Insurance Tech in the Dot-com Bubble: Lessons from Esurance & eCoverage

In October 1999, Fortune ran a story titled, “Could Tiny eCoverage Be The Amazon of Insurance?” Backed by investors including SoftBank and Accel, eCoverage aimed to be the “online version of Geico”, but imploded only two years later as the dot-com bubble burst. Meanwhile, Esurance, which was purchased with Answer Financial by Allstate in a transaction valued at $1B in 2011, is typically lauded as an insurance tech success story, but itself had its significant share of ups and downs.

In a look back at insurance tech during the dot-com bubble, we caught up with former Esurance co-founder Chuck Wallace and former eCoverage co-founder and CEO Jon Kelly to cover everything from raising capital to aggressive messaging to advertising on Google, prior to the advent of AdWords.

The Q&A has been abbreviated and edited for length.

Chuck Wallace, co-founder, Esurance

Describe the environment of starting Esurance, or an insurance startup more generally, in the dotcom days.

Esurance closed our first round of funding on May 17, 1999 – the near-height of the dot-com craziness of that era. A few of the more notable differences between the dot-com era and today’s era of InsurTech innovation are the ecosystem support and infrastructure, the approach to company building, and the focus of the insurance innovation.

In the dot-com days when we started Esurance, there was no infrastructure or environment supporting InsurTech innovation to speak of, other then a general enthusiasm for any company that was addressing innovation in a large consumer market, regardless of the industry.

The general approach to company building in the dot-com era was often focused on how much money could be raised over multiple rounds of funding, how fast a company could launch and then quickly expand into new markets, and how quickly a company could get to an IPO if it didn’t get acquired along the way. The general sentiment was that companies with momentum (regardless of the long-term viability of their underlying business model) could also get a substantial next round of funding on their way to an IPO. And then post-IPO could fix any issues with the underlying business on the way to self-sustaining profitability and long term growth. We all know how that story ended for the majority of companies that were caught up in it – which is not well at all.

In the dot-com era, the vast majority of innovative insurance industry companies were focused on distribution type of business models versus building true risk bearing core insurance companies. In the auto insurance space, many insurance market place companies were started with the goal of bringing both the direct to consumer and agent-based offline insurance shopping experience online. To my knowledge, only Esurance and eCoverage started with the goal from the outset of building a core, statutory auto insurance company.

What was it like raising capital for Esurance on the venture-side? Conversely, could you explain the transition to moving under White Mountains Insurance Group? What was the decision-making process like there?

White Mountains in 2011 wrote, “In 2000, Esurance’s venture capital owners lost their money and their courage.” Do you agree? 

Once we had our act together as a founding team (Jean-Bernard Duler, the original father and CEO of Esurance — it was his idea to begin with, Jeff Goodwin, David Griffin, and Huyen Bui) and developed a cohesive pitch, we found the VCs pretty receptive to funding our Series A and then Series B in 1999 for the reasons outlined above. NextCard (a now defunct company in the online credit card space), had recently gone public and at least their stock price was doing well in early 1999. We told the VCs we were focused on being the NextCard of the auto insurance industry, and that did a good job of getting their attention and interest in being involved with Esurance. Fortunately, the Esurance story has been a much happier one then NextCards’ turned out to be.

The decision to partner with White Mountains was a pretty simple one, and more important, one that turned out to be a great decision for Esurance. The dot-com crash hit in March 2000, after which it became nearly impossible to find funding for any e-commerce focused company (like Esurance) that did not have a clear path to becoming at least cash-neutral in the next 6 months or so. We called everyone we could think of who might even remotely be interested in acquiring Esurance or continuing to fund us, and the answer was an un-refreshingly consistent no – if they even returned our calls at all. However, our CFO Gary Tolman (who became CEO after the White Mountains investment) had a strong relationship with White Mountains from his earlier days of working for Jack Byrnes (White Mountains’ founder) at Fireman’s Fund.

Gary’s relationship with Jack and others at White Mountains, and his reputation in the insurance industry convinced White Mountains that they should come out and take a close look at Esurance. In September 2000, they made an investment of about $9 million that literally saved Esurance from closing down – which we otherwise would have had to do within a few weeks. The team at Esurance regrouped and we got busy on the very challenging, but rewarding, task of building Esurance into a leading, tech-forward auto insurance company. Esurance was ultimately acquired after I left the company by Allstate in 2011 for approximately $1 billion.

Esurance raised its Series A from Trinity Ventures and 21st Century Internet Venture Partners.  We raised our Series B from Redpoint Ventures and Global Retail Partners (now Upfront Ventures).  After the dot-com crash, the VCs chose not to continue to participate in funding Esurance, and they lost most of their investment in the company. As with any early stage innovative company, Esurance was a risky proposition in it’s early days, and our VC’s believed in the co-founders vision and boldly stepped up as partners to fund the company.

What are some broader points about the Esurance story that you think are relevant to today’s set of insurance tech investors and startups. Are there any misconceptions about the story or points you think aren’t widely relayed today?

I think the biggest misconception that I find when telling folks the Esurance story is that they didn’t realize that Esurance had its share of significant ups and downs over the years, and in particular in its first 2-3 years. Although people remember the super-cool (and super-effective) Erin Esurance commercials, that we were one of the few dot-com era companies that did well and grew rapidly after the crash, and that Allstate bought Esurance for $1 billion – they don’t realize that behind all of that was some pretty gut-wrenching moments in the company’s history. Building and funding innovative companies is not for the faint of heart, and that was certainly true for Esurance.

Jon Kelly, co-founder, eCoverage

What was it like raising capital for eCoverage on the venture-side?

Our three main investors were SoftBank, Accel and RRE. SoftBank had this notion that they were betting on the Internet, that the Internet would take over everything. And it has, it was just very early on at that point. And so what we were excited about was that there was enough excitement and enough capital available that you could build anything. The phrase we always talked about was, “Build the online version of Geico.” This was long before Geico came online and it was an era where that actually made sense, where a bunch of twenty-somethings could build an online insurance company and I think that was the core of the excitement, that the capital was available and that what people now refer to as disruption was possible because it looked like the Internet would upend everything.

In the beginning, it was David Riker, who was my co-founder, who had been talking to SoftBank, which had committed to lead the first round, the Series A. We ended up together closing RRE and Accel and then we went out and got some strategic investors. E-Trade and E-Loan both invested, which SoftBank had big investments in. We started off with this amazing group of investors and this sense that this is going to be really big.

I don’t have any of the documents from back then, but the number I had in my mind was that we were planning over the course of the company to raise $150M and that didn’t seem like a lot then. That said, it definitely was not a case where you walk into a VC’s office and they throw checks at you, it was hard.

We were getting ready to raise our Series C in December of 1999 at the peak of the bubble and had a huge amount of interest. In Q1 of 2000, I remember hearing some of our board members saying that things were looking weird and that we need to get this done. And then the Barron’s article came out and then the bottom dropped really quickly. It was incredibly quick – realizing how fast all that happened and at that point, raising money just became impossible.

How was eCoverage structured?

We were very clear from day one that we were going to build a carrier. And we sort’ve did. It was scotch-taped together. In an MGA-like structure, we developed the ratings plans with a lot of help from PwC and their actuarial team so we were filing our own rate plan. We did a deal with a company called Royal & SunAlliance and their Artis Division and we basically rented a fronting company and then we set up a reinsurance entity and a relationship with AmRe, who took most of the balance sheet risk. But to the consumer, it looked like a carrier.

On eCoverage’s aggressive messaging

We had a very brash, almost antagonistic attitude toward the industry itself. Our slogan was “The industry is history,” which was really pretty aggressive. When we launched the company, we ran a full-page ad in The Wall Street Journal, which in big letters read something like, “Fear. Anger. Denial. Acceptance. If you’re a big insurance company, here is your agenda for your next board meeting.”

So it was a really aggressive set of messaging; that there wouldn’t be any more agents and everyone would come to us. When the dot-com bubble ended, it probably hurt us when we were looking for a strategic buyer and it made a lot of those discussions somewhat uncomfortable.

On advertising on Google, pre-AdWords

We were very, very early on Google. Before AdWords existed when Google first started monetizing, they had a traditional salesforce like Yahoo did and you just negotiated with them. We bought the #2 position on all the relevant insurance keywords. I remember the price, it was $25 CPM.

On its rivalry with Esurance

There was a first pass, which was lead-gen and the primary player was InsWeb, which had a $1B market cap when we started. We were the next pass – it was just us and Esurance battling it out. We were pretty fierce rivals and their take on us was “They’re just a bunch of tech guys, who don’t know anything about insurance” and our take on them was “They’re just insurance guys, who don’t know anything about technology.”

I still remember when David Riker (founder) and I went back to New Hampshire to see Jack Byrne and Morgan Davis at White Mountains Group. This is a few years before they ended up buying Esurance, so we were just introducing them to selling insurance online and trying to get them on board. I was 25 at the time and David was about the same age. They sized us up and one of them asked, “So boys, how long have you been in the insurance business.” Without skipping a beat, David looked at his watch and replied “a couple of months now.”