Climate+fintech, AI as a force for good or an insult, VC platform functions
The best ideas come from anywhere and scale everywhere.
Climate change will create new fintech opportunities
I live in the Bay Area. My home has been non-renewed by insurance companies, not once but twice. Last year, I signed with State Farm, which just announced it would stop taking on new customers in California.
They are not alone. A.I.G. and Allstate just announced similar moves exiting the California market because of climate risk. What is striking about A.I.G'.’s move is how broad they have been, curbing sales in 200 area codes across New York, Delaware, Florida, Colorado, Montana, Idaho and Wyoming.
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Part of the problem of course is climate change, and very different risk profiles. “Natural-disaster losses from 2020-2022 in the US caused a record $275 billion in insured damages, according to the American Property and Casualty Insurance Association. Those figures, combined with the impact of high inflation on replacement costs, have insurers scrutinizing vulnerabilities beyond traditional regions of risk.”
Others barriers are regulatory. For example, certain states limit how underwriting can take place, notably how much insurance companies can use forward-looking modeling (instead forcing them to consider only historical losses). They also limit how much prices can change year to year.
This makes it easier to leave a state than to try to adjust prices.
The last challenge is with customers. Many consumers have not yet adapted to the new reality and increased their willingness (and of course ability) to pay.
How much should your home insurance cost? Well then another question: What is the percentage chance your house might burn down in the next 100 years? This was a question a friend at a reinsurance hedge fund asked me. My answer was definitely over 1%. Huge oversimplification of math but: 1% * home rebuild cost (ignores inflation from home construction if everyone builds at once, interest rates, etc), and the number for us felt meaningfully higher than what we were paying for home insurance. If it feels like a deal, for us it probably was. My next best option was Lloyds of London, 4x the price.
Already the government has stepped in to fill gaps left by exiting insurance companies. For instance, when flood insurance started becoming uneconomical, public services grew. “Now, over 90% of residential flood insurance in the US is underwritten by the National Flood Insurance Program through the Federal Emergency Management Agency.” In Florida, Citizens, a publicly funded insurance provider, has seen demand swell.
I suspect these will get bigger and bigger over time.
But the cracks among incumbents will create opportunities for fintech. Two portfolio companies are at the forefront of this change. Kin (which I had invested in while at Omidyar Network) is doing direct insurance distribution in climate affected areas. Kettle is betting on the reinsurance side.
But there will be much more demand to come for new offerings, from everything to data, financing and more. Incumbents will have a harder time to react, particularly given a mix of other opportunities and various hurdles to changing pricing and strategy. Here fintechs will win.
If you’re working in this space, please let me know. I’d be excited to discuss.
Will A.I. save the world? But also being called an A.I. is apparently an insult? Is regulation coming to stop both?
Is AI good for the world? Fascinating piece challenging the naysayers. “First, a short description of what AI is: The application of mathematics and software code to teach computers how to understand, synthesize, and generate knowledge in ways similar to how people do it. AI is a computer program like any other – it runs, takes input, processes, and generates output…A shorter description of what AI isn’t: Killer software and robots that will spring to life and decide to murder the human race or otherwise ruin everything, like you see in the movies. An even shorter description of what AI could be: A way to make everything we care about better.
Of course, the status quo today is not yet a panacea. In fact, calling someone an A.I. is becoming an insult on their writing. “Part of why AI is an insult is also that we’re in the middle of an AI hype cycle, where every company is trying to stuff anything and everything into a chatbot. These jokes serve to ground us in the technology’s present-day abilities: A bot can write a college paper, but can it write a good college paper?…But there’s a darker spin. Humor, of course, is a coping mechanism; jokes about AI are on some level an expression of the anxiety around these tools. Bots are already replacing some jobs, and surely will replace more.”
And the space is moving fast. Which is why caution is still warranted. ChatGPT’s cofounder Sam Altman signed an open letter calling for regulation on the space.
The risks are real. “This frantic gold rush could also prove catastrophic. As companies hurry to improve the tech and profit from the boom, research about keeping these tools safe is taking a back seat. In a winner-takes-all battle for power, Big Tech and their venture-capitalist backers risk repeating past mistakes, including social media’s cardinal sin: prioritizing growth over safety. While there are many potentially utopian aspects of these new technologies, even tools designed for good can have unforeseen and devastating consequences. This is the story of how the gold rush began—and what history tells us about what could happen next.”
Many entrepreneurs joke that a good venture capitalist is one that doesn’t destroy value. Anything beyond is gravy. But there are so many ways for venture capitalists to exert impact on their portfolio through expertise and services.
A fascinating analysis on platform teams as an example demonstrates the potential impact. Among larger venture capital platforms that had platform teams, a platform produced a 0.5x TVPI lift and 1,100 basis point improvement in net IRR. No surprise it is one of the fastest growing job categories at VC funds. “In 2022, one in eight core employees at a venture firm (13.1% of core team members) are focused on Platform.”
The news seems to say San Francisco is dead and everyone moved to Austin or Miami. And yet, it doesn’t feel that way on the ground, particularly with the current A.I. boom. “But such busts are almost always followed by another boom. And with the latest wave of A.I. technology — known as generative A.I., which produces text, images and video in response to prompts — there’s too much at stake to miss out.”
My thesis is that technology will continue globalizing. It will also regionalize with certain hubs becoming leaders in particular domains. Think cyber in Tel Aviv, fintech (at least pre-Brexit) in London, consumer in New York, and what is seeming to become true, A.I. in San Francisco.
Interest rates rising have hobbled many technology stocks. But it is also creating new opportunities, notably in fintech. Looking at Coinbase and Robinhood’s public stock performance as examples: “the changing revenue mix at both Coinbase and Robinhood makes it clear that their ability to generate material amounts of revenue off cash balances (and the crypto equivalent) is changing the game in their favor.”
Why type of risks are venture capitalists comfortable taking? Good piece that boils it down between existential and price risk. Existential risk “is the risk that the startup simply does not work. It’s a good idea, but it’s missing in timing, product market fit, or founder grit to survive long enough in the market. The existential risk is the non-zero chance that the company goes to zero”. But for these businesses price risk is low - if it works it doesn’t matter that much what the entry valuation was, as it will be low no matter what. At later stages however, the risk equation flips toward price risk; “by Series B or C or D the likelihood that a company purely goes to zero falls drastically. But on the other hand, your risk of over-paying, or investing at too high a valuation, become greater and greater. Thus the risk mitigation in growth rounds is very different than in pre-seed or seed rounds.”
The markdowns are starting. “The California Pension System, the largest pension system in the U.S. whose investments are sprinkled across the globe, injected $368.8 million into Silver Lake Partners’ 2015 V fund. In the quarter ending September 2021, the value on that return stood at $668.3 million. However, by the same quarter in 2022, this figure was reduced by $100 million.”
Book Movie of the month
The best ideas come from anywhere and scale everywhere. That in some ways is the mega mantra of this newsletter.
And in that vein, I loved the Tetris documentary. As the NY Times reviews it: “When the Communist Party bans your video game from state computers because it’s lowering workers’ productivity, you know you have a hit on your hands. But in 1988, few people outside the Iron Curtain were even aware of the existence of Tetris, never mind its potential to enchant millions. While its Russian creator, Alexey Pajitnov, was giving away copies for free, a savvy programmer named Henk Rogers was witnessing a demonstration of the game at a Las Vegas trade show and having his mind blown.”
But getting the deal done was something else.
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