. There is some legitimacy to this outcome: as we have pointed out above, the penalties of non-compliance with legislation will mean a “sandbox” is not to every organisation’s taste.
This would mean that for some companies the startup-as-a-supplier model will not work. So how do these companies get access to the best ideas, technology and talent?
It seems to me that the point of failure in the current model is that a startup is an outside partner. This is beneficial in some ways – a management team that is incentivised to build a business; separation from a corporate to allow for creative and rapid development. But where there are advantages there are disadvantages: alarm bells might ring in a corporate risk team when they see the words “creative” and “rapid”.
We therefore suggest more attention should be paid to an alternative model, which we call the “buy in – spin out” model. (Some companies are already offering elements of our model, but not, as far as we know, in the form we are proposing.)
In this model, corporates would buy a controlling stake in startups early in their lifecycle and run them as internal development teams. The startup’s objective is to make the technology work for the “host” organisation. This simplifies the startup’s objectives, makes the governance framework clearer and also gives the startup access to internal resources to comply with these requirements.
At a certain point in the future, each side has the opportunity to buy the other out. Either the startup believes that its idea is broadly marketable and buys out the “host” with a consortium of investors (“spin out”). Alternatively, the corporate thinks that the business gives it competitive advantage in which case it might offer a higher price than the consortium.
Clearly there are many issues to test before implementing the “buy in – spin out” structure. The most obvious is startup appetite: they will have a deep fear of either being crushed by a corporate owner or being tarnished by their host when trying to distribute to competitors.
The solution may not yet be clear, but the problem is well defined. Whilst there is a lot of activity around partnering with startups, we are yet to see many implementations beyond limited POCs. Insurers need to ensure they are not just defining their “vision”, but building an effective operating framework to make it happen.
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