Brewer Lane Venture is a new, Boston-based VC firm focused on early-stage InsurTech and FinTech startups. Former New York Life President and Chief Investment Officer John Kim is the founder, and veteran investor Martha Notaras joined the firm in January as Managing Partner. She was previously at XL Innovate, the well-regarded CVC fund backing P&C-related InsurTech startups, as well as those focused on data and analytics. Old friend Tom Hutton is a Brewer Lane Senior Advisor.
The fund will focus on early-stage (Series A and Series B) companies that have new business models, are empowering incumbents, and are leveraging insights from data & analytics in finance, banking, and across all sectors of insurance.
Brewer Lane, which is targeting $200 million for its first fund and has closed on $120 million, has made four investments thus far. The firm led a $15.2 million Series B round for Socotra, which offers a cloud-based core insurance platform including underwriting, policy management, and claims, reinsurance, and reporting systems. They joined the Series B for Cape Analytics, a startup using AI to provide instantaneous property intelligence for building across the U.S. (This was an XL Innovate portfolio company.) They led the $37.5MM Series C in direct-to-customer distributor of term life policies Ladder Life, and also led the Seed round in Avibra, which offers access to financial planning tools and advice as well as dietician-approved meal plans, lifestyle advice, and access to coaches with expertise in finance and health.
Martha and I recently connected by phone while in quarantine on opposite coasts.
Q. Martha, what is the impetus for starting Brewer Lane now?
A. Opportunity and insight. John and I were early investors in the InsurTech space. We’ve seen models that work and don’t work, and we’ve definitely seen problems that are still not being solved. We feel the market itself has grown up and we feel there will be a broader range of investment opportunities with new entrepreneurs entering the space with relevant experience, insight, and hypotheses. Yes, we’ve been through two waves of FinTech, but there are still opportunities.
Something else that has changed in the five years that I’ve been investing in InsurTech and in the seven years since John founded New York Life Ventures is that incumbents themselves have become more open minded. They are more honest about their own shortcomings, and are thinking seriously about whether there are technologies they should look outside for instead of trying to develop them in-house.
Q. What impact has COVID-19 had on your own fundraising efforts?
A. We are still seeing strong interest from LPs and we still signing up LPs in the midst of this COVID-19 crisis. There’s definitely a feeling that there’s an opportunity here, so no, we haven’t really seen an impact on fundraising.
Q. And what impact do you think it will have on startups that are raising capital, and on deal terms? Are deal term different than they were eight weeks ago?
A. The deals that are closing right now have been under discussion for a while and therefore we’re not seeing the true impact, yet.
From the entrepreneurs that we’re in touch with, though, we’ve become aware of conversations that had been humming along and had gotten to the point of discussing deal terms — maybe not to the point of a written document but certainly to the point of feeling like that was the next step — coming to an abrupt end. So yes, there are definitely companies that thought they were on track that have suddenly not been able to bring those discussions to a close.
One of the concerns we all had in 2019 was that valuations were getting ahead of themselves, and there is definitely a feeling now that the heat is coming out of valuations. It’s a double-edged situation. Even before you talk about multiples falling, you have revenue projections falling. Companies are having to make substantial changes to their operating projections based on substantial uncertainty around 2020. Use of capital becomes more about achieving breakeven, even at the risk of giving up some of the upside of the big win you were going for.
Q. What advice you are giving portfolio companies about managing through a crisis? This is the first go-round for founders who missed the dot-com crash and the financial crisis.
A. At Brewer Lane, we’re pretty fortunate in terms of the level of experience our management teams have. We feel all of our companies are in very good hands.
Venture capital is about growth, it’s about going for the win, but right now the message is very much about prudence. And this is a message that we’re hearing from our CEOs. We’re certainly not having to tell anybody this. It’s about more prudently managing cash burn so you can later go for the win.
Q. Will incumbents change their approach to working with startups? I can see some saying that they have to fix these known problems and that they’re ready to partner with startups that have new ideas and new technologies and new approaches to make that happen. But I can also see some saying, “Woohoo! All of those startups are going away and we can go back to doing business like we used to.”
A. You are a cynical person!
Q. This is not my first crisis.
A. I was going to go to the third option, which may be a variation on your second point — which is that now it’s too risky to do business with a startup — because they’re going to go out of business.
Q. You’re right — that’s a concern that’s going to make a comeback.
A. The fourth and fifth alternatives are ongoing investment, or insurers buying some of the InsurTechs.
Incumbents and InsurTechs are both going to come out of this situation scarred. I’m going to use an example that might not be exactly on point, but let’s work on it. InsurTech Next Insurance was the first to announce a 25% price discount on premiums for small businesses during the coronavirus crisis. They said it’s just not right that the other insurers aren’t doing this.
That was very nice of them, and it was appropriate. And now Allstate has announced that they are reducing premiums to reflect the drop in miles driven, etc. This is a good reminder that sleeping giants might not immediately realize what the right thing to do is, but they have the resources and the financial flexibility to make these changes. Don’t underestimate the strength that having a large, ongoing business gives to a place like Allstate
Did you ever see the movie Fried Green Tomatoes?
Q. Yes! Based on the book by Fannie Flagg.
A. Kathy Bates is in a supermarket parking lot looking for a parking space. Two young women steal her space and tell her they can do it because they’re younger and faster. So Kathy’s character rams their car and tells them she can do it because she’s older and has more insurance.
It’s kind of like that situation. They can do that because they have deep enough pockets.
Q. Why will entrepreneurs want to work with Brewer Lane? What do you offer FinTech and InsurTech entrepreneurs that they can’t get from other investors?
A. We offer a unique combination of many of the things other venture firms offer. We have a deep operational understanding of many lines of insurance. That means we have some insight into how insurance itself works and also how the incumbents in insurance think, both in terms of how they might react if you’re competing with them, and also what strategies you might be able to use effectively if you are trying to sell into them, what messaging you should consider, etc. Our line of business experience is quite unusual, including P&C from me, life from John, and more broadly the financial industry. John has been in the asset management and investment business and I have experience in banking and have invested in various parts of the financial services industry over the years.
Some of that is as straightforward as our contacts across the insurance industry and within the venture community.
The other thing is our insight into how to grow early-stage companies. I’ve been involved in growing data and analytics companies for at least 25 years and have served on many of those boards, gaining an understanding of what it takes to scale to many multiples of where you are the day you put money in. The success John and I have previously experienced, as well as the investments we’ve made that have been less successful, are what shape us as board members and enable us to cast a light onto the past in ways that illuminate multiple potential paths forward for a company. Often, what we find is that our experiences are really additive to the experiences of the founders.
In other words, what’s really terrific is that we’re not all sitting around the table with the same experiences, creating an echo chamber. Rather, we bring a diverse set of experiences together.
Q. What are your investment theses? What are you looking for when you evaluate companies for investment?
A. We want to look at three kinds of companies. The first are those with new business models. They’re attacking an issue in the market from a different perspective. Within the investment portfolio that we have so far, Ladder Life would be an example. We all know that it’s painful to apply for life insurance. What they’ve done is build a full tech stack, they are underwriting better within an MGA framework, they are able to gather a substantial amount data from you on your phone, and then they are accelerating underwriting so it’s no longer a twelve-week process or even an eight-week process for most people.
The second type of company that we’ll look at is one that enables incumbents. When we think about this in the portfolio, we look immediately at Socotra, which is a cloud platform for insurers. We’re seeing it being used in several different ways. One example is Nationwide, which is using Socotra for a new product line, Spire, which is their version of Metromile, their UBI for millennials. They said it’s a new product, they’re selling it to a new constituency, they’re going to put it up on a cloud-enabled platform allowing them to be more responsive and to structure it differently than other products because they don’t have to work around a legacy system. They can start from scratch.
Then there’s Mutual of Omaha. Their plan is to put existing product lines on the Socotra platform. They’re showing foresight and courage by saying that running systems is not their core business. Their core business is creating the product and fulfilling the product to protect our customers. They’re acting on that by moving this to the cloud, which will allow them to be more responsive. They are taking that mundane activity out of the insurance company and putting it into someone else’s hands.
The last one is data and analytics. This is an area near-and-dear to my heart. This is particularly focused on better understanding risk. Cape Analytics is in this area. It was one of the companies in my portfolio at XL Innovate, as well. They are using machine learning to extract more accurate property data from aerial and satellite imagery. I know this will shock you, but when you use better information in underwriting, your underwriting better predicts your risk. They’ve now been around for long enough that they have insurance companies that will tell you this is true. They have the ROI calculations and they have the case studies.
So those are the kinds of companies that we tend to be attracted to. When we think of these types of businesses, they can operate across life, health, retirement assets, P&C, reinsurance, etc. In terms of FinTech, we are thinking along those same lines. But one specific area we have been thinking about is vertical payments. While it feels as though some of the overall payments topics have been well-addressed, I think there are some unique challenges in some of the vertical payments markets and there may yet be big opportunities there.
Q. You mentioned Ladder, and that was a Series C. Will you be doing many later or expansion rounds, or is this an exception?
A. That’s a fair question. We do expect that most of our investments will be Series A and B. But you’re right, we will make exceptions. John followed Ladder from its beginning so doing a Series C was a justifiable exception. We have a lot of value to add to the company and it ticks all of our boxes in terms of having a fantastic team as well as compelling traction and a well-thought-out plan to achieve goals that are very ambitious. That’s why we were attracted, even though it’s a Series C.
Q. How are your investment decisions made inside the firm?
A. It’s a straightforward process that starts with some pretty wide-ranging discussions across the whole team. That makes sure we collect everyone’s insights and we air all the different views. But in the end, John and I both need to agree on every investment.
Q. What’s the average size check you expect to be writing?
A. $5 million, plus or minus.
Q. Are you usually the lead investor? And do you always take a board seat?
A. We will lead in the right rounds and my expectation is that we will end up leading more than half of our deals and we will take a board role in those cases. We look to play well with others and so there will also definitely be deals where we follow on. Maybe in some of those we’ll follow on in the A and later lead the B.
Q. Do you have regional investment preferences, or will geographic allocation be a residual of the attractiveness of the deals you see?
A. It will fall out based on the attractiveness of the deals. To the extent that it matters anymore where you are based — Brewer Lane is based in Boston and I live in Los Angeles —there will be a natural attraction to the Northeast and the West coast, but that is also coincidental with where a lot of the InsurTech and FinTech companies are located. There are certainly companies we are looking at that are elsewhere. We are looking at deals nationwide as well as select international deals, but our expectation is that Fund One will be primarily North American.
Q. Similar question regarding how you’ll determine the allocation between FinTech and InsurTech within the Brewer Lane portfolio? Between life, P&C, and health? Will that also be a residual?
A. We are very fortunate in that we don’t have any hard-and-fast allocation requirements, so we there’s a lot of space in which to be opportunistic. Our expectation is that FinTech will end up being about a quarter of the portfolio and InsurTech will be the remainder.
Q. You’ve spent the last several years focused mostly on opportunities in P&C. Now that the handcuffs are off, and you’re free to invest across the whole spectrum of FinTech, InsurTech, RegTech, etc., what are you most excited to look at?
A. One of the things we think is very interesting are the infrastructure plays that are relevant across the entire industry. We are looking for InsurTechs that are not just focused on a single line of business but really are providing something more structural that can be used broadly.
As mentioned, Brewer Lane is developing its thesis around vertical payments. There are also some solutions to really boring and annoying problems like compliance. While we don’t expect to go heavily into RegTech, we may make some investments. But we’ll be quite selective in terms of making sure there’s a big enough opportunity and a powerful enough solution so it’s worthwhile for clients to use the product.
Both John and I have a lot of experience in business-to-business, and we continue to be attracted to it. What’s not to like about B2B enterprise solutions?
Q. Do you anticipate being involved with accelerator programs and incubators?
A. There are some accelerator and incubator programs, including MassChallenge FinTech, and many in Hartford and New York, where we will participate in events and expect to build those relationships over time. And then organically we will learn which specific ones we want to get more involved with.
For us, as a firm that expects to have multiple funds, our expectation is that it will be worthwhile getting to know people early as long as we can do that in a way that is respectful of everyone’s time. We don’t want to give anyone the impression that we will be institutional angels, but certainly we’ve seen a significant amount of deal flow, even in the past couple of months, because I’ve been talking to those entrepreneurs for a couple of years.
Q. Your firm’s investment philosophy is that technology should be used to improve people’s lives. What do you mean by that? Where do you see the opportunities to do this within FinTech and InsurTech?
A. Improving people’s lives can be accomplished by quite a range of applications. One way to do this is by enabling a better customer experiences so less time is wasted. Allowing people to do something simply encourages them to it. Another way is reducing risk in people’s lives, whether this is through life insurance or by protecting a business. What is absolutely clear is that people and companies generally don’t carry enough insurance.
A lot of that is because they don’t understand that if they don’t carry insurance, then they bear all the risk. Big companies understand this. They have a CRO. But even midsized companies aren’t explicitly thinking about the risks they self-insure for. It just happens.
In FinTech, there are opportunities in terms of customer experience, of course, but also in the decisions people make in terms of strengthening their financial positions as much as possible.
Q. What do you see as the differences between being a venture capitalist versus being a corporate venture capitalist?
A. I will say that at XL Innovate we were blessed because we were entirely compensated based on performance. We weren’t compensated on squishy characteristics like strategic fit. That was convenient.
But one of the things that is a pleasure at Brewer Lane is that we have a much more open investment remit and that means that in the final analysis the only thing that matters is if we expect something to be a good investment.
Q. What are some of the best practices you’ve observed when it comes to insurance companies and startups working together? What needs to be done by each side to ensure a successful relationship?
A. If I started by suggesting each side proceed with honesty and respect, you would probably call me old fashioned. I mean honesty about what each side wants out of the relationship. Sometimes it still happens that a startup thinks it is having a meaningful conversation but someone in the innovation group is just ticking something off their list. So – honesty, respect, and having the right people at the table are where things should start.
You have to have honesty on the part of the startup, as well. Be explicit about what you can deliver this week and what is in the roadmap. Have a conversation and explain what it is you plan to get to within the period you are talking about. Startups are naturally optimistic, but they need to be honest with their partners.
Respect means that if you’re going to do a proof of concept it needs to be paid or it needs to go right into a business relationship. You need to spend the time upfront so it can go directly into a business relationship. We’re all grownups and that’s the way people should do business.
Be respectful of people’s time. I recently saw a deck which laid out how much time had been spent putting together a commercial deal with an insurer. It was astonishing and it’s not right. Certainly, 25 people from your organization shouldn’t need to meet with a startup before a deal is signed.
My advice for innovation groups at insurance companies is to choose the right problem. You have to choose a problem that is urgent enough, so you’ll be able to get the required attention of other people internally and you have to find a startup that can solve a big enough piece of that problem. Then determine the metrics by which you will measure success. Be clear about those upfront.
Q. Where do you see the biggest opportunities to apply AI in financial services?
A. It’s hard to see where there is NOT an opportunity in financial services for AI. There’s huge opportunity. We’re only just scratching the surface. Even if we look at RPA and some of the repetitive processes we have in financial services, there is a lot to be achieved. You really should be able to leverage AI to speed up every single process in financial services, whether that’s underwriting, customer service, or claims.
The other thing we’ve seen is people using machine learning to identify patterns that are not obvious to us — maybe because we have fixed mindsets — but relationships between various datasets that provide insight. There’s a huge amount of opportunity there.
Q. What are your thoughts on blockchain? Is it an area you want to invest in?
A. I am a blockchain skeptic for the foreseeable future.
Q. What about neobanks?
A. The market in general seems to be open minded as to whether there’s room for more neobanks, and whether they have really proven themselves. I am open minded here as well.
Q. Direct distribution of insurance, particularly term life insurance, is an area that’s dear to my heart. Direct insurance distribution doesn’t have the market share in the U.S. that it has in the UK. I believe an overreliance on traditional channels has contributed to the coverage gap, particularly in life insurance. Based on your investment in Ladder, is it fair to assume you agree?
A. Absolutely. I agree with you, the intermediaries are not uniformly delivering, and I think there are certain areas that have been left behind because of that. Small business is certainly one area.
To the extent that a company is only providing distribution, it is probably less interesting to me. But a company that is distributing directly is of interest.
Q. How are you thinking about climate change and cyber as investment themes? Both require a forward-looking view of risk. As we know, insurance underwriting is backwards-looking, and in any case these risks are very rapidly changing.
A. We are thinking about both of those. I don’t know if there is something investable in climate change, though it is absolutely a huge risk. Until a couple of months ago, we thought that was the huge risk.
The thing that both have in common is that traditionally insurance relies on twenty years of actuarial information being available. As an example, RMS creates stochastic models. They started out with natural catastrophes. When they moved to man-made catastrophes — post 9/11, with terrorism coverage — they had to use Monte Carlo simulation. Even though they had tremendous experience with modelling, they had to take an entirely new approach to modelling this new risk.
What we would be looking for here is how people look at this risk, which is constantly morphing and about which history tells us nothing. It is possible that AI could be helpful in extracting more information from very short periods of time, or by helping us take in more disparate data that will inform decisions. As to whether that becomes part of our investment portfolio? We’ll have to see.
Q. Brewer Lane chose to be based in Boston. Several people have said to me that they are very pleased to have another FinTech-focused VC firm based here. What are your impressions of the Boston community?
A. A lot of the components for a strong ecosystem are there. One thing that really stands out about Boston is the workforce. It’s a great combination of smart, entrepreneurial people and a really good supply of engineers. It creates the foundation for some really strong tech companies. People also like living in Boston, which creates a good environment for startups where people aren’t moving every eighteen months. For us, the well-developed expertise in healthcare in Boston may also be relevant to some of our investment portfolio.
I suppose I can’t say it’s a hidden treasure in terms of VC — there are a number of high-profile VCs based there — but I do agree with you that it isn’t seen as a hotbed the way it should be. Boston has a lot of the kinds of companies we’re interested in and we love smart people.
Q. How would you like entrepreneurs to contact you?
A. They can reach me at Martha @ brewerlane.com. From that you can probably figure out all of our email addresses.
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