When major FinTech companies like Monzo suffer a down round, it can causes a cloud of fear over the market, but there will still be a need for digital financial and insurance solutions post-pandemic.
InsurTech is not a niche market. Global investment into the sector nearly topped $6bn last year through 258 transactions, FinTech Global data shows. This is a sizeable jump from just the year before, where $3.7bn was invested via 218 deals. Funding has been growing at an accelerated rate year-on-year since 2016, growing at a 52.3% CAGR. The sector has clearly grabbed the attention of investors and insurers around the world. If it had not been for the pandemic, it would have been a safe bet to expect the sector to keep on rising. However, that’s not the world we are in and the coronavirus is most likely going to have an impact.
Despite the majority of the world being forced into lockdown, funding during Q1 of 2020 stayed relatively strong. There was a total of $925.9m invested through 71 funding rounds, globally. North America was largely responsible for this activity, representing 52.9% of all the deals in the quarter. However, while this seems to show the funding for InsurTechs might not be as heavily impacted as believed, it’s key to remember that most of these deals were likely in the pipeline for many months. If there is to be a drop in funding, this will not likely be seen until the second, third or fourth quarters. That said, some of the companies raising funds during that period may have done so during pandemic situations.
Leo Corcoran, CEO of Insurance claim management software provider ClaimVantage said, “I believe it will be tougher to raise funds if you have not already started the process. Funding will be available for companies that are core to digital transformation and mission-critical business functions, whereas nice to have products will struggle to get support, particularly for InsurTech funding.” The impact of raising capital during the pandemic could largely depend on what sector you are in.
Cybersecurity looks like it is one of the sectors which has seen growth in traction during the pandemic, which is only natural given that employees are largely working from home and open to new threats. There have been a lot of worrying stats suggesting people are not taking online security as seriously while they are working from home. Cybersecurity company Tessian stated that 52% of people working from home believe they can be more lenient with their cybersecurity. As a result of this mentality, a study from research company Canalys, claims the global cybersecurity market increased by 9.7% in the first three months of 2020 compared with the same period in 2019. This increase comes after businesses spent $10.4bn to enhance their online security as they let their staff work from home during the pandemic. But opportunities might be available for more sectors and the B2B side of things.
ClaimVantage’s global head of sales and marketing Stacy Varney said, “I recently read an article from Crunchbase that shows that late-stage funding rounds, Series C types – usually over $15M, are still getting funding during this time. They named 5 industries that are getting funding now, including Edtech & Cybersecurity. While cloud solutions weren’t listed specifically, I believe companies that help other companies survive in this new post-pandemic world will. Look at what Salesforce is doing with work.com.”
Earlier in the year, Salesforce released work.com to help business and community leaders around the world reopen safely, re-skill employees and respond efficiently from the Covid-19 pandemic. Some of the tools it has created include employee wellness assessment, shift management, contact tracing, emergency response management, and grants and volunteer management. Salesforce, like many other companies, has capitalised on the new opportunities presented by the pandemic, showing there are still promising business routes for many companies to pursue when other aspects of their business are not as important currently. The problem is with the companies that are not able to adapt and are in need of raising capital.
“There will be companies that need funding if they do not already have traction in the market. However, the terms available for this funding will be a lot tougher in the post-COVID-19 world,” Leo Corcoran added. “Funding has not gone away and there is still plenty of funding available. However, the multiples have dropped and the market is a little skittish as we do not know the final economic outcome of COVID-19. Based on some discussions I have had with private equity and investment bankers, valuations are already effected by anywhere from 10-30%.”
Venture capital firm Finch Capital recently completed a report which claimed many companies would experiencing down rounds if they seek funding now. Putting more pressures on companies looking to raise money during the pandemic, Finch claims that investment firms will be more focused on their existing portfolio rather than new opportunities. A report from Rosenblatt Securities also painted a worrying picture for funding. It claimed unicorns were most at risk and the 58 FinTech unicorns in the world could lose $76bn in market value if an economic fallout is caused from the coronavirus. However, the report states that InsurTechs will not be as impacted as other areas of FinTech.
A good example of unicorns suffering during the pandemic is UK challenger bank Monzo. The bank recently suffered a down round after its closed a £60m top-up round which resulted in its valuation plummeting from $2bn to $1.24bn – a 40% drop. Reports claimed this was caused by investors being tough on the bank to reduce its share price. The bank has suffered during the pandemic, It recently fired 120 members of its staff, closed its Las Vegas office and lost the 165-strong team, and has reportedly furloughed 165 members of its UK team. All of this trouble even sparked rumours the bank was going to go bust, but this was not true.
That said, not every unicorn is in trouble and maybe InusrTech companies are in a better position in the current climate than other areas of FinTech. InsurTech giant Lemonade recently launched an initial public offering and with an initial share trade price of $29. The company reached a $3bn market cap in its first day. While there may be fears in the market, appetite for InsurTech is still as hot as ever, but this doesn’t mean every InsurTech will be safe.
While the prospect of down rounds might make the industry look like it is hitting turbulent times, would it actually be that bad of a scenario? There have been numerous discussions regarding whether the FinTech market, as a whole, is over-inflated and company valuations are unrealistically high. As of the end of March 2020, there were at least 12 InsurTech unicorns, but this could be higher as not all companies reveal their valuations. China-based WeDoctor is the highest valued InsurTech in the world, with it being a colossal $5.5bn enterprise. If there is uncertainty in the economy and investors are becoming tougher with FinTechs and InsurTechs, we could see the market adjust itself to better levels. Too high valuations cause issues for companies if they cannot meet the demands or continue to attract high interest from investors. WeWork fell from grace last year when its valuation plunged from a supposed $47bn to $2.9bn and the company is struggling at the moment to survive. The pandemic could cause the InsurTech market to become stronger, with the best companies surviving the uncertain market and valuations become more realistic.
Corcoran said, “The need for insurers to continue to transform their business model has not gone away. If anything the pandemic will spur them to evaluate their business and focus on specific areas to improve business continuity. The InsurTech market will take a hit, but there is tremendous momentum out there and I see this as a blip. The problem is we do not know how big a blip it will be or how long it will last!”
There are clearly players in the InsurTech space that are still going strong. Obviously, the previously mentioned Lemonade is seeing no trouble in attracting investors, but a number of other FinTechs are also raising capital. Over the past few months several InsurTech companies have raised capital. In the past few weeks, Oscar Health closed a £225m round, Layr bagged $5m, Hi Marley secured $8m, Koala raised €1.6m and this is just to name a few.
Stacy Varney said, “InsurTechs, and more traditional companies will win in the market if they are solving real business issues that companies are now experiencing. Companies will continue to struggle to find qualified employees in a tight labour market.”
Copyright © 2020 FinTech Global
