The words "venture capital" usually call to mind California-domiciled firms that dominate the VC space. The marquee names in the arena —Accel Partners, Benchmark Capital, Greylock Partners, Sequoia Capital and others — regularly make headlines with investments in Silicon Valley firms that are blazing new paths in the tech world.
Less often associated with venture capital are life insurers and their staid, button-down executives. This perception is increasingly antiquated.
In the last few years, several major carriers — American Family, AXA, Transamerica, MassMutual and USAA — have joined the venture capital fray. And if current trends are any guide, the group's number is likely to grow.
According to "Yearbook 2016" of the National Venture Capital Association, the number of active VC firms increased in 2015 relative to 2014. Last year, 718 VC firms deployed $5 million-plus in companies in 2015. Of the total, 238 invested more than $5 million in first rounds for a company.
Venture capital under management, NVCA reveals, rose to $165.3 billion, reversing a three-year decline. New commitments to VC funds in the U.S. hit $28.2 billion last year. That nearly matches the $31.1 billion of 2014 and is well above 2013's $19.9 billion.
Why are life insurers contributing to these huge sums? Executives interviewed by National Underwriter cite two drivers underpinning the launch of their venture capital arms: (1) access to technologies of seed-, early- and later-stage companies that can help advance strategic objectives; and (2) potentially lucrative financial returns on investment that can boost the carriers' bottom lines.
The latter is not an insignificant consideration given that insurers have struggled in recent years to generate sizeable yields on their conventional portfolios (such as corporate bonds and Treasuries) in a historically low interest rate environment. But the companies' VC investments are miniscule relative to their investable assets, which can run to hundreds of millions or billions of dollars.
Which brings us back to item (1), strategic objectives. This, executives say, is the weightier of the two drivers and the principal filter through which the VC units judge the merits of tech companies being considered for capital funding.
"The idea of our strategic venture fund was to create a vehicle through which we can gain access to ideas early in their life cycle," says Manish Agarwal, a general partner at AXA Strategic Ventures, which oversees a $200 million venture capital fund on behalf of the Paris-based insurer. "Of particular interest are emerging innovations relevant to insurance, asset management, financial technology and health care services industries. Many of these innovations, we expect, will help us improve our core insurance and asset management businesses. We also hope to derive a strategic benefit in learning about what start-ups are doing."
AXA's goals are mirrored in the aims of other carriers with venture capital arms. But their objectives only partially overlap: Some insurers focus more narrowly on solutions that can improve existing business processes. Others with broader aims are investing in technologies that may not yield immediate benefit, but could be more far-reaching in impact.
The VC funding also cuts across an impressively varied range of IT disciplines. Take Transamerica Ventures. A unit of the Netherlands-based Aegon N.V., the venture capital firm targets companies that are developing software with applications for financial technologies and services, big data and analytics, digital marketing, sales and social media. Seed and early-stage companies with enterprise IT, content/publishing and mobile applications also are receiving VC dollars.
Transamerica aims to harness market-ready solutions resulting from these investments for multiple objectives. Among them: enhancing front-end web portals and media with which customers and Transamerica's brokers and advisors interact; and revamping back-end IT structures, including aging legacy systems that manage policy administration, marketing, sales, finance and underwriting.
The investments are already bearing fruit. Case-in-point: a personal benchmarking tool from NextCapital that brings together individuals' investment accounts — 401(k)s, IRAs, mutual funds and brokerage accounts — and lets them see how the vehicles are performing relative to their investment strategy.
"This is a solution we're now providing to Transamerica's customers," says Transamerica Ventures CEO George Schegle. "But the service can also be used by brokers who are interfacing with consumers. So there's potentially a dual benefit."
Typically, he adds, Transamerica Ventures is one among several institutional investors that are investing in tech start-ups like Next Capital. In some cases, competing life insurers are also ponying up capital for a promising company.
A prime example is Policy Genius. The New York-based business provides an online platform for people to buy several types of insurance: life, disability income, renters and pet insurance. The site includes an "insurance checkup" feature to determine how much coverage an applicant needs. Prospects can also get a quote, access educational resources and complete an application online.
Backing PolicyGenius along with Transamerica Ventures are AXA Strategic Ventures and MassMutual Ventures. Intriguingly, insurance products from just one of three carriers —Transamerica — are part of the product mix, which also includes offerings from AIG, American General, Guardian Life, MetLife, ING, and Principal Financial.
Why invest in a website for insurance products if your company isn't on the virtual shelf?
"We separate our investment activities from our commercial activities," says AXA's Agarwal. "We invested in PolicyGenius because we believe in the company and their platform."
Agarwal notes also that AXA is interested in learning from PolicyGenius' business model, while also driving sales to their online platform. The start-up is also targeting a market segment — the mass affluent — that's additive to AXA's core business.
Also with a view to delivering added value, insurers' venture capital units are investing in life-enhancing solutions that can be used to lower policyholders' premiums after the sale. In the life insurance space, technologies of interest include Internet-connected wearable devices (think Fitbit) that can track — both for the user and an insurer in contact with the device — such health-related activities as heart rate, quality of sleep, distance walked or calories burned.
Many new technologies hold promise in the property and casualty arenas as well. American Family, for example, has invested in Keen Home, a developer of home automation products; and 1Concern, which provides rapid damage estimates across natural disasters using artificial intelligence.
Also in this category are Chai, a developer of devices that help homeowners understand their real-time energy use; Carvoyant, maker of Internet-connected car systems and data; and Ring, a Wi-Fi enabled video doorbell that lets you answer your door from anywhere with a Smartphone. The unit's video motion capture feature can also detect activity on a property and trigger instant mobile alerts.
The various technologies dovetail with the three-pronged thematic focus of American Family's VC unit: insurance innovation, connectivity (including vehicle telematics, home automation and wearables), and analytics solutions that distinguish patterns from massive flows of data, enabling companies to predict and improve business performance.
"Big data is a reflection of the huge amount of information in the world, which is increasing at a rapid rate," says Dan Reed, a managing director of American Family Ventures. "We need tools to drive market insights."
Yet, determining which of the myriad of tech start-ups and technologies to bet VC money on can be a challenge — and a risk. Like new businesses in other sectors, many of the tech start-ups fail because their strategic focus, products or services don't align with market demands. Often, too, top executives at the companies aren't up to the task.
