July 18, 2020

Fundraising for capital-intensive and highly regulated fields, how does it work? By Katelyn Johnson.

Fundraising for capital-intensive and highly regulated fields, how does it work? By Katelyn Johnson.

Katelyn Johnson, the Principal at American Family Ventures talks about starting a business in capital-intensive and highly regulated fields like insure-tech. We discuss how these startups should fundraise and where should people, willing to work in those field start.

American Family Ventures: https://www.amfamventures.com/

Generator Accelerator: https://www.gener8tor.com/

Speaking of raising a lot of capital - interview with Adrian Druzgalski whose company raised over $107mil: https://www.fundraisingradio.com/1076-million-dollars-raised-the-role-of-a-cto-in-the-fundraising-process-by-adrian-druzgalski-co-founder-and-cto-at-radius-intelligence/


Transcript

this is fundraising and today's a guest speaker we have Kaitlyn Johnson principal at American family Ventures, 

and Lisa will talk about this American family Ventures and also fintech fintech is a pretty highly regulated field as well as insurance. 

So, we'll talk about that how founders can work in such highly regulated fields and not yet suit. So Kaitlyn, unless you call by, you, giving us some background on yourself and on American family Ventures. Awesome. 

Well, first of all, thank you so much for having me today. And I'm really excited to talk to you guys a little bit about my background as well as what I do at amfam. 

So my background, I started my career in medical device engineering of all things quickly realize that that itself was also a highly regulated environment. 

They kinda got bored with the slow moving pace and so it really led me to explore other career paths. And that's when I fell in love with the venture capital. 

So, I actually, my career path in the venture was I first went to get my MBA and then was lucky enough to land a job in venture post graduation. And so. 

I've been doing this for the past five years and loving every minute of it. It's, it's such a pleasure to get to work with entrepreneurs and founders, and people pressing the limits of what our technology and capabilities are able to do. 

So, at amfam Ventures, we're very much so looking for those types of entrepreneurs who, you know, our fund is focused on investing in things that impact the future of insurance. 

And so we defined that as kind of two predominant areas one, 

which is core, 

which is going to be the very obvious insurance type place so think of such as lemonade, 

which just recently Hippo is another big one yes, 

they did. 

They did. Well, okay, sorry. To interrupt you, but literally, like, a week ago I was recalling eliminates and how I found the mountain Thun, sixteen and read all those horrible reviews. 

I was like, 

oh, 

probably that companies already did they actually, 

and they've been performing better than I think the markets in the venture capitalists thought they would so they are substantially up from where they are their price was at and, 

and things seem to be going pretty well, from them from this transaction, 
so definitely want to take a look at. 
And so so, things like lemonade our total. 

False brokerages and reinsurance plays things of that sort. 

And then there are the adjacent SES that either impact the data that you could get to inform insurance software subscription services that gets sold into insurers as well as into other types of corporations. 

And it really runs the full gamut. It, it ends up allowing us to play a little bit more broadly than just the insure tech side of the house. 

So, is American family Ventures, like, key corporate venture capital, or is it like a normal venture capital? 

We started as a corporate fund back in twenty twelve, but, since then have had really to evolution of the fund, where we went to a single L. 

P model and now we're backed by a syndicate of who are all very invested in the future of insurance. 

So this ranges from carriers to financial institutions to wealthy individuals to traditional, traditional institutional investors. 

I just keep getting distracted by this eliminate. I just Google them and it turns out they have four billing market cap. Cool. Alright. Okay. So, let's talk about that then. 

So, how do you find companies, like lemonade that struggle through the beginning? It felt like they're gonna die. 

I mean, I took a look at their vapors back in two thousand, seven hundred and sixteen, and that you were low and budget. They had Pre horrible reviews on the Internet. People were unhappy. 

How how do you find basically companies, like eliminate that manage to go through all the struggles and still survive. 

Yeah, I mean, look, I think it's a true testament to the founding team and their ability to raise capital. They're a bit ability to grow premiums. Lemonade is in a particularly interesting part of the world. 

So, renter's insurance hasn't historically been a very attractive space to play in just because the premiums are low, and the customers end up being transients because they either move apartments or they end up. 

And so, the thought really what lemonade disclosed in their s. one is that the big bet on them is their ability to transition from a consumer from a rental policy into a homeowner policy. 

So then, and that's where you can end up making a lot of premium. Because then, once folks are homeowners, they're likely to also be automobile owners and then that's when they start to think about bundling multiple lines and that's when he can get. Right. Interesting. 

Because you can start Compounding those, those premiums. Right? I think that was actually smart move. I actually I saw that, but I didn't pay much attention to that because the reviews on that were horrible as well. 

So basically, I believe people too much, I guess, but anyways, let's talk. Let's go back to American family Ventures. What do generally invest in. 
We're an early stage shop, so we're gonna be looking at things that, you know, we've incubated 
companies before, although we don't regularly do that, but we will invest Pre revenue and Pre product. 
Yeah, and then usually at the high end, we're gonna tap out at the series B, but we'll certainly follow on in our portfolio beyond the series. B. 

if we, if, if you're in, if you're in before that understood understood. So, let's go back to lemonade light company. So, it's a highly regulated field. 

You have to have it's Pre capital, dense, super complicated miles. Who do you think should try to pursue that? I mean, can a first time entrepreneur actually do something like lemonade. 

You know, we've had this debate on our team internally as to whether what's the better founder archetype to back in the insurance landscape? Is it? 

Someone has an in depth knowledge of the insurance markets in a keen understanding of of what to do because it's a playbook that they've run several times within the bounds of the carriers organization. 

Or is it somebody who's kind of taking a fresh look at the, at the business and I think what we found is that is so highly dependent upon the individual. 

You've got folks like a soft blonde who is the CEO Hippo who came add insurance is a new comer. 

He did not have an insurance background and he was able to find a tremendous success within that market. 

And then you have folks like Steve Lucas, that branch, which is one of our portfolio companies, and he's a long time employee employee of an inch of an insure. 

And, and he is now off a building and a carrier in the space. 

And it's really with all of the knowledge that he gained from his previous experiences that has allowed him to really carve out what hope what we hope will be a success with thesis for branch. 

So so I think you can find success in in both of those avenues and quite well. 

Right, right you're completely right here. And my next question was about fund raising specifically so generally my advice to people is, you know, who asked me the question when should I actually start fundraising? 

My advice is bootstrap until you get at least some revenue and then actually go out to venture capital angel investors, etc. What how does it work in fintech or insurance? 

I mean, you can really get some revenue there because it's so so regulated. What's your advice to those people? When should they start fundraising? Totally. So we look at fintech and kind of desegregate insuretech from it. 

I kind of put fintech into two camps. It's either gonna be some sort of an enterprise SAS play or a data play, right? 

Or it's consumer, like all of the challenger banks and Robin hoods of the world, and well, friends of the world that are really focused on on the customer acquisition piece. 

So, in, in, on those businesses you can do, you can certainly do financing Pre revenue. 

You just gotta get somebody who believes indivision and you need to be one of the things I struggle with with the challenger banks, is that. 
A differentiated pitch seems to be hard to come by and so it's tough. I find it tough to kind of invest behind a concept. Unless the team is the most amazing team I've ever seen. 

And then you're just placing a bet on the team and hoping that the vision kind of will come to distinguish itself thereafter, or the other side of the houses. Okay. 

So,
now you're going after, like,
the big banks, 

and you gotta get somebody to believe that that solution is so either proprietary or well needed that they can get behind it without having to have one of these large establishments basically validate the idea by 

either doing a or having some sort of commercial contract, so. 

But those commercial contracts are really hard to come by, because, as you mentioned several times is a highly regulated space, and you have to go through the compliance and regulatory departments of all of these institutions, which can take six to nine months in and of itself. 

Yeah. So, they can, it can be awfully cumbersome to get your book your first big commercial contract. And then, sometimes after that, it can truly snowball, depending on how you've built your sales pipeline. 

So, 

I think, 

you know, 

it's really much it's so much about the vision that you're painting the validation and proof points that you're able to provide and especially on the consumer front, 

how you're differentiating yourself and really what your go to market strategy is to have some sort of proprietary way, 

or interesting way to get at distribution. 

Right so, most of my listeners are first time entrepreneurs, and I bet some of them just have to work in insurance, or I hope to sell them work entry. So what would be your advice to someone? 

Let's say not taking, like, a, you know, not someone who's an execute at State farm or something like that. What's your advice to those people? How can they validate the idea that's in their head? 

So, they see some inefficiency, for example, in their company, but they don't want the management to take all the credit for it. And they just wanted to make a separate startup solve that problem. What's your advice? How should they start this process? 
Yeah, that is a great question. And and one that we think about a lot. 
So, 
I think that one of the interesting ways you can do that is rarely do I find that people get themselves into necessarily legal trouble, 

because there's so many different types of consultancies or regulatory hoops that you need to jump through. 

So, the good news is, is it's unlikely that you'll have an idea out of the gate, and you'll launch it and you'll find out. Oh, man this is highly illegal because there's so many checks and balances to make sure that you don't find yourself in those shoes. 

So I think it's, you know, first, I would always start with friends and family, because people don't love buying insurance. 

It's not something you wake up in the morning and you say, 

man, 

I cannot wait products forced to buy or you feel like you need to, 

to provide some sort of protection if things were to go around. 

So. 

So, 

first and foremost people, 

when they think about ways that their life is enhanced, 

it's, 

it's not because they have some great insurance policy and it's not the insurance brands or not brands that you interact with with high regularity. 

Like you would your bank. So, I think what's really important is to talk to friends and family and get a sense of, is this the type of product that they would ever think about buying for themselves and under which circumstances? 

And if the answer is an overwhelming yes, this is much needed. Then, I think you start building a board of advisors really? 

That come from well, informed areas without within the insurance market, who understand? 

Both kind of the legacy regulations and history about the space as to why this product might not exist today. 

So you can either learn from the failings of those, those who have come before you, or you can understand what hurdles lie ahead. 

And then also,
these people I like,
when they have kind of an eye towards towards startups, 
and they can understand what it's like to be under funded and and under resource, 
because that's really what all startups are at the end of the day. 

Right, absolutely. So speaking of resources I'm getting back to this topic of, you know, high barriers to entry. It's tough. I've seen, I mean, deep tech hardware and all that stuff. It's super high capital density. 

It's really hard to break into those fields. How would you recommend? Just any foundries in that, you know, high barriers to entry fields getting there. My personal suggestion would be, like, try some corporate venture capital. 

Maybe they could recommend use some goods accelerator or incubator that belongs to big firm or something like that. What's your beyond that? Yeah, I think if we're talking about the ensure tech market, specifically, if you're talking about. 

You know, 

access to capital and what I mean, 

by that is not fundraising capital, 

but it's access to, 

like, 

if you're starting, 

when a soft one was starting Hippo, 

he needed he was an MCA so he needed a a fronting carrier who's basically paper he could write on so that he could be able to legally able to conduct insurance throughout a variety of different states. 

And then you also need a reinsurance partner. 

So, that way, you need to, as an insurance carrier, the state mandates, that you have X amount of dollars relative to your premium, that you have set aside as reserves. 

So, that way in case, there are catastrophic events or losses at a certain rate. 

You have enough money to cover those and basically make good on the insurance policies that people are purchasing from you and that's where a reinsurance partner comes in. 

Because it's unlikely that a startup is going to be able to have the amount of dollars that's needed for balance sheet capital that a large carrier will have and a reinsurance partner will help take on those losses in order to 

to offset that.
So that the, the insure tech kinda grow without having to deal with. 

Those pain points and so at least initially and so, but getting from a fronting carrier and a reinsurance partner is no small feat and it is actually quite challenging. 

So I think if you're thinking about going the MCA and kind of ensure tech route, 

it would be to think through what type of partnerships you need to put in place and what type of proof points you need to have to prove to these partners that you guys are worthy of their partnership, 
and I don't think it's a terrible thing accelerators like, plug and play TechStars. 

They have insure tech focused tracks that can get you connected with the red advisors and in the right folks you know, I'd be remiss if I didn't mention generator, which is another accelerator they're based out of the Midwest. 

It's one that American family Ventures back, and I think they do a great job. They've got they've got a lot of tremendous companies that come out of that program as well. 

So I think all of those are worthy of a look and can kinda get you off on the right foot. They'll really more so help you with the tooling around how to get a startup ground versus insurance specific guidance. 

But nonetheless, I think a whole of that can be tremendously valuable as a first time entrepreneur. 

Great. So, I feel like we're getting too deep into the tech here, reinsurance, all that stuff. Let's get back to the more general stuff and let's talk more about American family Ventures. 

So, let's start with the simple question. What's your role there as a principle? What do you do? Yeah, so my job, I can't put it into a three or three to four buckets. One. 

I'm they're finding new deals for us to invest in. Then as the deal lead I am so. So to find the new deals. That incorporates the diligence. 

And I'm leading all those efforts and then, once we've decided made the determination that we're gonna invest I maintain the relationship with those portfolio companies and continue to help support them throughout their lifecycle. I then work on fun, specific projects. 

That will help us either perform better. Whether it's things that setting up a data portal so that we could get some sort of advantage or figuring out how to how to find better investments. 

Right things of that nature and this really supporting our. 

So, I think that is a, a big piece of it when you take money from outside parties is figuring out how you can create value along with the alpha that you're driving from an investment standpoint. 

So first question here that I would like to follow up with is the first thing that you mentioned, which is finding deals to investing, how do you find them? So do do you go to conferences? 

Do you mainly get them from your network where most of those deals come from? Yeah,
I mean,
look, 

I,
I spent a long time creating a network of other investors, entrepreneurs,
angel investors, 
folks that sit upstream to me downstream to me,
you know,
reading interesting blogs and meeting interesting people at conferences. 

It's really all the like, it's really tough to be perscriptive as to where a deal coming. You really will never know venture where your next deal, but it's just it's really good to have lots of Stokes in the fire. That's true. 

And speaking of choosing the investment, let's talk about the beach decks. What do you think are the three must have points on the beach deck? 

Yeah, so, first of all, so I'm gonna take this from a we invest like, I told you across a variety of different stages since your audience is first time founders. 

Let's talk about it from this precedes seed decks are really the first step they're ever gonna build. I'm really going to want to focus on the team, you know what's special about you guys? 

What have you what experiences have you had over the course of your career that has allowed you to a nurse this problem and really what attributes are going to set you up for success in chasing down the stream. 

So, I wanna, I wanna be a student of you, I want to understand what your motivations are. I want to understand your background in why are so passionate about this space? So that's highly important. The second piece is I want to understand that says along the state. 

So, why is this incredibly exciting both moment in time as well as opportunity to be chasing down this specific idea? 

What makes it a billion dollar idea or bigger and, you know, like one of my portfolio companies I invested in, they have kind of a three phased approach. 

They were like, phase one is to sell interesting software phase two is to then be able to expand those services and then we'll get into the details. But then phase three is. 

From phase one and phase two, we've unlocked this really interesting data asset. That's totally unique and proprietary to us and allows us to take over the world. And so, you know, you don't need to necessarily have the roadmap to how you're gonna do all of that on day one. 

But you need to have a plan, a logical plan in place. That makes sense. That an investor can follow. 

That helps you show and delineate why doing what you're doing is going to be immensely valuable at the end of the day and create an opportunity for real returns for the venture team that's backing you. 

So those would, I would, I would say, are kind of the two key ones and then, really for founders, I think it's, it's having a keen understanding of the use cases in the market size. 

So I think sometimes the biggest mistake that I tend to see is that folks are chasing venture dollars for an idea. 

That is a Super valid idea, but really is better served as a lifestyle business or something and you can bootstrap and not have to re, venture dollar store suited for that. Because you're not going to really be able to realize the venture returns. 
Because either the market size, or the use case is so specific that it's not going to really be able to 
unlock. 
Massive funding round set late around and that's totally fine. And it's, it's also okay to raise from angels and kinda just stay the angel path for a bit. 

But those would be kind of the, the big things that I'd want an entrepreneur to have thought through before they're, they're coming to pitch me. Right that's actually grade list important advice. Here. We're moving onto the last question off base episode. 

We choose a call to action. What's the one thing that you would like the listener to do? As soon as the episode was over? 

Linked in me message. No. And in all seriousness please do that. 

But in addition to that, I think it's really important to have to surround yourself with a board of advisors being an entrepreneur can be a really lonely road and you're going to need mentorship. You're gonna need guidance, you're gonna need a shoulder to cry on and you're gonna need people to celebrate with you and things go. 

Well, so it's surrounding yourself with that support network. That'll ultimately allow you to whether the highest as well as the lows. 

And I think that, you know, that, that that's probably one of the best pieces of advice that I can give and and be relentless it to be an entrepreneur. You've gotta be scrapping. You've gotta show hustle. 

I can say this when we're hiring at our analyst and associate levels that I want to see somebody who's knocking down the doors of startups to try to turnover every leap and come to the interview with something interesting and proprietary to share with us. 

Because I know that for the interview process, they're gonna do that when they're in the role. And that's the same thing that I want to see our entrepreneurs. I wanna see that hustle. I wanna see that tenacity. And so that would be. 

My recommendation is do whatever you can to to you're gonna you're gonna have the door slammed in your face thousand times. 

Don't be, don't be ignorant to the advice that's being given to you. There's sometimes, you know, really good advice, but also understand that everybody's gonna have their spin on it. 

And you're the one at the end of the day, he needs to believe in the vision and kind of be your biggest champion from day one. So don't let yourself get discouraged. Absolutely. That's a good advice. And hustling is probably the key word here. 

I think being the under dog being hustling in the startup field, the most important thing, I guess so, it's a good advice. Thanks a lot for that. I think that was a great episode. 

A deep tag insure tech. I never had those, so I'm pretty sure it was really interesting for all of the listeners, even those who are not in the fields. So thanks a lot for that tailing. 

I'll definitely leave a link to your LinkedIn in the description of this episode. So, please check it out people. Awesome. Thank you so much. Constantine.