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Last summer (August 2016) I sold my second software company. It ended a decade of growth, working with the best co-founders, building a great team, and transforming an industry. The company was in the #insurtech space, a recently formed tech category that is on fire. The most common question I immediately get after people congratulate me is, “how did you end up starting a company in the insurance industry?”

I always reply by starting with a joke about Nancy Reagan’s “Just Say No” campaign. I then continue with the real story, which is a lot more interesting. It’s about an analytical process to find customer pain that took place over 18 months.

Seeds of Learning

A few years before embarking on this journey, we ran a start-up angel fund called Next Stage LLC. We provided founders with seed funding, advice on their technology, and business planning. Their next milestone was a series A financing with a venture capital fund. We were not the best investors because we wanted to be on the other side of the table as founders.

Most ideas we’d see encompassed great tech, but no real business. One of my favorites came from an entrepreneur who presented us a new software-based phone switch. The technology jazzed the geeks in us. However, we stumped him when we asked, “what’s the business?”, and “what’s the business problem?” Through this experience, we learned a great deal about the keys to the success of a new B2B venture; tech is easy, building a business is hard. To be successful, you must find pain.

Finding Pain

In mid-2005, when we finally set off to form our new venture, we kept this learning squarely in mind. At the time, there were three emerging technology trends: SaaS, open source, and business process management (BPM). The “dot-bomb” of the early 2000s had also moved enterprise software investing from horizontal solutions to vertical solutions. We thought to ourselves, “Could we combine these three technology trends and create a solution for a needy vertical?”

We weren’t sure of the answer, so we decided to leave the office and start a hunt for pain. Most founders return calls from venture firms, so we decided to make cold calls. (Every one was returned.) We started with the BPM companies since the concept of digitizing processes for reuse was like our first startup — a component software company. These ventures seemed to be getting traction in three verticals: government, banks, and insurance.

The government was using BPM to manage growth by digitizing their onboarding processes. Banks were investing in it to assist with the implementation of straight-through-processing (STP). This regulation required financial institutions to clear trades through the back office within 24 hours. Finally, there was insurance which seemed to be doing something obscure in the underwriting domain. Among these three, the Fed was out because you’d need to a former four-star general just to get your foot in the door. We also passed on banks because regulatory-based pain can be dangerous, as many times laws are relaxed, removing the sense of urgency. It also seemed to be a crowded space. Insurance, however, was intriguing because it is well known to be a technology laggard, and yet they were investing in a relatively new technology early. We thought they must be feeling a lot of pain!

In early 2006, we hired the Tower Group, an insurance analyst firm based in Newton, MA to teach us insurance. Yup. They created an insurance 101 course just for us. I remember poking my co-founders as they’d be asleep in our private classes near Boston. We learned all about the history, processes, macro challenges, and more importantly, the economics of insurance companies. Believe it or not, for years insurance companies did not make money from the business of selling the transfer of risk. Surprisingly, they made money by investing the premiums they collected from policyholders in a host of investment vehicles. Unfortunately, after the market crashed in 2000, it was not going so well for them. We also learned why commercial insurance companies desperately needed to digitize their underwriting operations to drive growth. They were now under pressure to make money being insurance companies.

Speak with Real People.

So, what did we do next? We hired a recruiting firm to help us find and speak with real insurance people — underwriters, brokers, etc. We told the recruiter to explain to the candidates it was a job interview with a new firm looking to transform the insurance industry. We then embarked on a pivotal, albeit quirky interview process.

Underwriters would come to our offices in New York and Boston, not understanding what expect.

First, we’d ask, “So, you are an underwriter, right?”

“Yes,” the candidate would reply.

“What do underwriters do?”

“Um, you mean what I have done? Should I review my resume?” they’d reply.

“No,” we’d say.

“So, you come into work at what, 8:30 am? Walk us through your day and tell us what you do and why.” After remarking on how this might be the weirdest interview they have ever experienced in their life, they ventured over to our whiteboard. One underwriter, for example, shared what they did for a living step by step in minute detail — taking dumb questions along the way.

We then asked, “So, what is the hardest part of your job?” They’d share a host of challenges they experienced every day and over the course of their careers. Then, we’d ask the most important question of all. The magic wand question. “If you had a magic wand, what would you do to improve the situation? What would you change? A process? New technology? People?” And like an epiphany, they all started describing a system they wished they had. We wondered whether this system would be replacing anything. “Is there is a ‘Microsoft’ of underwriting?” we’d ask. When they all answered no, we knew we were on to something! We hired a few of these insurance domain experts. (See? It was not a wasted interview for some after all. J)

The Wedding

In the summer of 2006, I married an amazing woman and started FirstBest Systems (my other wife) with three co-founders. The rest, as they say, is history. While there is a lot more to the story, the essence is this. We spent 18-months looking for pain, understanding and learning a market, and meeting with people before writing a single line of code. The most important ingredient to a successful start-up is finding customer pain.

(Today, the process we followed is known as “Customer Development” and is a part of the lean startup movement. It is also the subject of a great book and companion blog by Steve Blank, entitled “The Four Steps to the Epiphany.”)


Key Learnings / The Plays

(1) Start with the business problem, because technology is easy by comparison

(2) Speak with real people (as many as possible) who experience pain every day — and listen

(3) Wave the magic wand, allowing yourself and the end-user to forget any current barriers or experience

(4) Hire domain expertise on day one

(5) Do steps 1–4 ideally before writing any code