Derisking & Other Critical Insights for Startup Founders

Host – 00:00:01:
Welcome to Startup Success, the podcast for startup founders and investors. Here you’ll find stories of success from others in the trenches as they work to scale some of the fastest-growing startups in the world. Stories that will help you in your own journey. Startup Success starts now.

Kate Adams – 00:00:19:
Welcome to startup success. Our guest today is David McFarland, who is the CEO and Founder of Coterie Insurance. Welcome, David.

David McFarland – 00:00:30:
Thanks, Kate. Good to be here.

Kate Adams – 00:00:32:
It’s nice to have you here. So I’m very curious, Coterie Insurance is known for being different, you’re one of the founders, if you could walk us through what motivated you to start it and then we can get into why Coterie is different, that would be great.

David McFarland – 00:00:49:
Yeah, absolutely. My background is heavy on the insurance space. I’m an Actuary and what we do as Actuaries is we quantify and assess risk. And we do this so that insurance companies can actually transfer risk from the people who don’t want it to the people who will willingly take it for money. Right. That’s all insurance does, it’s a transfer of risk. And this is really beneficial for a lot of people, especially the small businesses or even people like you and me, who have cars and health and other things that we care about that we don’t really want to take on that huge amount of volatility. And when we looked at the small commercial space, 32 million small businesses and 43%, almost half of them, don’t have the insurance that they need. That’s a lot of risk in our macro system that’s not appropriately being transferred, and that puts our macro system at risk and actually, it’s an inefficient use of GDP. So I looked at this and I was like, look, there’s a massive underserved market that we can come to and help by using data and technology. Pretty simple data. Shouldn’t say simple – complex data technology play where we can come in and change how the market actually gets insurance to these people and just make that go from a 43% population to like an 80% insured population and really help some small businesses in the process.

Kate Adams – 00:02:15:
So two questions from that. First, why was there such a large population that didn’t have the correct insurance? I mean, that’s significant.

David McFarland – 00:02:26:
Yeah, it’s very significant. And it’s basically because the agents and brokers who would sell to these small businesses, they’re really the ones responsible for making sure the small businesses get the insurance they need. They had no incentive to do it. They would spend the same amount of time on selling a $50,000 policy as a $5,000 policy, and they’re getting a 10th of the commission. Right? Same amount of time, but they’re getting a 10th of the commission because they’re paid off a percent of the premium. And so why in the world are you going to spend days to get a couple hundred bucks on a commission for this, that dollar per hour math doesn’t work. So agents and brokers are not incentivized whatsoever to touch these folks. And so what happens? You’re a small business owner. You come to an agent, hey, I think I need insurance. Yeah, we don’t do that. And you get disheartened. You just keep going and you don’t actually get the insurance that you need until unfortunately, it’s too late.

Kate Adams – 00:03:25:
Got it. So how does Coterie, how do you make it then work for you? And you said you use data and technology. Could you walk us through that?

David McFarland – 00:03:35:
Yeah, what we do is we drastically shorten the quote to buy time. So whereas it took days, sometimes weeks, supplemental applications, all the forms that you have to fill out, faxing still exists – it’s still a thing in the insurance space. What we did is we said that, don’t worry about that. We’re going to take two inputs from you, not 200, 2: business name and address. We’re going to take that, we’re going to say thank you, and we’ll go get 3000 pieces of information on your business. We’re going to analyze them, make sure everything looks good, and we’re going to do this in a couple of seconds. And we’re going to pop back and say, here’s a bindable quote with coverage recommendations so the agent or broker can feel good about what they’re recommending to the end policyholder, that small business customer. So we took this days, week long process and made it seconds. And so now the cost per policy, right, for these agents to actually write this stuff is de minimis. And so they’ll happily write these small commercial policies. And that has thankfully led to things going up and to the right for us. And it worked out from what we call a loss ratio standpoint in that we are writing this business very profitably because we get a lot of good data on the underlying businesses.

Kate Adams – 00:04:49:
That’s fascinating. So how did you figure out to use data and technology to do this based on your background? No offense.

David McFarland – 00:04:58:
Yeah, it’s kind of depressing. It’s honestly a little depressing. So I was an Actuary at a variety of insurance entities and insurance companies and here’s what happens. And a lot of Actuaries can probably commiserate with us. Actuaries are not known to be personable, so they put us in a back room with a bunch of calculators, and then to keep us entertained, they’ll throw data at us that the business can’t use. And we’re naturally inquisitive, so we say, then I can create some lift out of this, and sure enough, there’s so much signal in this data. And so we come back with these amazing reports and we’re like, look at how the numbers get better when we use this. And the business will smile and say, “good job, actuary. Thank you.” And we go back to our hidey hole, and it never gets implemented. And I totally understand why it doesn’t get implemented, honestly, for a good reason. If there’s an opportunity cost that really large insurance carriers, it doesn’t make sense for them to deviate like 80% of the money they make is off their renewal book. Why in the world are they going to shift away from that and try to do stuff for new? It doesn’t make sense. But I was like, look, if anyone’s going to change this massive underserved market, they need to start a new insurance company. None of the legacy players are going to do it because it doesn’t make sense from an opportunity standpoint. And so knowing what I knew about commercial insurance, I started Coterie with that in mind, really bringing speeds of listing and service to the commercial insurance space.

Kate Adams – 00:06:28:
That’s a great story. And all the successful founders we talk to on this show, that’s what happens. They see a problem, they see a need, and they go out and fix it and make it happen. And that’s what you’ve done here. So what has it been like as your experience as a founder? What have you learned along the way?

David McFarland – 00:06:51:
It’s so funny because I think most people have this view of founder success, startup success, right? It’s like, oh, had this problem, we solved it, and it went up and to the right and everything was so great – not always the case. And we’ve had a very successful company. We do have those pretty charts that go up and to the right, but not without a lot of just like banging your head against the wall for a long period of time. It’s not glamorous, it’s not sexy. It’s painful hard work that you just have to go in every day and execute. And that’s basically what it’s been. It’s absolutely rewarding, but it’s chopping bamboo. You’re not always going to see the difference. You just got to keep whacking away at the bamboo for a while and then eventually it breaks and you do start seeing something really phenomenal. And I think one thing that I recommend to founders as you go through the drudgery and the pain of starting anything, you don’t realize how fast you’re moving. The same way if you have children, you don’t realize how big your kids are getting until you take a step back and you actually look at a picture of them from six months ago or you measure them. You need to take a look back and say, how far have I come in a six-month period? Do that every once in a while. Don’t get consumed with it, but do that every once in a while to help you understand your velocity and how things are actually going because it’s probably far more encouraging than what you think it is.

Kate Adams – 00:08:24:
That’s great advice, and I appreciate you being so candid about how difficult it can be too, because I never believe the founders who make it sound like it was easy, so thank you. Also for the founders listening, insights you can share about decreasing their risk, especially in the turbulent, uncertain market we’re in right now. That would be helpful.

David McFarland – 00:08:49:
Yeah, absolutely. My actuaries jobs are about quantifying risk and a startup is inherently risky. That’s what we do. But I think there are some things that we’ve seen in our experience that have helped reduce those, aside from the obvious ones. Like granted insurance. Great idea, right? Like diversification of bank accounts – maybe too soon to say that, but great idea. But put your money in a money market – you actually earn money on the money that you raise. That seems intuitive…

Kate Adams – 00:09:19:
Right. But it wasn’t.

David McFarland – 00:09:22:
I think there are some operational things that really help, that can help founders derisk what they do or at least help them make non-stupid decisions. The first is, and this is kind of very broad, but I think it’s helpful. Focus on decisions that are first-order negative, second-order positive, rather than first-order positive second-order negative. Some high-level examples are, going to the gym and working out, right? Painful, you got to sacrifice time, but over the long-term you feel good, endorphins go up, you’re healthy, those things. I recently just got a torn meniscus, and I’m like, maybe there’s a downside to that. But in general, saving for retirement and other things. But there’s a lot of stuff that founders make short-term positive, long-term negative decisions like, oh, well, this guy’s not really working out, or this gal is not really working out, but we don’t want to cause disruption during this particular time, so we’re just going to let them tag along. It’s not going to get better, and you’re going to actually create more risk with your company and with your operations by continuing to have this problem be in there. So if you feel like this is not the right person for your company, go ahead and execute on it. Don’t be scared. Execute on it and derisk that. Another one and I think this is probably the one that’s probably most relevant to now is term sheets. Take low valuation, over poor structure any day of the week. Valuation, you pay that price once. Structure, that compounds, not only do you keep paying it, it compounds. So if you take like higher liquidation preferences, full ratchet, anything like that, not only do you have to give that up to these investors at this round, but in the subsequent rounds, other investors are going to jump on and say, I want that too. And your company is not going to be pretty, and it’s not going to be anywhere close to being advantageous to you. The other thing that I think it’s not as obvious is that when you have a group of investors who are similarly incentivized, meaning they have the same terms on equal footing, it’s very easy to manage them or it’s easier to manage them. They want one thing and they all want the same one thing, right?

Kate Adams – 00:11:46:
Right.

David McFarland – 00:11:47:
Okay, I can handle this battle. Right. If you have multiple investors or groups of investors who are incentivized by different things, your world is terrible. We call that flanking in battle.

Kate Adams – 00:12:03:
Right. Good way of putting it.

David McFarland – 00:12:06:
Avoid those types of terrible problems. That a lot of founders, short-term positive, oh, I was able to raise some money. Long-term they are ripping their hair out because they have four different types of investors who want different things for the company and you’re not really incentivized to do any of it because you don’t actually get the benefit of a good exit.

Kate Adams – 00:12:26:
That’s really helpful how you laid those all out are these areas that you’ve also struggled with in your founding of Coterie.

David McFarland – 00:12:36:
Thankfully, I’ve had people who are smarter than me tell me not to do stupid things.

Kate Adams – 00:12:42:
So you have an advisor network?

David McFarland – 00:12:45:
Surround yourself with people who are smarter than you constantly. Like having a bunch of people, just a bunch of cheerleaders who are going to tell you how pretty you are and that you don’t do anything wrong. That’s not helpful in the least. Rid yourself of the flatterers. They just don’t do anything good for you other than making you vain and arrogan,t and I don’t think anyone likes vain, arrogant people. So yeah, I have a group of trusted advisors who I talk to regularly, and they help me with these decisions. It’s helped us steer clear of a lot of bad things, including big ones that are also relevant now, debt, right? Like on the debt side and by the way, there’s nothing done wrong with debt. It’s a source of capital. Just like equity raising a source of capital. If it makes sense from a price standpoint, go and get it. But a lot of terms, the structure, right? Like MAC clauses, material adverse change, material adverse effect, may clauses, subjective default, investor support – all this nonsense that’s in financial covenants, when you are a startup that is prone to risk and volatility, get rid of all that. You don’t know what’s going to happen. So what we’re seeing now is a lot of the materialization of what smarter people than me and more experienced people than me have seen in downside scenarios and of course, no one thinks Silicon Valley Bank is going to go under. But these things do happen and the more that you can protect yourself from material adverse change the better.

Kate Adams – 00:14:18:
And so I have to ask you too about a big change that everyone’s talking about right now and that’s AI. How do you see that playing into I mean, just for Coterie and then for the industry at large that you’re dealing with?

David McFarland- 00:14:35:
I absolutely love it. We are adopting it very strongly across our organization. It’s helping us on the efficiency side. I cannot take credit for this, but one of my friend said it’s genius. There’s a South Park episode where underwear gnomes are stealing everyone’s underwear. And they have a business model where they collect underwear, something happens, profit. This is the pitch for all of these bad investments that have come on scooters. Right? Scooters. Social networking sites with users. We get all these users, and then something happens, profits. Yeah. I can get on board with that. And insurtech was no different. It was like, look at this. We’re getting all these users. Something happens, profit. And everyone’s flooding to AI right, now. AI will the large language models, Generative AI is absolutely going to solve real-world problems. And it is. But investors, don’t get too excited. People all have the Internet. There is not much moat to creating a large language model. Now, the continued learning that you get from it, from more adoption, that may be considered a moat a little bit, but there are a lot of people. And the first mover advantage is a real one, and additional OpenAIs may not be that useful. Same thing with Uber, right? There was Uber, and they had a great first mover, and a bunch of investors invested in other Ubers and didn’t do so well. I think what we’re doing on the Large Language Model, Generative AI stuff is fantastic. RPA, all that, is a huge part of what we do as a business. But we need to learn from goodness gracious, all the other stuff that has happened and realize this may be another underwear gnomes model.

Kate Adams – 00:16:40:
Yes. that’s a good point. And you bring up some good historic lessons for people to remember. Yes, it’s true. So you’ve shared a lot of great insight with us today for founders listening, just about your experiences with Coterie and just general risk in the market. I always close the show, though, by asking for one more thing that you would tell founders. It can be anything about their own journey or about anything that you’ve experienced, pitfalls, things to watch out for.

David McFarland – 00:17:22:
That’s a good question.

Kate Adams – 00:17:23:
I know it’s hard because you’ve shared a lot of great information for founders, but maybe something from your own journey.

David McFarland – 00:17:30:
Yeah, I got to go with the Winston Churchill approach – don’t give up. It sounds so cliche. I’d say my first one would be the focus on short-term negative, long-term positive. But so many people, they’re like, all right, I’m done. And that’s okay. That’s not a bad thing. But if there’s something that you really want to achieve and it’s noble, it’s good, keep doing it. Just try and yeah, the world can be against you, but if it is against you and you succeed,, it just makes it that much better. Don’t be afraid of looking stupid. It’s like 99% of what you do as a founder. Like, when you raise we’ve had a fantastically successful time as a business, but 95% of the people we pitch to say, no. that’s okay. Don’t be here to impress anybody. Impress yourself. Focus on what you’re doing and do it excellently. There’s a Greek term called arete. It’s also known as, like, the Aristeia, where two people would come together and fight in one on one combat. If you read The Iliad, you know exactly what I’m talking about.

Kate Adams- 00:18:37:
Right. Yes.

David McFarland – 00:18:38:
And Arete was this concept of being great at whatever you do for greatness sake, and it’s not to impress anybody. And Aristeia was almost like a real version of that, where two men were fighting each other to the death just for the sake of greatness sake. But a arete could be applied to how you raise your kids, to how you clean your house, from being a janitor to a bricklayer to a CEO, whatever it is, it’s arete. Do everything with not thinking about failure, but just going after these honorable things with all you have and not giving So that would be my altruistic good advice.

Kate Adams – 00:19:16:
I like that a lot. First of all, Winston Churchill has never come up on this show before, but I just finished that book about him. And you’re right. I mean, it was really incredible how he was able to get people and himself to persevere. And then also being excellent because on this show, when we dig into success, that’s what that the founder says,. They get to know everything. They make sure they’re best, they live it, they breathe it. I mean, that’s their passion project fully. You’re absolutely right on that. Thank you. So if I’m a small business owner listening and I want to learn more about Coterie, where do I go? How do I get some more information?

David McFarland – 00:19:58:
Go to coterieinsurance.com. And what we can do is actually we can help you find an agent or you can go to a local agent and tell them to get a point of a Coterie, but chances are they may already be. And you can also find us on LinkedIn. Feel free to reach out to me. Always happy to chat.

Kate Adams – 00:20:14:
Fantastic. Thank you, David. This was really fun. You had a lot of great insight to share. I appreciate it.

David McFarland – 00:20:21:
Thanks, Kate.

Host – 00:20:22:
You’ve been listening to Startup Success. To make sure you don’t miss out on future episodes, subscribe to the show and your favorite podcast player. Like what you hear, cap the number of stars you think the show deserves in Apple podcasts. For more tools and resources for your own startup success, check out burklandassociates.com. Thank you so much for listening. Until next time.