Informed Tip of the Week: Read yesterday’s post about how we uncovered one of the big insurers promoting inaccurate information in its TV ads.

Will Kermit find the Rainbow Connection before
investors find an Insuretech Unicorn?

Last week, I wrote the epilogue on Insuretech, Act 1. Today, we will move on to Act 2, the Revenge of the Tortoise. No, no, that’s tired. I’ve beaten that into the ground. We all know the merits of the tortoise at this point. It may or may not prove better, but there’s little more to say there.

It’s time for a new analogy. Wait, I’ve got it…the fundamental problem is startups think they should aspire to be “unicorns”. But why? In startup speak, all being a unicorn means is you achieved a certain market valuation. It says literally nothing about your business prospects.

It’s like drafting football players solely on speed. Sure, if you are already good at football, being faster is really important, but there is a reason most track stars don’t play football. There are other skills required. Speed alone tells me nothing about whether you will be a good football player or not.

Similarly, while raising money is an important part of being a startup, fundraising success alone tells me nothing about whether you can run a successful business. Becoming a unicorn is a completely misguided aspiration.

I will discuss what a real unicorn looks like a little later, but first, I need to finish the analogy. Companies that pursue empty goals that make you feel good for a little while but leave you feeling worse in the end aren’t unicorns.

They’re Candy Corns, full of sugar and empty calories. Sure, you get that initial dopamine rush, but if you have too many, you have a sugar crash and regret it. And just like tech “unicorns”, candy corns are plentiful and oversupplied.

Most of what went wrong in Act 1 was investors believing candy corns were haute cuisine. There are still a lot of candy corns out there. There are very few true unicorns. Which is as it should be. Because unicorns are supposed to be rare.

Why Unicorns Are Rare

A true unicorn is unconcerned with its short term valuation. It focuses on building the best long term business. Rather than try to please investors or create buzz with customers, it provides solutions to customers. And by solutions, I mean actual solutions, not something cosmetic that sounds good at first but proves empty upon further inspection.

It doesn’t take shortcuts or rely on “cheat codes” to get ahead. It understands that real change is hard because, if it were easy, somebody would have done it already. But if you can execute on something hard, you will have created real value that is hard for others to copy. Unicorns create franchises, not features.

A true unicorn is willing to do things differently because, after all, if you do things the same way everyone else did, you’re average. That’s called a horse, not a unicorn.

It understands most people say they want a unicorn, but don’t really mean it. Because betting on a unicorn is riskier than betting on a horse. People understand what a horse does. It may not be exciting, but it can be explained.

If you found a real unicorn, nobody would actually believe you. And nobody wants to look stupid and admit they bet on a unicorn and be proven wrong. It’s safer to bet on the horse, even if ultimately disappointing.

So the reason it’s hard to find unicorns in the startup world is because most founders don’t actually want to be one. It’s too hard.

Characteristics of a Unicorn

Now, that you understand why unicorns are hard to find, let’s describe what one might look like. Remember, nobody has seen one, so what I’m about to describe may or may not exist. If you think you’ve seen one, let me know.

Let’s go back to that comment from above. Unicorn create franchises, not features. I’ve said this too many times before, but a user experience is a feature. Usage based insurance is a feature. IOT is a feature.

By contrast, Chubb is a franchise. Progressive is a franchise. USAA is a franchise. You don’t have to like everything they do and can find plenty of room for improvement, but they have established roles in the marketplace that are hard to displace.

And yes, those are hard to create, but look at what Ren Re did in cat reinsurance or Hagerty in specialty auto. There are MGAs many of us don’t even know that have franchises in a specific niche. You don’t have to be large to have a franchise.

But you do have to do one thing. What do all these companies have in common? They have a unique customer experience you can’t replicate. That’s the secret to being a unicorn!

OK, now that we know the secret, can I tell you how to create one? No. If it were that easy, I’d already have finished creating the one I’m trying to build. That’s where the hard work comes in. But if you’re focused on the wrong goal, you’ve got no chance to get it right.

What I can tell you is what a unicorn looks like if you find one.

First, they have loyal customers. That means their retention is high and their acquisition costs low. That might remind you of what in other industries we call a subscription model. Subscription models are highly valued and for good reason. Yet, you don’t see too many insuretechs trying to create a subscription model.

This approach naturally leads to focusing on maximizing underwriting income rather than sales. Remember from the last post Progressive’s “grow as fast as you can at a 96 or below“? Given insuretechs have large expenses early on, the proper focus is likely on the technical ratio instead, but have you ever heard an insuretech speak of a technical ratio???

Finally, they produce lots of cash. Because retention is high, they don’t have to spend a lot on new business. Because they have loyal customers, loss ratios are better than average. Even if G&A is average, that’s a pretty good business model.

Now, let’s compare this to some candy corn business models.

Characteristics of Candy Corns

I’ll begin by describing some typical candy corn behavior and then we can evaluate some popular business models to see whether they look like a unicorn or candy corn.

Focusing on market value over franchise value

As I said up top, achieving a certain market value at an early stage is really pretty irrelevant. It tells you nothing about the ultimate prospects for the business. It only means you know how to check the right boxes that investors like to focus on.

Coincidentally – actually, not coincidentally at all – the remaining mistakes all flow from the first one. In other words, companies doing counterproductive things to try to maximize a valuation rather than their franchise value. People follow incentives and when they think the game is about maximizing the valuation at the next round, they pursue the wrong incentives.

Obsessing over top line growth

I covered this already. The goal is to maximize underwriting income or at least the technical ratio. The only reason candy corns chase premiums instead is because they are trying to please investors rather than customers.

It’s hard to tell investors that growing customers as fast as you can is not the main objective, but it’s not. If your investors don’t understand the difference, then you need to educate them or find different investors. Which leads us directly to our next mistake.

Chasing the wrong customer

In order to drive those sales higher, insuretechs tend to focus on the wrong customers. Instead of pursuing those who will be loyal to their unique offering and help build the franchise, they scrape the bottom of the barrel and pursue high churn customers. After all, there are more of those shopping than low churn customers! And the mission is to grow as quickly as possible!

But, by definition, high churn customers are not good prospects to be long term customers to build your franchise around. They may give you that initial sugar rush of appearing to succeed, but is it really better to have 10 customers with a 50% churn rate than 6 customers with 90% retention?

Not only does the math work better to go a little slower (less marketing spend, better loss ratios, etc.) but you don’t end up with a customer base who views you as a commodity. The ability to give customers what they really want and create a unique value proposition is much higher when you are focused rather than scattershot.

Relying on cheat codes

I talked about this in the last post and it goes back to what I said above about responding to the wrong incentives. Taking short cuts like writing high churn business, relying on unreliable capital providers, or purposely pricing business to a loss only serves to let you think you’re winning when you’re not. It’s another sugar rush.

Candy Corn or Unicorn?

And now, my friends, we get to the portion of our show where we play America’s favorite game…Candy Corn or Unicorn? That’s right, I will highlight some popular startup business models and you have to guess what kind of corn they are. Ready to play?

Embedded Insurance

Let’s jump right into the deep end of the pool! What’s more popular in insuretech today than embedded insurance? It “solves” for distribution and has a “captive” audience to help conversion. What could be better than embedded insurance?

I can think of lots of things, actually (and I’ll write about it at more length someday). For starters, you are a complete commodity player. Congratulations! You are the batteries that come with the toy. Quick, what brand of batteries came with that last toy? Sorry, you have no franchise. Thanks for playing though!

There are a lot more issues with embedded I’ll save for a future post, but people like embedded because it allows you to show growth quickly. That sounds an awful lot like a Candy Corn.

Don’t worry if you got that wrong, you can still play in our next round.


One of the favorite cheat codes insuretechs like is using a patsy to put up the capital so they don’t have to. First, we tried reinsurers and realized that might not work in the long term. So for act two, these clever financial engineers decided to abuse reciprocals.

Now, there doesn’t have to be anything wrong with a reciprocal. Farmers, Erie, and others have done very well with them. However, everything has a catch because, if it were that easy, everyone would do it!

What’s the catch? It is the rare customer who understands the risk they are taking funding a reciprocal when they buy a policy. Sure, if it’s a well capitalized one that’s been around forever, the odds of a capital call are tiny. But a startup reciprocal? With no history of profitable underwriting? Writing volatile lines of business?

That is a recipe for potential disaster and the customer has no idea. Tricking your customer isn’t how you build a franchise. It’s actually about the worst way to do so. I think it’s safe to say reciprocal models are Candy Corns. OK, we have time for one more round before we run out of time.

Cyber MGAs

I think the only thing more popular these days than an embedded insurance model is a cyber MGA. But are they a Candy Corn or a Unicorn? Let’s find out!

On the surface, cyber MGAs sound a lot like personal lines startups. They are highly dependent on reinsurance, there is a question about whether it can be underwritten profitability, and there is significant tail risk.

These companies are, nevertheless, growing very fast. And it’s not like they have discovered some new market. There are plenty of brokers who are more than happy to sell you cyber and tout how they can help protect the corporate as well with risk services.

So is there anything here or are the new companies following the personal lines playbook and hoping for a different outcome? It certainly feels the same. If there is a difference, it will be that they are able to provide services that truly do reduce gross losses unlike what the established brokers are able to do.

I’m not close enough to each competitor’s model to say this can’t be done, but I haven’t yet seen evidence that it is happening. Certainly, industry cyber results don’t suggest there has been some major breakthrough in loss mitigation.

So, for now, I will call these companies suspected Candy Corns but I will withhold providing a final answer until I have more definitive data.

And that will do it folks. We’re out of time for today. But join us next time, for another episode of Candy Corn or Unicorn. Just like the Rainbow Connection, if we keep searching, one day we’ll find a Unicorn.