The Games Fund is a Moscow-based $50 million early stage fund that launched last weekRead more...
Nationwide Ventures is the corporate venture arm of Nationwide Insurance
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Erik Ross is Managing Partner at Nationwide Ventures.
Ross leads Nationwide’s venture capital and open innovation efforts. In his role, he oversees the more than $100m that Nationwide has committed to invest in early stage companies to create strategic insights and accelerate current and future capabilities.
He has an eclectic background spanning Fortune 100 companies, early stage technology startups, and the public sector. He was also an executive-in-residence at the MIT Media Lab and has 50 issued patents.
Ross earned a BSBA from Bloomsburg University with a minor in Philosophy and a MBA from Penn State University. On the weekends, you’ll find him on the field coaching youth soccer, and he likes to relate nearly any situation to an 80s/90s comedy.
VatorNews: What is your investment philosophy or methodology?
Erik Ross: Nationwide Ventures is the corporate venture capital arm of Nationwide. A little bit about Nationwide: we’re about a $50 billion financial services and insurance company. On the financial services side, we have retirement plans, annuities and life insurance; on the P&C side we have personal lines, commercial lines, agribusiness, and excesses and surplus, so we pretty much cover the gamut of both financial services and insurance.
We started the group in 2015 with the guidance of several of our senior leaders, with the idea that we would be the tip of the spear for Nationwide’s innovation efforts, and be a way to bring an outside entity to the world to help accelerate our business. As a part of that journey we spoke with CVCs to understand the pros and cons of different models, like Qualcomm, Microsoft and Intel Capital and they helped us formulate our model. We also worked with Silicon Valley Bank to get their perspective on models and got introductions to many of the founders and institutional firms. When I reflect on it, I have to give credit to our C-suite and board for their vision to support and enable our team, and for their continued support. They want Nationwide to be serving our current and future members for the next 100 years; our centennial is coming up in 2026, so there’s been a lot of discussion around that.
That being said, we focus on three main objectives as a CVC: as you can imagine, making investments is the first one. So, we will grow a portfolio with strategically focused startup companies that accelerate the enterprise and provide strong financial returns for Nationwide. In our model, we underwrite first for the financial return, and then a strategic return from Nationwide. What we mean by that is that we need to be credible investors in the ecosystem to have staying power, and if we’re going to partner a company with Nationwide we need to make sure that company is going to be solvent in three, four or five years. We couldn't promote a partnership unless there was a strong financial model in place to help grow that company. Then we look for opportunities where we can bring to bear the assets and diversity of a Fortune 100 company to help that portfolio company, whether that’s through domain expertise, distribution, product, scale or guidance. And we look for strong partners and co-investors, so we’ve co-invested with IA Capital, Menlo, Lightspeed, Goldman and many more.
From a strategic perspective, we invest in companies that we believe will have a material impact on our businesses, so this is the second part of our underwriting: where and how they’re going to make a material impact in different parts of our value chain, whether that’s product, underwriting, claims or so forth.
We have two other goals as well that we focus on: one is driving insights. As you can imagine, we speak to many companies and to a lot of partners in the innovation ecosystem, so we’re trying to provide that insight and drive into the company and our executive and strategy teams. We also create partnerships, which is the value that we can bring to a portfolio and to Nationwide. We develop opportunities that can help co-create and accelerate our businesses, bring new solutions to market and this is where we believe that we have the most material impact on the company.
The final thing I’ll mention is that we’re thematic investors, so we work with our executives, take a look at the macrotrends and emerging technologies, then invest from those points of view.
VN: So it sounds like you’re mostly investing in fintech and insurance companies that can partner with Nationwide. Is that correct?
ER: We look at insurtech and fintech companies that are aligned with our mission of protecting people, businesses and futures with extraordinary care. There’s also a couple more areas that are pretty interesting like the future of transportation and mobility, which is an evolving area that has the potential to change our lives dramatically, so we have a large book of business that’s associated with that sector. Another area is called “protecting data and digital assets,” and basically that's cybersecurity framed from a protective lens. And then what we call “living and retirement” which is financial and non-financial solutions that help older Americans live comfortably in retirement.
VN: What are the opportunities you see in those spaces?
ER: Anything that can either help take our friction that’s in the model, or help us from an expense perspective, whether that’s in the sales process, claims process, underwriting. Think about the last 25 and the digital exhaust that exists from each one of those out in the world, so how can that be leveraged to create a better customer experience, to create a better underwriting model based on those insights, and make it very seamless for the consumer? We think about that from the core infrastructure side. In transportation and mobility, at some point cars will take over and drive themselves, so what does that mean for an insurance company? Are we insuring software or hardware? That’s a model that will continue to develop and we’ll ride along with that. In cybersecurity there's lots of things that we’ve seen out there from an insurance perspective are focused on reaction, so post- occurrence; we’d like to see more things that are proactively protecting people with suggestions, tools, items that can help people and businesses protect themselves.
Probably the biggest one that we don’t feel that there’s been very much attention on from an investor perspective would be the living and retirement.
VN: What's the big macro trend you're betting on?
ER: I’ll dive more into living and retirement because we have a lot of really good macro themes here.
If we take a look at the backdrop, America’s population is getting older. We have about 10,000 people turning 65 every day, by 2026 we’re going to have 98 million people that are 65 or older, which will be roughly 25 percent of the population. Older Americans control America’s wealth: Boomers and the Silent Generation comprise about 80 percent of the wealth. Americans are under-prepared for retirement. 46 percent of people going into retirement don't expect to have enough money to live comfortably through that time. Three out of four Americans want to age in place, but, even so, the demand for caregivers will likely exceed supply, so there’s going to be a caregiver shortage. If you think about caregivers in families, most are unpaid family members that provide an estimated $500 billion in free care annually.
Our perspective is there’s a big opportunity for us to help our members think about moving through that time, as they approach retirement. We’re looking for a couple of different things: novel, holistic financial solutions that consider health, finances and lifestyle. That can mean things like advisor and broker-facing solutions that provide aging in place resources, novel home liquidity solutions, asset decumulation platforms, so I’d put things like that in one bucket. Then tech-enabled elder care solutions that provide the ability for older adults to age in place and live in an independent and dignified manner. That can mean non-intrusive activity monitoring and predictive solutions on their health and wellness, care coordination and caregiver technology, social isolation solutions and family caregiver resources. We really feel that that's an area where not many institutional investors have been focused. I think Lightspeed and Bessimer are the only two that have put out any type of thesis around this, and we want to be focused on helping our members to prepare for and live in those retirement years.
VN: Why do you think this is a space that has so far been ignored by other investors?
ER: I don’t if they’re really ignoring it, I think it’s more there just haven’t a tremendous amount of founders in the space. There’s now a great, merging nexus of many themes: you have machine learning and neural networks that are able to predict things that will happen that are very easy now to implement. I think about technology and wearables and where they’ve come to and now we’re on the cusp of having wearables that can provide very insightful data that can help enable some of these solutions. So, it’s not necessarily ignorance but more of now you’re finally getting to a point where you have this large population that is becoming 65 and older, and you have technology and hardware that’s becoming readily available and it’s to the point where it's acceptable for the masses. I suspect that now that you have all these factors coming together, you’re going to see a lot more entries, both startup companies and investors, moving into the space from this point forward.
VN: What is the size of your current fund and how many investments do you typically make in a year?
ER: We publicly announced that we’ll invest more than $100 million into startup companies, and that’s the only number that we publicly discuss.
We’ve made 19 investments since late 2016, when we started writing our first checks, and we’ve one exit so far that hasn't been announced. We’ll do around five deals per year; in 2019 we had five new investments and several follow-ons, so that’s where we’ll average.
Some other stats that are interesting: we’ve had about 1,000 discussions with startups to date and declined a little north of 300 deals so far. We have eight people on the team, so we have a nice group of folks.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
ER: We are primarily A and B rounds, first check in, but we’ll do early to late stage deals, just depending on strategic alignment. On the earlier side, we’ll do somewhere between $1 and $5 million on the A through C rounds. Then, if it’s a growth stage company that we believe can have an immediate and material impact on one of our businesses, we can also write larger checks, and we’ve done that a couple of times. But I think our average is right around $2.7 million overall.
From an ownership perspective, we like to be somewhere between three to 10 percent, and we’ll hold 75 percent of the deal value for follow-on, so we do like to make follow-on investments into successful companies. Since we’re not a fund, we do have the ability to do that to support the companies that are doing well.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
ER: The biggest hurdle for us, and the only one that’s a hard number, is $1 million in recurring revenue. Pre-revenue and seed stage are a bit too early for our investment committee, but, that being said, we like to get to know entrepreneurs at that time. We want to understand how their building the company, what KPIs they’re using, and then we’ll track along with them as they start to build traction and to get to that $1 million. Also, at that time, we like to introduce them to Nationwide, not so much from a sense of promoting a partnership or creating opportunities there, but to more educate our executives on what’s happening in the world and also perhaps provide some guidance to that company. In that way, we like to be well positioned when they do get to that $1 million in revenue and they’re right around A stage. We feel like we’ve made some good progress in helping the company, as well as Nationwide.
VN: What other signals do you look for? Team, product, macro market?
ER: We look for deep domain expertise and then diversity in backgrounds of the founders. So, both experiences and other attributes. We also have four or five things that we talk about a lot, like what is their ability to raise capital from capital investors? Can they tell a good story? What is their ability to sell the vision? How do they hire and recruit talent? How have they shown they can execute and hold people accountable? So, we try to do the valuations on the team from that perspective. Then, of course, we always ask for their KPIs that they’ve been using to manage the company and have them explain those; we’re looking basically for their insights and what they believe to be the future of the company.
Probably the most important question that we ask is could we work for the founders? A number of us have operator experience in the past and have had both positive and challenging experiences being inside an early stage company, so if that answer is “no” or “maybe” we immediately decline. That might be something that separates us.
Other things we look for are good unit economics, good market information and product roadmap; if it’s a B2C company we like to look at customer cohorts, and if it’s a B2B company we like to talk to a couple of the customer references. One unique thing we look at is the distribution strategy and scaling, especially if it’s on the insurance side. We’ve seen a number of companies underestimate what it takes to scale a business. If you’re doing direct-to-consumer insurance play, it’s just a long, hard struggle. That's true for any direct-to-consumer side, but then if you’re salso selling to a large institution, especially an old financial reserve company, it takes a long time to sell into insurance companies. So, those are the kinds of things we like to spend a little more time on.
VN: Can you go more into what diversity of background means? Why is that something you look for?
ER: It goes to both demographics, experiences, technology, different domain expertise. We like to see a technologist partnered with a business domain expertise person. A lot of people have personal experiences that have driven them to create those companies, so we try to look at those things together.
We have a number of founders from across the world, from the Middle East to the UK to the States, so we’re trying to see if they have a good mix of thoughts and different approaches to the business problems that they’re trying to solve. Basically, are they solving a problem that causes a customer a lot of pain, and then are they building a novel solution that we believe will be successful given time and money? We try to evaluate it based on those things, and it’s a very holistic view. There isn't one item that sticks out but across the board we're looking at what they have and what they can bring to the table.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
ER: From a trend perspective, we’ve seen valuations be extremely high over the last several years, based on traction. We’re a follow-on investor, so we look for a strong institutional lead to set terms on rounds. Basically, we can't directly control the valuation so we can either accept it or walk, and we have walked away from companies and teams that we really liked. If the valuation is 150x or 400x revenues it’s just really hard to wrap your head around it.
We do think about it but, at the end of the day, we’re looking to invest in the best companies for Nationwide, so we don't have to pick the unicorns, so to speak, but we do need to pick companies that we believe will have a material impact on our business. If a company can save us $100 million then that’s way more impactful than a return that we’re going to see.
With the current situation, I think it’s unknown what is going to happen. We have some recent term sheets that have 40 to 50 percent decrease in valuation from the previous round, so it’s going to be tough in the near future. If we look back at the financial crisis, and lots of people are doing that, valuations took a 25 to 30 percent lagging dip, and then slowly recovered over the next five years. This being much more of an immediate shock, we’re not sure what to expect over the coming months.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
ER: We only have one LP, and it’s very important how we show value to the company. Really, while financial returns are great, and we underwrite to that perspective, if you think about our balance sheet and our investment platform, even if we get a 100x return on one deal it really doesn't move the needle. So, while we do underwrite from a financial return first, we do spend a lot of time on the strategic returns. Like I mentioned before, we’re really trying to get founders and investors interacting with our executives so they get some perspective outside of the four walls. We provide insights and competitive intel on insurtech and fintech to our strategy, business and M&A teams. So, if we can help take out $50 to $100 million in expense by using a technology we’ve invested in, and we get a 3x return on investment, that’s a huge win for us and how we show value to the one LP that we have.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
ER: It’s probably cliche to say that we have to help our founders. Capital has been pretty readily available over the last several years, so this is how you have to differentiate yourself.
One way is, since we’re not a fund, we have a bit of a longer horizon and more patience for a business model to develop. As long as we believe in the team and the model, traction may be slower at times but we can play that longer game. I think the average exit for a startup right now is around 11 years, so we can wait that long, whereas some funds can’t and perhaps make decisions that may not be in the best interest of the founders or the company.
In addition to creating relationships and partnerships with Nationwide, we try to provide connections, domain expertise, help them find talent, help them with capital raises; we’ve coached several of our founders through capital raises. Since a couple of us have been on that operator side, we really try to empathize with founders and provide them guidance when they ask for it. One example of the domain side, given the current situation and environment, is we’ve had our chief economist speak to about half the portfolio now to give a view of what he believes is going to happen in the next six to 12 months, as a way to help them formulate their game plans.
Really, at the end of the day, when we’re speaking to a new company or an opportunity that we want to make an investment in, we always ask them to speak to our portfolio company founders and let them tell them how we do, because if we’re doing our then that's the best reference that we can get, so we really rely on them to provide that feedback.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
ER: This is a tough question, you can't pick your favorite children.
One I really like is Socotra, which is an open API, cloud-based insurance policy admin platform. We met the founder, who is an ex-Palantir gentleman who started the company, in 2017, but they were still a bit immature; as I mentioned we like to track along with the company, so, I introduced him to Nationwide, but they weren't quite ready yet for the bear hug of a corporate giant. The company continued to develop its product and solution and we made an investment alongside APC in 2018. Then, last year, the company formed a partnership with Nationwide; we announced a new insurance platform called Spire and Socotra is the underlying policy admin platform. If you look at this space, Guidewire is the biggest company, and it’s early innings but we believe that Socotra could be the next Guidewire. They have a great team, they’ve done good work and have the maturity and traction and now they’re working directly with us to continue to develop that product. Those are the types of partnerships that we really like.
We have others that are on a similar path, like Betterview, which is a property analytics company that’s working with our commercial lines and underwriting team. They’ve done a nice job of professionalizing the company, they have product maturity and they've done really well on traction with other carriers as well, so they’ve made a nice dent in the space.
In mobility and cyberspace we invested in an Israeli company called Upstream Security, which is a cloud platform to protects connected cars and autonomous vehicles. We all know that with those vehicles, protecting them is going to be a very big opportunity, so that’s another one we really like. In our living and retirement domain, there’s two companies we invested in: one is called Vestwell, which is a cloud platform for small to medium sized business retirement plans, and the other is Vesta Healthcare, which is a cloud-based clinical support and care coordination platform, so they’ve seen a tremendous amount of traction recently given the current situation.
All of them have great teams, that’s probably the biggest thing that we focus on, as well as good spaces and lots of headway to grow.
VN: What are some lessons you learned?
ER: I’ve been on the other side of the table, and this was my first time on the investing side, so maybe it was that move but I think being transparent, being humble and having empathy for our founders and businesses partners, those are pretty critical to both how we approach our investments, our founders and Nationwide.
We talk to as many founders, and we decline many of them, but try to be very transparent in how we provide that information and our rationale for declining, or to help them as they think about where they want to take their companies. Even if we decline an investment, that doesn't mean that we won't help them try to form a partnership with Nationwide; there’s many things that can happen, so we really try to help them as best we can.
From a humble perspective, we approach this as a lifelong learning opportunity. We learn from our portfolio companies, our business partners, our co-investors every day. While we have strong points of view that we’ve created in our theses, as we learn more, and conditions change, we’ll revise our point of view and continue to try to help both Nationwide and the portfolio companies.
Finally, innovating, whether it’s in a startup or a Fortune 100 company, is super hard, so we have to have empathy for our business partners and what they’re trying to accomplish, as well as our founders, to understand their needs. Those approaches to the problems and environments that we face, the conditions really help drive who we are as a CVC and as a team and as Nationwide.
VN: What excites you the most about your position as VC?
ER: I've been fortunate enough to write my job description, so if I have anyone to complain to it’s me!
I love my job and it’s a great space to be in. I don’t think there’s another job like this: you get to work with super talented founders that are changing the world right in front of your eyes, and partner them with a Fortune 100 company. That just doesn't happen in most people's careers.
Both the founders and Nationwide are counting on us to do great things. We have the honor and pleasure to help both founders achieve their goals and Nationwide to help protect their members for the next 100 years. Working in emerging technology with smart people, both at early stage companies, investors and corporates, I love it.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
ER: There’s two things that I’ll mention. One, is that for insurtechs and CVCs it’s still pretty early innings. I think of insurtech as a standalone space from fintech as maybe five or six years old, so lots of things won't be determined for quite some time. Exits are around 10 or 11 years, so we have lots of hypotheses on what we think is going to happen but it’s likely we'll see things change over and over again. It’s exciting times, and it’s unusual that you can see things evolve right in front of you. That's one super exciting thing about where the industry is at.
Then, more on current conditions and timing, I would be remiss if I didn’t mention that our C-suite and board have been super supportive through these current conditions. They’ve been very visible and concerned about our associates, holding several AMAs to address concerns and answer with great transparency. They’re really been great for everyone inside the company. Similarly, we’re trying to help our portfolio companies get through these times; we need to be there for them in good times and tough times as well. For me, and for the team, it’s an honor to work for Nationwide, which truly lives that our mission of protecting people, businesses and future with extraordinary care. You can see lots of companies that claim missions and values, we can see, right now, our company is living that, so it’s great to be part of that team.
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