INSTANDA CEO talks insurtech investment & funding

Tim Hardcastle is the Co-founder and CEO of INSTANDA one of the UK’s most successful insurtechs which recently closed a US$45mn funding round

INSTANDA is currently thriving - and recently raised US$45mn in its latest funding round, despite the harsh economic environment that has seen many goring insurtechs contract, freeze hiring and even reduce a percentage of their staff. We caught up with Tim Hardcastle - a veteran of the insurance industry and the company’s dynamic founder and CEO.

Tell us about your role, background, and how you launched INSTANDA?

When you're starting a company up, there usually isn't an extensive recruitment process to decide who's going to be the boss. It's a question of who's got the passion and the bravery that's willing to take on the particular challenge that you feel needs to be addressed. That was a passion that we felt very strongly. I felt particularly strongly.

Prior to setting up INSTANDA I'd been in the industry as a CIO. I understand insurance, but I think it was useful. I'd been a CIO in other industries as well, prior to joining insurance. I had a very good appreciation of technology and change, both at scale, and a retail interface, and the business to business environment. The insurance exposure that I had brought a lot of that experience together to allow me to think about what was good for the insurance industry. The challenge that the insurance industry faced was rooted in the use of technology that was stopping the industry from moving forward.

That's where INSTANDA was born. It was to create the opportunity to give creative, imaginative people in insurance, the actual chance to do something without being held back by archaic ways of working, and technology that just doesn't change easily. 

INSTANDA recently raised US$45mn in funding. What’s it like raising capital in the current environment for insurtechs?

There is still an appetite. Capital is always looking for opportunities to create a great return. The fundamental shift that we've seen, and the analysts have written extensively about it, you can read about it yourself. You only need to look at a few of the headline-grabbing names within inure tech. Essentially, the primary shift has been that the valuation of those organisations has dropped dramatically. We're not talking about a small change, we're talking anywhere between 80 and 90% reduction in value. That sentiment comes from a number of factors.

Fundamentally, there's been a shift in appreciation of the hit and hope model, which was these companies are fast growing, they'll generate revenue, and with enough funding, they will at some point in the future, yet to be determined, not to be described, achieve profitability, and that the valuation models that were applied to a revenue multiple with this hit and hope view, that profits would be seen as collapsed as a prevailing norm, as one of the big shifts in valuations.

What is the current insurtech funding market like right now?

If you look at the statistics, the funding in 2021 overall globally, was something in the order of about 85 to 87% higher than 2020. It was reaching about $10bn globally. In the first quarter of '22, we saw investments in the order of $2.2bn. Pretty much the same rate as '21. I haven't seen the stats yet for Q2, the calendar Q2 that is. That's where there will be a shift in capital finding targets to invest in.

The reason why there may be a delay, and a slowdown, is because there's this adjustment needed. The fundamentals are there, but the capital needs to find organisations that have got, let's say, a slightly more robust valuation and view ahead of where they're going to become profitable. We'll touch on the profitability aspect later, as well. But, the conditions are obviously worse from the value side, but there's still the appetite there and the fundamentals are still there.

How do you go about ensuring a successful result for a funding round within this period of time? 

I think it is, and it depends on where you are in the cycle as a growth company. For example, if you've raised money historically at quite high valuations, then you're going to come into the environment right now. And if you need to raise money, you will not be able to get the same valuation you had historically. Therefore, simply put, you'll go into a down round. A down round is not good for founders because it creates a higher level of dilution for them and existing investors. It will usually trigger anti-dilution protection rights with existing investors, so everyone is negatively impacted.

Which types of insureds will struggle most with the current climate, in your opinion?

It will be very challenging for those companies that are looking for funding right now and have had a history of fundraising at high valuations. For those companies that are looking for funding now, that maybe don't have such a long history, it's just a reset of expectations on value. As I said, the capital's still there. What we are aware of is that the investors today are still focused on similar metrics as they were no less than three or four months ago. That's growth rates, and customer churn statistics, so that you retain your customers that you're winning, but there's a higher focus in, let's call it, a path to profitability.

The argument goes a lot of high-growth companies need to invest ahead of the curve, and put money into sales and marketing ahead of when the revenue's coming in, obviously, but there needs to be a path to profitability. A lot of the venture capital firms will be focused on an extended set of metrics, which includes rates of cash burn, importantly, a path to profitability, but it's still very possible to raise money.

We saw recently, Wefox, raised a significant amount of money. There's a wider point that many other aspects of the market are still thriving. With interest rates rising, inflation rising, capital has got other places to potentially go, other instruments that you can use to get a return.

What's INSTANDA's journey been like in relation to this most recent round?

The Instanda platform is not just an innovation enabler. It's not just bringing ideas to life, and helping people take to market really creative and new propositions. It's also a platform to run the entire insurance entity's business on. 

That kind of transaction between ourselves and our clients is a very strategic one. The sales cycle is quite long, and the consideration that's given to us as a partner is a very serious and extensive one. If you look at the VC model and the appetite for capital, it's expecting quite a short-term horizon for return, something in the region of typically three to four years. There's a fundamental mismatch between a lot of VC capital money with an appetite for a high return, with a core strategic technology that's going into an organisation that takes quite a while to sell, and it takes a while for that technology to be fully deployed and a business to add more and more business to it.

What elements have been critical to the process?

We've been fortunate because our implementation time scales are so rapid, and our model as a NOCO platform for insurance allows the clients to self-manage and add, make change. We deal with some of the inherent problems of old technology in that way, but we still have to recognise that there's a cycle that we work under. 

We were very clear in our outlook that we chose a different kind of capital provider. It was a growth equity firm, not a VC firm because we didn't believe there was a full alignment between VC money and hunger than growth equity. Growth equity has a slightly longer medium-term outlook, and slightly lower expectations and returns, but then valuations are a little bit lower too than some of the very stratospheric ones that VC firms might offer. We took a very, I would call it, mature, but the circumspect view on what was the best capital provider for us.

We worked with Deloitte as our advisors, to help us select and choose the right partner. I'm absolutely over the moon with the partner that we found; Toscafund is a brilliant partner. They even were with us very closely on the investment before the Insuretech valuation collapsed. They concluded the deal after the Insuretech valuation collapse, and as a credit to both organisations, there were no material changes to the premise for investing. What they saw was our appetite and preference for them. There were no material changes to any aspects of the transaction. 

Would you say a lot of insurtechs are going to have to seriously consider changing their business strategy and modeling to fit into this new economic situation? 

I think that's a really good observation. We never fell foul, let's say, of what I would call the hit and hope model. When you're in an environment where capital is quite freely available, and you can get high valuations, and questions are not being asked about where you will become profitable, and where your return to be an all more normalised, predictable business, which is making money. If questions are not being asked about that, capital is freely available, and there's a high valuation being given, then I think some founders have fallen foul of that.

Their business then has been constructed on what we would now call a bubble way of looking at the world where they probably have not engineered the company in the right way because then they are going to struggle to adapt to this new environment where it's saying, as I said earlier, the fundamentals of what insurance needs still exist, but the economics and the maths around how you look at a company have fundamentally changed.

Therefore, that has an impact for those that haven't designed their business in that way. What we'll see in the next six to 12 months is a fallout. Essentially, we will see companies will have to conserve cash, but they'll have to make adjustments and cut costs.

Then we'll see that impact rippling out through many of the companies that haven't set themselves up in the right way for what I call business fundamentals. Maybe one could argue that I'm blessed because I'm an older entrepreneur, so I've been aware of bubbles in the past, going back to the dot com bubble, I was in the industry. So, there are certain mindsets that having a little bit of experience on your side is helpful.

What does this latest funding round mean for INSTANDA, and what plans are on the horizon?

We're very, very clear on our product market fit. We're very clear on what makes us successful. Again, that was one of the big attributes that Toscafund valued. It was, we had a thesis that our platform could go into any market and any product line, bring value to the management that's using it, and they, over a course of time, can become fully self-sufficient.

We're in 13 countries now. Part of the funding will be to double down in some of those key markets and make sure that our geographic foothold to prove the value of the platform will be extended and deepened. Part of the funding will be used to naturally extend the platform itself. There's a huge appetite within insurance for new ways of working, doing the same thing, but in a different way, innovation is sometimes called that, and then to be in control of it, and our platform enables that. 

We make a change on our platform because we have one code base that enables all of our clients. We make one change, and every client is able to use it. We have this very rich dialogue between insurers at the frontline saying, how about this, and can we make that change? We then are able to rapidly stress test that with other clients. Then we can make these changes on the platform, and bring them back onto the platform within weeks.

What’s your current biggest challenge in terms of managing company growth? 

There's a lot for us to do in terms of staying at the forefront of what the industry requires, and trying to jump ahead in a few places. There's a lot of investment needed on the platform, and then equally we can't reach all of the parts that we would like to reach. We want to be extending our network with our partners. We'll be investing more with our partner network as well.

Then finally, the thing that does sometimes trouble me is how are we going to bring on the amazing talent, and are we doing the best that we can to develop the talent we have? If I was to take a step back and look at our future, the biggest limiting factor is, can we find enough talent to take this wonderful platform that we have, and the wide range of market opportunities, to drive our growth forward? That's a challenge, not just for us, but for every company that I talk to.

Companies are not hiring as feverishly as they were before. Does this mean the war on talent for insurtechs might be easing?

We're not seeing it yet in the market. I think the ripple-out effect of some of these changes in the appetite for capital will start to impact companies over the next six to 12 months. It's quite sad to see companies not thriving, but I would take it back to the fact that if you haven't set your business up with the right fundamentals, then there is going to be that Darwinism impact.

The insurtech/fintech, collapse has just accelerated, perhaps some of those things that would've happened in over a longer timeframe. It's not nice to see, but arguably it's probably in the best interest of everybody, that those things happen quickly, and that people won't be short of opportunities because there are others out there.

What does that mean for insurtechs going forward?

There's an expansion in those companies that are further down the track and growing, and really sizing up. I don't think those people will be unable to find a job. It's just sad to see some of the smaller, and some of them are very innovative, but maybe they haven't got the fundamentals quite right.

Overall, the industry will still continue to do the things that it's doing, which is exploring the boundaries of what's going to be good for the customer, and what they want. We're certainly right at the centre of that. That's what we enable.


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