Remember to ask: what if it worked?

A little over ten years ago, we had the opportunity to meet the team of a start-up fintech company called SoFi. The same SoFi that acquired Utah-based Galileo recently went public through SPAC and now trades on NYSE with a market cap of over $ 12.5 billion at the time of writing.

The SoFi team explained to us that there was a dislocation in the student loan markets, that all student loans were the same price regardless of where the student was educated, the outlook for finding a job and the likelihood of repaying loans. They raised capital from family offices and refinanced government-issued student loans from leading university students into private loans. The result was a high return on a debt instrument compared to other options, but with relatively low risk.

We were intrigued by the model, but as we assessed the investment opportunity, we asked ourselves what we need to believe in order for it to turn into a large-scale opportunity. We had to believe, among other things, that 1) there would be a market to privatize student loans, and 2) for this to develop, there would need to be a market for the securitization of private student loans, a market that did not exist in the past. the weather.

Unfortunately for us, we missed the opportunity to invest in SoFi. Watching SoFi grow over the years, I realized that I had made a critical mistake by only looking at what we should believe. I didn’t allow myself to ask the question at the time, what if it worked? In other words, what if the company could privatize student loans and demonstrate value in such a way that it could create a market for the securitization of those loans.

Over the years, as we’ve had other opportunities to review investments, I’ve learned not to just ask the question: what do we have to believe to make this work? I also ask and encourage my team to ask, what if it worked? The interplay between these two questions is what has become so important, as we have learned to take more risks on “what to believe” if we see a compelling opportunity when we ask ourselves “what if it worked”.

What are we to believe?

In every investment we make, we try to identify two or three essential things that need to happen for the business to be successful. As primarily early stage investors, we focus first on what the business will need to accomplish to be well positioned for a Series A. the company have a disproportionate impact in the space they operate.

Let’s look at another example to bring this to life. In 2016, we met Peter Colis and Lingke Wang, co-founders of Ethos, a direct-to-consumer life insurance company. Parcels and Wang were close to graduating from Stanford GSB and believed the life insurance space was ripe for disruption. So many products and services were now purchased online with minimal friction, why was life insurance, such an important product for people in times of need, still so difficult to buy? We were intrigued by the concept of making life insurance as easy to buy as a pair of Allbirds shoes.

While we were very impressed with Colis and Wang, their vision and ideas, we had to believe that they could solve two key issues in creating a business that could have a disproportionate impact on the life insurance industry.

  • First, we had to believe that the team could develop an underwriting model to assess candidate risk in real time.
  • Second, given that Ethos did not intend to be a life insurer, we had to believe that they could find a partner insurer that would issue policies based on their online underwriting.

If they were unable to develop this underwriting model and find a life insurance partner, this idea, however compelling in concept, would have died on arrival.

Screenshot of our first due diligence agreement in 2016

What if it worked?

The second question we have learned to ask ourselves is “what if it worked?” There are several things that need to go right for a start-up to be successful. The “what if it worked?” The question helps us determine whether the upside opportunity outweighs the risks we have identified.

Going back to the example of Ethos, out of the Fortune 100, nine are life insurance companies and those nine companies have a combined market value of $ 411 billion. Yes Ethos could build an underwriting model, find a life insurance company to partner with, and take a lot of the friction out of buying life insurance, we thought that even if they could get a life insurance company. small part of that market, it would be a very valuable business. Despite the potential existential risks to the business, the “what if it worked” answer was so compelling that we decided to support the founders of Ethos to make our “what to believe” questions come true.

Today, Ethos is valued at over $ 2.7 billion and backed by world-class investors such as Sequoia, Accel, GV, General Catalyst and Softbank. Ethos has not only been able to secure the necessary partnerships with insurance companies, but they have also developed a unique, vertically integrated model that manages the creation, underwriting and administration of policies, and has an NPS score of 86. in an industry where the average NPS is 4.

Are we always right? No, of course not (maybe a topic for another article). We are missing out on key risks or even if “what we have to believe” becomes a reality, we may find that we have overestimated the market opportunity. But, when the combination of great execution, favorable industry winds and great market opportunities come together, it’s a wonderful thing to see.

How can these questions help you?

We know we take a myriad of risks when making an early stage investment, we hope to be as clear as possible about “what to believe” for a business to be successful. Once we are convinced of an opportunity, our job is to be “deep” with the founders to help turn the “what if it worked” into a reality.

As an entrepreneur, if you can also identify ‘what to believe’ for your business and what you will do as a founding team to overcome these risks, you will not only be making better decisions yourself, but you can also help investors. understand how you plan to deal with these risks. Most importantly, consider the opportunity on the rise, the “if it works”. Help investors see the vision for what this business could become despite any obstacles that may stand in your way. In doing so, you will help investors convince investors of your business idea and increase your chances of not only raising capital, but also finding a partner committed to helping you realize the potential of “what if it works”.

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