Three M&A Alternatives For Accelerating Your Digital Transformation

In 2014, AmFam launched a separate venture capital fund called American Family Ventures to scout promising investments in early-stage startups. Armed initially with a $50 million war chest, the fund eyeballs InsurTech startups from the seed capital phase through the Series B round, the point where investors take bigger stakes right before the company starts to scale.

“Our approach is to invest in these companies to build a strong relationship, give them some work and, if the time is right, at some point to consider an acquisition,” says Dan Reed, managing director of American Family Ventures. “If we get to this stage, it’s just a much easier conversation to have since we already know them well, and vice versa.”

While most of the fund’s investments don’t culminate in an acquisition, they nonetheless serve the purpose of providing access to innovative technologies that can be used in underwriting, claims management or other parts of the insurance value chain. A case in point is the fund’s investment in Hover, a startup with a machine learning application that homeowners use to assess damage to their property.

Once a homeowner clicks on the Hover app, they’re asked to take pictures of the damage. The tool then stitches together these images into a highly accurate 3-D model that includes accurate measurements for claims purposes. “We invested $4 million in the company, giving us a headstart for our own needs and theirs,” says Reed.

In scrutinizing startups, the fund looks for insurance innovators in product distribution, predictive analytics and the Internet of Things (such as developers of home automation and autonomous vehicle systems). Most investments result in the fund receiving 5 percent to 10 percent of equity in the startup.

Some investments turn into acquisitions. In 2013, the fund invested $5 million in Networked Insights, a startup that ingested social media posts on a massive scale. Using Natural Language Processing, a form of machine learning, the tool provides unique insights into customer experiences for marketing purposes.

“After we made the investment, we became one of their largest customers; I spent time on their board and helped them raise more money,” says Reed. “As they continued to build out their capabilities, they became a more meaningful partner to us.”

AmFam acquired the company last year, which is now part of its new digital transformation division.

Investments have been made in 54 startups since the fund’s launch. “Ten of these companies have been sold to the likes of Google, Amazon and Apple, providing good returns,” says Reed.

As for the remainder of its investments, the returns are measured in enhanced efficiencies and customer-focused innovations. Says Reed, “The ideas we’re getting from these companies are worth more than what we’ve invested.”

Locking Up a Joint Venture

Accuform, a developer and distributor of workplace safety signs, tags and labels, has acquired companies in the past, but when CEO Wayne Johnson wanted to develop a high-tech new product, he opted to take a different path. Accuform already offered lockout/tagout systems that ensure dangerous machines are properly shut off before employees service and maintain the equipment. Johnson’s idea was to create a digital locking system that would provide maintenance teams with real-time data over the Internet about the status of equipment repairs. “Electronic locks have been around for some time now, but nobody had designed one specifically for the safety applications of lockout/tagout,” he says.

He learned this fact by scouring the Internet for evidence of a small startup tech company actually making such locks, thinking of a possible acquisition. None surfaced. Lacking the tech resources to design the product in-house, he spoke with a friend who had recently sold his startup technology business and was looking for another venture to stick his teeth into. “I told him my idea and he was intrigued,” Johnson says. “He understood both safety and technology and happened to know a design group in Taiwan that could develop the Internet-enabled software inside the lock.”

The two men met with representatives of the Taiwanese company. This past summer the three parties inked a joint venture to make the novel electronic lockout-tagout system, which Accuform would brand and market. The Taiwan-based company is a silent partner in the deal. “We put together an MOU (Memo of Understanding) where we’d share in the design and development costs and split the eventual revenues,” explains Johnson.

The partners established a one-year deadline to bring the product to market in summer 2019. The Taiwan-based technology provider is in charge of design and development and will manufacture the product in Taiwan and ship it to Accuform in Brooksville, Florida. The other two partners are in charge of sales and marketing in North America and globally.

The design is now completed, and a prototype is ready for testing. Once the tests conclude, Accuform will reach out to the Occupational Safety and Health Administration (OSHA) for regulatory approval, since the agency’s current standards don’t address an electronic lockout-tagout. “The system is designed for user access via an electronic key as opposed to a traditional metal key that goes into a padlock,” Johnson explains. “It works just fine, and we have no qualms. We just need OSHA’s buyoff, which may involve some additional tinkering.”

From Johnson’s perspective, the arrangement is far more palatable than buying a company outright and attempting the messy business of integration. “From a risk standpoint, [acquisitions] are a much bigger bet than simply partnering up,” says Johnson. “A JV is much simpler and less risky.”

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