Insurtech funding flight to quality to accelerate after SVB collapse

Insurtechs' recent increased focus on profitability over growth should gain speed with the recent collapse of Silicon Valley Bank.

The Federal Deposit Insurance Corp. took over SVB on March 10, and whereas the immediate concern was access to deposits, the tightening of venture capital purse strings is the more serious threat facings cash-hungry insurance startups.

SVB was much more than just a traditional bank in that it provided both debt and investment facilities to startups, according to Sam Evans, a partner at insurtech-focused Eos Venture Partners.

The bank's collapse exacerbates an already challenging set of conditions, according to Evans. "[It] will accelerate the trends that were already happening."

Those challenging conditions include a chastening year for many would-be disrupters in the insurance space — companies such as Root Inc. have seen year-over-year stock price falls of over 90% as they struggle to turn a profit on the back of high-speed growth strategies.

"We already saw evidence of lower fundraising by insurtechs coinciding with more scrutiny of business models, cash burn, and path to profitability," said Tommy McJoynt-Griffith, an insurtech analyst with Keefe Bruyette & Woods. "The shake-up of a large, established venture and credit capital provider like SVB does suggest even more headwinds to insurtech fundraising."

Fight for funds

With insurtechs now fighting over for a smaller pool of cash, fundraising should be both challenging and competitive.

"There's a huge flight to quality. The top 10% are dominating access to the funding that is available," Evans said. "Venture debt is playing an increasingly important role given accessing equity was so challenging, and SVB was one of the biggest players here."

As fundraising becomes more difficult, the pressure on insurance startups to move out of the red is set to become stronger.

"A common message we hear from unprofitable insurtechs ... is that they believe they have a plan to get to positive cash flow with existing capital resources," McJoynt-Griffith said. "We expect the tougher environment for raising capital to even further sharpen their focus on that strategy."

Winners and losers

In this environment, the insurtechs set to suffer the most from the SVB collapse are newer companies that do not have a visible path to profitability.

"Venture capitalists, rattled by recent events, are primarily focused on reinforcing their existing portfolio companies. Consequently, they are less inclined to pursue additional or new investments," said Kaenan Hertz, managing partner at Insurtech Advisors. "The larger public ones won’t be materially impacted, nor will those with tens of millions in the bank and at least a two-year run rate of cash."

"The ones most likely impacted will be the ones who have run out of or are nearly out of cash right now. Their options will be very limited and there is a higher likelihood that they will close than find a buyer or even another entity to assume them," Hertz said.

But this increased focus on profitability will likely involve cuts similar to those that Big Tech has embraced over the last year.

"I think we'll see more companies failing in the next 12 to 18 months. There will be layoffs. A lot of companies are already switching to how can we get to breakeven as quickly as possible," Evans said.

In a tightening credit market, venture debt providers’ preference for software-as-a-service revenue-generating companies may be a determining factor on which companies gain access to funds.

"There's also a lot of digital MGAs, brokers, other businesses that don't have the [software-as-a-service] revenue structure, reliability or visibility. The venture debt market for those types of businesses is smaller," Evans added.

In the long-term, McJoynt-Griffith was optimistic: "Innovative ideas that demonstrate visible paths to tangible returns will continue to be able to raise capital."

That viewpoint was shared by Adrian Jones, a partner with HSCM Ventures, who did not see a "fundamental realignment" of the insurtech funding space.

"It will be a pothole in the road that we're all driving down. You hit it and your car really rattles, but ultimately, you keep going," he said.

Global effect

While startups in the U.S. are expected to be the most affected by the SVB fallout, Asia and Europe are not completely immune to the contagion. The Asia insurtech space had already experienced a sharp decline in fundraising in 2022.

SVB primarily supported U.S. startups, but it has been behind a lot of the funding work done by venture capital firms in Europe and Asia, Steve Tunstall, general secretary of the Pan-Asia Risk and Insurance Management Association in Singapore, said in an interview.

"There's a network effect that will have repercussions for the industry globally," Tunstall said.

The SVB collapse does not appear to have a big impact in Southeast Asia, and VCs in the region do not appear to be closely tied to the failed bank, said George Kesselman, president of InsurTech Asia Association.

The impact of the SVB collapse in the U.K. is also expected to be limited, not least after HSBC bought the U.K. arm of SVB for the fire sale price of one pound.

"I'm a little bit more optimistic about the U.K. ... I'm assuming HSBC are going to make some changes, but if they stay at least somewhat aligned with the initial strategy, which is obviously dedicated to supporting start-up businesses, then maybe the impact in the U.K. is not as severe as we're going to see in other European markets," Evans said.