Investment Analysis (1) — Spex, making inspection intelligent for insurance carriers
Investment opportunity analysis: Spex (https://spexreport.com)
Founded: 2012
Headquarter: Denver, CO
Funding: Seed round $875k in Feb 2016
Investment Thesis
Spex (FieldTek, Inc) is a mobile digital inspection platform that brings automation, efficiency, and data to the ecosystem of insurance carriers, independent adjusters (IAs), and construction firms. The value proposition of Spex’s digital solution is threefold:
o For insurance carriers, Spex creates an effective archive of property information and reduces cycle times and associated Loss Adjustment Expenses. It also brings transparency to the performance of service providers.
o For IAs, Spex offers integrated tools (Spikes for laser measurement) that enables accurate data capture in flexible formats such as photos, videos and, audio. It then enhances collaboration in the cloud services it provides.
o For contractors, SpexReports makes report generation automatic and standardized, and can be used for sales purposes, bid/estimate approval, and ongoing collaboration with the IAs.
As an ancillary benefit, large amount of data generated on the platform can further be used in business analytics products, thus providing more value-added services for all parties. Spex brings the same form of SaaS cloud-based workfoce solution that has improved business logistics for many industries, to one that has not yet seen such enhancement. The next funding round is expected in 6–10 months, at which time current trends dictate a series A MRR of $50k (2014) — $160k (early 2016). Based on Spex’s current pricing, the Louisiana flood of 2016 in which nearly 100,000 homeowners were affected could have generated $104k MRR alone (assuming the project takes 24 months to finish, 1 report per homeowner).
Property-casualty (P&C) insurance is a billion-dollar market in the US with low digital penetration and declining customer satisfaction. In 2015, net premiums totaled $519.8 billion and $15.2 billion were paid out in property losses related to catastrophes. Success in this industry strongly depends on operational performance. Of 2,500 P&C insurance companies in the US, the largest only has less than 10% of market share. With slow growth expectation (3% CAGR from 2014–2020) and a highly-fragmented market, participants in P&C insurance space are now emphasizing technical investment to improve profitability, leaving a huge potential market for productivity software. The founding team of Spex is comprised of experienced entrepreneurs with decades of experience in insurance, tech, and sales poised to fill this critical demand.
Exit Agenda
· IPO
o From 2012–2016, the median amount raised by a SaaS company going public is around $108 million, while LTM revenue at time of IPO is ~$80M (~$6M MRR). To reach this target solely on post-disaster report generation revenue, Spex should generate 266k reports month. Given that over 300 triggered natural disasters are registered in the US each year, Spex only needs to obtain less than 5% market share.
· M&A
o Spex would be a strategic acquisition target for SaaS companies that seek for vertical market opportunities insurance or construction.
Risks and Questions
· Customer acquisition costs (CAC). IAs and construction firms are mostly SMBs, meaning high CAC and low switching costs. Spex needs to develop a proven cost-efficient customer acquisition channel and launch high value-added features to its product.
o As a new and niche market, competition is still nascent. Happy Inspector (https://happyco.com/) provides a software to inspect, monitor, and analyze business assets. It graduated from 500 Startups and has raised $3.7M to date. Although the features are similar, Spex has a clearer value proposition by targeting the P&C insurance industry and fosters a higher barrier by connecting insurance carriers, IAs, and construction companies. Targeted marketing strategy has brought early traction. Current customers include insurance carrier Family Mutual, IA NCC, and restoration institute Claim Assist Canada (CAC).
o Early adopters are already enjoying significant improvements in efficiency. Current customers include insurance carrier Family Mutual, IA NCC, and restoration institute Claim Assist Canada (CAC). CAC has been able to increase its volume of inspections during Fort McMurray from five per day to 25 per day in part through the implementation of Spex.
· SaaS subscription business model relies heavily on demand.
o The model is flexible for adjustment to extract profit targets. Spex allows new customers a 2-month trial, followed with a basic plan that charges $10 per SpexReport, 25 minimum per month. After attracting more customers on board, the product could be expanded to fixed + on-demand pricing with team management and BI features.
· Unproven ability to develop a data analysis product. Spex needs to hire a high quality engineering executive to develop BI features to help retain customers.
Sources:
· http://www.iii.org/fact-statistic/industry-overview
· 2016 global insurance market insights, McKinsey report
· J.D. Power 2016 U.S. Property Claims Satisfaction Study
· https://www.cbinsights.com/blog/insurance-tech-startups-investment-growth
