Insurtech in a bear market with MTech Capital

After sliding 3.9% on Monday to 3,749 points, the S&P 500 officially entered a bear market. The warning signs have been around for months, if not longer: from runaway inflation, to ghastly supply chain issues, to geopolitical turmoil. The crypto industry—and, less drastically, fintech—seem on the verge of major contractions. 

But what about insurtech? What will the next few years look like for the nascent, yet potentially massive sector? 

Brian McLoughlin, Partner and Co-Founder of MTech Capital, suggests insurtech will undergo a dramatic but needed correction through larger market forces. 

In an interview with The Financial Revolutionist, McLoughlin details upcoming fundraising challenges, discusses the likelihood of major acquisitions, and describes why insurtech remains a promising site for investment. 

This interview has been edited for length and clarity.

The Financial Revolutionist: What is MTech Capital and what’s MTech’s vision? 

Brian McLoughlin: We're an investor focused on insurtech, and it’s a purpose-built fund for that. We wanted to create an ecosystem that would be for the benefit of entrepreneurs, and the way we did that was to have insurance companies and insurance brokers as our limited partners. 

The idea is that our job is to call on all of the insurance companies in the market. By calling on 100 or more, I get to work with them in a variety of ways. I can convince them to invest in my next fund, sure, but if they don't, I am showing them companies that are in my portfolio with the idea that they should be possibly a buyer of the products sold by that company—or even a buyer of the business itself. 

And so every head of innovation, every head of corporate development, and sometimes business unit heads are happy to talk to us. And then entrepreneurs get the benefit of having an insurtech VC with that kind of network in their cap table. Of 24 investments we've made to date, I believe we're on the board, or as an observer on the board, in 21 of them.

And we’re stage agnostic. We have invested in companies on a business plan, and then we've invested at a $2 billion valuation at the same time.

How did this work start?

I was early in fintech at Upfront Ventures. And so when 2017 rolled around, my partner Kevin—who's also my brother—was the Global Head of Insurance Investment Banking at Bank of America Merrill Lynch. And he said, “You know, it's getting strange: I go into these meetings with CEOs of top 10 global insurance carriers, and they want to talk about technology.” 

I think the genesis for that was how cloud computing was being sold into large carriers between 2012 and 2017. You had Google, Microsoft, and Amazon attempting to sell their wares inside of those firms. As they started to either go hybrid cloud or have some part of their business in the cloud, they started to learn that there was a next wave of technology and tools that will be available to them once all that data is there. If I had to pick a single year, 2017 was when CEOs started to say, “Hey, I think this technology thing is getting real. What are we going to do about it?” 

Kevin and I thought we could take that ecosystem angle and put it to work. And it just gives us an edge. Let's face it: In this market, you need edge as an investor. Why do you get chosen other than paying the highest price? We think we have a specialized edge there.

Having gone from fintech to insurtech, what is so promising that makes you want to dedicate so much time to it?

Entrepreneurs started to recognize the opportunity in insurtech between 2015 and 2017. They said, “Ok, payments maybe has run its course. What's the next thing in fintech?” and insurance showed up. 

It’s a massive category, probably 15% of GDP—just as big, really, as the banking space. And it's going to have to be transformed like any other enterprise, and it’s transforming itself. It just so happens that retail did it early. Those who didn't went out of business. The number of recent bankruptcies in retail was shocking after a 20-year run of innovation from 1999. I don't know that that happens in insurance, but the point I'm trying to make is how early we are in this transformation and how long it may take. 

Looking at fintech at least, there has been a wave of acquisitions by massive players. Is there a similar kind of dynamic in insurtech? How are you advising the companies you invest in on that front?

We’re at such an early stage in insurtech that the valuations have vastly outrun the underlying value. So if you're a corp dev executive at an insurance company and you see the prices being paid for Series B and Series C financings, do you want to step in and do M&A and take on enormous goodwill? The answer to that is no. 

We'll finally grow into those valuations. You're either a really special business, in which case someone pays the super premium for it, because the sky seems to be the limit. Or you're a more mature business, you've slowed down to a 20 to 25% growth rate, you don't have a crazy cash burn, maybe you're even making some money. And now you fit into the M&A box a bit better. That’s been the life cycle in fintech, where the biggest companies with the craziest valuations have not been bought. So Klarna has not been picked up by anybody, Stripe’s not been picked up by anybody. 

I don't know if it takes another three years, five years or eight years—or this downturn—that presents opportunities where valuations come down. At some point insurtechs will finally be substantial enough, and what they've built will be durable enough, that two types of buyers show up. If you're an insurance company looking for distribution, you might pick up other distribution businesses. If you are in the services space that's technology enabled, you'll start being a buyer of companies that are similar.

You mentioned overvaluations. Are you worried about a big market correction of overvalued companies the way we’ve seen with fintechs like Robinhood? 

We've had conversations with our portfolio companies that if you did a big round at a very high price and have a very high burn rate that was supported by that very, very big round, then you probably need to rethink your burn rate. That's for the later-stage folks. 

And then for our early-stage companies, Series A and Series B rounds have been less impacted by this change in valuation. I don't know whether nuclear winter comes to those, but a $75 million Series C might not be available. There are still pools of capital that are that large and that require writing larger checks; it's just going to be a much smaller list of companies that get access to that kind of capital.

Any final advice for folks working in fintech and insurtech? 

This downturn could get a lot worse, and I don't know how long it will last, but it won't last forever. I had an old colleague of mine with a funny saying—a truism. “Companies only go out of business because they run out of money.”

I don't know how that helps anybody, but it makes it very clear. This is what happens when things go wrong: You run out of money. So make sure you don't. If you’re really only thinking about extending your runway from what was 12 months to 24 or 30 months, I can't tell you that that will be enough time. Will you be able to grow enough and still be attractive enough as a business that people still want to invest during an extended downturn?

They better grow, or they're not going to be able to raise money, and yet they really haven't raised enough to get to profitability. It’s not a gem as advice—it’s just a fact.