Reflections on Kin’s Journey: Investing with Kin-viction (Part 2)

In our last post, we discussed the origins of Kin (fka Bright Policy), and how we invested primarily based on our excitement about the founding team. In this post, we wanted to share key learnings about the importance of investment conviction.

Kin’s Florida Man

At Commerce Ventures, our mandate is not to lead rounds with our initial investments, and this has led us to analyze fundraising and round dynamics quite carefully. Some firms like us choose not to lead rounds because of specific investment strategies and mandates. But we have also observed firms that lead sometimes and other times prefer to wait until a lead is identified — in other words, they or their partnerships are waiting for social proof.

Social proof is the habit of copying or taking comfort from the actions of others, in determining one’s own actions.

At Commerce Ventures, we look at opportunities differently. We love to work with other great investors, but we also feel like we need to come to our own views and conviction on investing since that is what our investors expect of us…even if we’re not leading.

Conviction, by definition, is a firmly held belief or opinion that exists (or ought to exist) regardless of social proof.

It also might be intuitive that during a second/follow on investment in a portfolio company, existing investors have better information than new investors. The fallacy that often persists in the venture industry, is that interest from new investors is somehow required to validate the portfolio company, rather than a firm developing its own sense of conviction with the information they already have.

Our Experiment with Kin

We observed some of these dynamics early in our experience with Kin, and the insights we’ve gained as a result have helped us reshape our entire approach to follow on investments. At the outset of multiple Kin rounds, we saw an abundance of prospective non-lead investor interest (sometimes where mandates didn’t permit leading and others who were waiting for social proof), but a shortage of lead investor conviction.

The interesting experiment we decided to run was to see if we could convert CV’s high conviction, non-lead second investment into playing a small round leadership role to help the company catalyze its fundraising.

The short answer was yes — with a $300k ‘lead’ investment, we were able to unlock a $4 million total seed round for Kin. More importantly, this single experiment unveiled a completely new set of opportunities for us to help our portfolio when we have conviction about the company and its trajectory.

Sean Harper at the 2019 Commerce Summit

What Contributed to Our Kin-viction?

We try to evaluate any investment in a similar way (regardless of initial or follow on), with the same core criteria: team, market, product, and financials.

The benefit of being an existing investor is that you likely already understand how the team operates, the dynamics of the market, the value of the product, and the potential scalabilty of the enterprise. It’s worth noting that the biggest point of ‘re-diligence’ we typically focus on confirming is product-market resonance, and this helps counter the inherent ‘insider bias’ we may have.

Team: In the case of Kin, we saw an impressive and scrappy team of founders demonstrate that they could also scale customer acquisition. More importantly, we saw how they responded to an early speed bump when their initial insurance partners didn’t perform as expected (a common challenge in InsurTech). Their response informed us about the team’s resilience and ability to solve important problems, which resulted in a better, more scalable Kin.

Market: We were always optimistic about the market opportunity in homeowners insurance for reasons shared by Sean in his first deck (the one we included in our last post). If anything, all of the data we saw after our first investment only confirmed how poorly served the market was, especially in catastrophic risk states.

Our market and product analysis on Kin’s Series B round

Product: In insurance, product means two things:

1. the digital interfaces and user experiences (UX)
2. the actual insurance policy (e.g. homeowners, HOA, renters, etc.) and its associated risk and profitability

We saw from the early days that Kin could create a digital-first product with inherently better UX than the incumbents’. The UX product was also attached to a reasonably priced policy where Kin could manage the risk as well or better than incumbents, because of their early adoption of alternative data sources and analytics. The economics of these policies were attractive with long lifetimes and relatively quick paybacks (and a high LTV/CAC ratio).

Financials: Analyzing the financials of a business really entails placing all of the above in the context of scalability. Insurance businesses are generally capital-intensive, so their scalability is different than other types of businesses. However, Kin’s early decision to set up a reciprocal exchange structure proved they could scale with a relatively capital-efficient approach.

In short, we felt we knew Kin better than any new investor would. We also recognized that we planned to invest in the company regardless of who the lead was. So why not just catalyze the round with our conviction?

This single change in approach helped enable the company to raise nearly $40 million across a couple of different rounds of funding.

So What?

The world of venture is changing in so many ways, the biggest of which is the available capital and levels of competition ramped up to record heights. There are also way more startups raising money at any given time. The implications are:

1. If you’re an investor and you rely on social proof to build or confirm your interest, you likely are and will increasingly be at risk of being left out of the very best opportunities.
2. If you’re an entrepreneur, you should recognize the difference between investors with conviction and those who require social validation. We’d encourage you to lean towards the former because they are likely to support you over and over again, at times when it’s most helpful.
3. As you build your businesses, keep in mind that your strongest allies are likely the ones you bring along for the journey and keep informed about your progress. Sharing information in a reasonable, but open way with your investors is just good practice. This is what helps your investors confirm their initial belief in you, your team, and your opportunity.
4. If an existing investor has high conviction to support your business, relax all preconceived notions about what fundraising norms are and think creatively about how you and that investor can leverage that conviction to incur your success.

IMPORTANT DISCLOSURE:

The content shared above includes materials prepared for historical fundraising activities and considerations and are NOT intended to be a solicitation for future investment nor inducement towards future investment in Kin or any related entity.