ManchesterStory’s Gross says current insurtech investor market approaching “normalisation”

ManchesterStory’s Jason Gross has said market conditions for insurtech venture capitalists are improving as he called 2024 a “normalisation” after a period of froth.

The VC investor spoke to The Insurer TV at last month’s InsurTech NY Spring Conference in a wide-ranging interview where he laid out his firm’s approach to the current environment and how founders are approaching tougher conditions, as well as the likelihood of M&A.

“There's this old adage that says: ‘It's either a good time to raise money, or a good time to invest money’,” Gross said, making the point that the current trough in insurtech funding is working to the benefit of investors.

Gross spent 20-plus years on the carrier side, having worked at EMC and Nationwide before joining ManchesterStory in late 2021. He said that now is “the better time to invest” than when capital flooded the insurtech market.

ManchesterStory has been around for 7 years and invested in 36 companies across three funds.

“If you don't have to be raising capital right now, you probably shouldn't, because the cost of capital is higher. All that said, what 2024 for us really feels like is a normalisation,” he continued.

Gross said the spike of insurtech investment in recent years “was artificial”, where founders “were asking for and getting unrealistic multiples” on revenue.

He also disclosed that ManchesterStory – an early-stage investor – led a Series B round after passing on the firm’s Series A, saying that “the market has come back into our sweet spot”.

Veteran founders more “realistic” about funding environment

A major theme in insurtech in the last year or two has been how founders manage to secure funding while avoiding a down round or ending up with a deal that has heavy preferred equity issuance.

Gross said “some” insurtechs “are doing better than others“ and that ManchesterStory largely invests in repeat founders that understand the “rollercoaster” nature of launching companies and are “very realistic”.

“That doesn't mean that it's still not a bitter pill,” Gross said of founders accepting down rounds.

Gross said that founders in whom he did not invest have on occasion told him that they should have taken deals at lower valuations, and that at the peak of the market, it was difficult for founders to decline elevated valuations.

“[If I’m a founder], I'm going to say yes, because that is a pretty big ego boost. My company is worth [let’s say] $40mn. Why? Well because someone thinks it is,” he suggested.

Now, Gross said many of those companies are raising at sometimes half the valuation, which he acknowledged “sucks”, but said that valuations were coming “back to normal”.

“And that's why they're like 'You were right, we raised at too high a valuation, and we're paying for it.' Because there's also this notion [that I remember] from my political days, that perception is reality,” he explained.

Gross said that the prospect of a down round has the potential to carry a stigma in the current environment.

“But because it's now a big down round, even if they're still seeing growth, the perception is, there's something wrong, and it's going to be that much harder to raise in the future,” he explained.

Strategic investors offering value to start-ups

Gross couldn’t recall any instances where founders elected a more modest valuation, while also disclosing that ManchesterStory frequently declined to invest during what he termed an “18-month bubble”, recognising the responsibility that comes with being a steward of capital.

“Across our funds we're backed by 24 insurance carriers, brokers and wholesalers and we have a responsibility to them as well to make good investments. That doesn't mean they're all going to be going 10x or 100x but if there's not a path to a reasonable return, we just can't do it,” he divulged.

ManchesterStory’s first two funds were devoted to early-stage companies, largely in the insurtech sphere, and in 2023 it launched the BrokerTech Fund in conjunction with BrokerTech Ventures to specifically invest in broker-centric innovation.

The venture firm’s strategy includes typically leading rounds where it gets a board seat and is typically “rolling up [its] sleeves and trying to help [its] companies grow.”

“We're not going to invest in, say, medical hardware, but we have invested in a telehealth back-office SaaS platform,” he explained.

Part of ManchesterStory’s value proposition is its industry backing, which can be helpful to founders, along with sourcing capacity for MGAs.

Gross emphasised the importance of capacity to MGAs, telling a story of one firm his company invested in that lost their capacity five days before renewal, which he said left them “dead in the water”.

“So, it's really important for MGAs, as they start to grow to have some diversification, have a panel together, so you're not reliant on a single point of failure,” he commented.

Gross acknowledged that carriers tend to have limited resources allocated to “new things”, but that founders tend to pitch carriers on items that are low on their priority lists.

“As a head of innovation, if I can get one or two things done this year, I'm going to be doing a happy dance – like, that's a home run, if not a grand slam,” Gross said of carriers’ mentality.

He also said some insurtechs face challenges in failing to appreciate the length of sales cycles in certain areas of the industry, like employee benefits.

“So, if they're not looking two, three years ahead, there's no way they're going to get the type of growth that I'm sure most founders would like to see,” he explained.

Watch the full interview with ManchesterStory’s Jason Gross to hear more on: