There are over 1,000 Startups in the insurance industry looking for capital. But from my experience, InsurTech startups don’t even know that there are different types of capital needed to thrive and survive. What types of capital are needed to survive?
No. 1 – Investment Capital
Unless startups have bootstrapped their way to profitable growth, seed and venture capital investors are an essential source of money.
Why is that? Because InsurTech startups have limited operating history, are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan.
Hint: Incumbent insurers can provide this type of capital as a seed or venture capital investor.
The Investment Capital is used to set up operations and grow the startup.
No. 2 – Working Capital
Working capital is required to ensure that the venture is able to meet the on-going operational expenses (it’s not only about payroll and other bills, but also for the preparation of preliminary work in the project business or product development and for customer acquisition, B2C / B2B).
Three Types of Capital InsurTech Startups Need to SurviveTweet
Incumbent insurers can provide commission payments to brokers and MGAs or compensation within the scope of PoCs and projects.
No. 3- Underwriting Capital
Underwriting Capital AKA Underwriting Capacity is required to finance potential claims. InsurTech startups who would like to offer innovative insurance products and novel business models need this form of capital to indemnify policyholders.
Keep in mind: This form of capital is only provided by primary and re-insurers.
There are three types of capital InsurTech startups need:
- The 1st type is investment capital: It’s needed for setting up and growing the company.
- The 2nd type is working capital: This is needed for financing day-to-day operations, pre-financing PoCs and projects, and of course for acquiring new customers like in the B2C or B2B markets.
- The 3rd type is underwriting capital or so called Underwriting Capacity. It is vital for financing potential claims.
Remember: All three types can be provided by incumbent insurers, No. 3 only by insurers.
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