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With Scott Orn

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Scott Orn

Scott Orn, CFA

Travis Hedge of Vouch on Business Insurance For Startups

Posted on: 09/28/2020

Travis Hedge

Travis Hedge

Co-Founder - Vouch Insurance

Travis Hedge of Vouch Insurance - Podcast Summary

Travis Hedge of Vouch on Business Insurance For Startups. Travis talks about growing up in his family’s insurance business, spending time at SVB, and then co-founding Vouch.

Travis Hedge of Vouch Insurance - Podcast Transcript

Scott: Hey, it’s Scott Orn at Kruze Consulting and welcome to another episode of Founders and Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely, but guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services and their computer, which sounds like not a huge deal. But actually, we did the study at Kruze. We spent $420 on average, just getting a new employee’s computer up and running and their web servers up and running. It’s actually a really big deal. It saves a lot of money and the dogs are eating the dog food, like we see a lot of startups coming to Kruze now using Rippling. So please check out Rippling, great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words, but we’re seeing them take market share. So, shout out to Rippling. And now to another awesome podcast at Kruze Consulting’s Founders and Friends. Thanks.
Singer: (singing) So when your troubles are mounting in tax or accounting, you go to Kruze Founders and Friends. It’s Kruze Consulting. Founders and Friends with your host Scotty Orn.
Scott: Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting. And today my very special guest is Travis Hedge of Vouch. Welcome Travis.
Travis: Hey Scott. Thanks for having me. Great to be here.
Scott: Oh yeah. Well maybe you can start off just by telling everyone, well retrace your career a little bit and tell everyone how you had the idea to start Vouch and, and maybe what Vouch is.
Travis: Yeah. So, Vouch is the insurance company for venture backed technology companies. We do all the business insurance that a venture backed technology company needs, from E&O, D&O, Cyber, GL. The difference with us is we’re not the broker, we’re the underwriter, work directly with us and we bundle coverage together and pass along those savings and a much better experience back to founders that we work with so that they can focus on building their business.
Scott: I want to get in the underwrite aspect of that, and we’ll also go through the different types of insurance, but what was the epiphany?
Travis: Yeah. I wish I could say it was like this one aha moment, I was sitting under the tree and the apple fell on me. It was really a journey and it does actually come back to where I grew up. My parents were independent insurance agents in Columbus, Ohio. Our dinner table was like the boardroom growing up. I wore a sweater vest to career day in third grade, saying I wanted to be a broker like my dad and fast forward here we are. Now, there was a bit of a detour in there. The biggest thing I actually took away at the time from my parents’ small business was the value of entrepreneurship. They impounded in me every day how lucky I was to have these opportunities in life because neither of them graduated from college. My dad grew up with dirt floors. I was really passionate about this. So, in college I tried to start a bipartisan political platform to support entrepreneurship on both sides of the aisle, like gamify the experience and all this stuff. Well, you imagine how that worked out. Didn’t really get anywhere.
Scott: That was before, craving the current climate.
Travis: Oh, yeah. We could have a whole other podcast on that experience. I knew I needed to go get a lot better in a lot of ways to be a good founder next time I did it. And so, went and did finance, did operations, ended up at Nationwide Insurance where I helped them out their venture arm and then had the opportunity to work for SVB Capital, venture Silicon Valley bank. And that was where a few things happened. First, my parents’ business went under, they faced a cyber-attack. And so, it got me thinking a lot about the tools, services. Meanwhile, I’m sitting here, we’re investing in a company called FireEye and I’m like, okay, enterprise security.
Scott: CEO FireEye on some of these other companies, or that the founder, excuse me, not the CEO, he’s a great guy.
Travis: Yeah, and awesome business. And I’m sitting here going, okay, well, like they’re not really the solution for, what does someone like my dad do? They’ve got one guy, an IT guy doing laptops. What tools do they have to protect against the same global threats as a Fortune 500 business? So that started getting some gears turning, at the same time, had the opportunity to help a business called Root Insurance, get off the ground. So, you download the app, you drive for three weeks and it uses mobile telematics to price your insurance. And what was really unique about them and a company called Lemonade at the time where they were the first ones really going full stack, taking on the risk and really owning the full value chain. And what that enabled them to do is redesign everything end to end, right? They weren’t just taking off one slice of the value chain, it was the whole thing. And enabled them to move a lot faster and deliver a radically better experience. So around that time, why doesn’t this exist in commercial insurance? Well, there’s a lot of reasons. When I was at Nationwide, every big carrier is dumping millions into that strategy, but the brokers play a really important role and they’re disintermediated. So, we spent a couple of years. I actually pitched SVB a few years ago and “Hey, we should go build this, let’s make it happen.” And they talked me into sticking around for a little bit, trying to find somebody to partner with maybe or invest in, but nobody really had wanted to take on the full stack in the same way that we felt really needed to design it, redesign the whole thing from scratch. So, I was really fortunate to meet my co-founder, Sam, a couple of years ago. He was getting the process of taking a Funding Circle public and was ready to build this next thing. So, we did the FounderDating thing for a little bit and next thing you know, it’s like two years later and we’ve got a team of 50 people and this thing’s really off to the races. It’s been a heck of a journey.
Scott: I love it. There’s so much in there to unpack like the full stack experience. I think you can really see that in your guys’ experience. But going back, I grew up in an entrepreneurial family too. My mom owned a small business in the East Bay in Danville San Ramon. And I was thinking about how lucky I was just to be sitting at the dinner table and listening to all the stories and not just the good stuff, the bad stuff, like stresses with people that she was working with or service providers or the customers. And I feel like a lifetime of education before I even graduated, before I even got to college, just sitting there. Did you have those same experiences, you guys talked business?
Travis: Oh yeah. All the time. And actually, it was funny, as you were talking, the first memory that came to my mind was them talking about people, talking about the team. It was the first thing you said too. And it’s interesting, our first core value is put people first, and our philosophy when it comes to risk and businesses is that people are at the heart of everything. So, I never thought of that before, but that’s actually really interesting.
Scott: Yeah. It’s a great thing you picked up on that because I just remember, and I think we’ve even experienced this, there’s times where you have people who you think are going to be able to do the job, and on paper they should be able to do the job and be awesome at it, but it doesn’t quite happen for whatever reason. I think that’s one of the hardest things, as an entrepreneur, is just becoming okay with that and understanding and seeing the patterns. And I still remember sitting there, my mom had many deliveries, she was a retailer, so she had a lot of delivery people. And then she finally found her amazing delivery and warehouse team. And I remember it was like a life change for her. But just having that, just knowing that because a lot of times when you’re pitching a business to get funded from a VC or we’re working with entrepreneurs to help their pitch, that stuff gets glossed over. It’s all about the market size and how we’re going to attack this. And we go in direct and through the internet and things like that. But the people side and the customer side there’s oftentimes the most stressful. It’s good to learn how to deal with that.
Travis: Absolutely. It’s really funny you say that. One of the most powerful experiences for me at the beginning of all this was, we started off as Sam, me, made our first couple of hires, amazing people, but I was the insurance person for the first few months. And I remember sitting there with Evan, white boarding out our coverage options and all this stuff. And then we found John, who’s our Chief Insurance Officer, who’s been doing this for 30 years. And finding someone who’s creative and innovative like he is in the insurance world was hard. But then he came in, I was like, “Oh, that’s what world class looks like.” Same thing with Kelly our GC and Rajat Team Product Officer. It’s like, yeah, I’m pretty mediocre and all the things I do, though I just need to go find great people at what they do.
Scott: Yeah. We’ve had the same epiphany. It’s amazing. Let’s talk about the underwriting aspect of Vouch, because I think that’s probably where, like you made a really clear distinction, which I love because we, in the past, we’ve worked with a lot of brokers. But my interpretation of the quote unquote underwriting is that you guys are actually basically underwriting the risks. You’re investigating understanding the risks. Then it sounds like you’re taking part of that risk too, down the line.
Travis: We are. Biggest thing is we have skin in the game. So not only do we underwrite differently, but we’re also invested in making sure that claims don’t happen in first place. So yeah, quick plug for Scott, it’s important you have the right CFO, the right financial help around the table. And we can talk about some of those mistakes. It’s important you have an employment attorney to consult. When you’re building out your employee handbook and all those sorts of, those things all feel to a lot of founders, like it’s too early for me, but it’s actually, in my experience, never too early for that stuff. So, I know that wasn’t your question. Your question is on underwriting.
Scott: I think owning the ramifications of how that company behaves and whether they’re doing prevention or not is a great point because you’re so right, getting people to think about prevention and connecting that to you can save money on your insurance is actually, it’s a win-win for both Vouch and the client, the customer. So, I actually think that’s a really smart way of looking at it.
Travis: We’re really excited about it. I’ll be honest, we’re just getting started in that part of our journey. We have our startup risk assessment on our site for really early stage companies to make sure they’ve got the basic hygiene in place, but we’ll be announcing some partnerships later this year that I’m really excited about helping companies with anti-harassment training and all sorts of things that you can do. And then, frankly incorporating that into our underwriting and really rewarding people for building businesses the right way. I think we’ve all seen this, move fast and break things isn’t really going to be the mantra for the next 10 years.
Scott: It’s tough. It’s tough to recover sometimes. Well, that’s super intriguing. And then your co-founder, we glossed over this, but Funding Circle was a really successful FinTech company. So, it sounds like there’s probably some lessons you guys have or that you’ve been able to glean from his experience as well.
Travis: Oh gosh, absolutely. Learning from and working with Sam has been just such a pleasure. We met through friends that had invested in his previous company. They had a lot of confidence in how he ran things. And for me to work with someone who I respect both personally and professionally, and he’s helped me avoid so many of the pitfalls that I know I would’ve made without him. It was funny, I was walking with my wife the other night and I was like, “Gosh, if I ever do this again, I’ll know to avoid so many things.” I was like, “Well, I kind of had Sam to help me with that along the way.” So, I’m really thankful.
Scott: Yeah, that’s awesome. And then the other thing you talked about in your background was just working for SVB Capital. And for people who don’t know, that’s Silicon Valley Bank Capital. And actually, everyone thinks of the bank with Silicon Valley Bank first, but they actually have a venture capital arm. And maybe you can talk about that a little bit and what your experience was like at SVB.
Travis: Yeah. So, it was interesting. When I was at Nationwide, we invested in SVB Capital as an LP. And so that’s how we got to know the team.
Scott: Insurance companies that are the life, like we had at Lighthouse, we had a lot of insurance companies invest in us too. It’s a great way for insurance companies to get long-term and high return, be able to take advantage of that kind of stuff.
Travis: Well absolutely. When I was there, our LP base went from 1% to about 30% of it ended up being insurance companies. Now a big part of that, so what happened for me was I joined the team and of course my first six months, I moved from Columbus, Ohio to San Francisco and I get all excited about drones and AR/VR and all the shiny objects, which I still think is awesome. And love we work with those companies. But about six months into it, I go, “That insurance thing is still really broken.” so I called the smartest person I knew, this guy, Alex Tim, he was the youngest actuary in the history of American Actuarial Society or something like that. And at Nationwide, he was the boy genius that they just kept giving every opportunity to. So, I called Alex and he goes, “Actually, I just left Nationwide last week. Drive Capital just gave me a few million bucks,” and that is what became Root Insurance. So, we started doing these quarterly InsureTech dinners and bringing together the carriers and the investors. And just from there ended up going really deep on regulated industry. So digital health, InsureTech, FinTech was where I ended up spending a lot of my time. And SVB Capital really specialized in series B stage companies, it was our sweet spot and really working deeply with the other venture funds that we were LPs in and working with. So, it was an amazing platform, great people and I’m really grateful for that experience.
Scott: Yeah. And they’ve grown so much. I remember when I was at Lighthouse in ‘02, SVB was still big in our world, but they were like a small bank globally or nationally. And now it’s got a huge asset base. It’s a real success story. I think you guys are a good example of this and maybe we’re a good example of this, and SVB, people tend to think of startups and the drones or the SAS or whatever the shiny objects are that you talked about before. But honestly, a lot of the biggest companies and biggest startups are built in these quote unquote boring old industries where it’s just if you stay with it and you keep executing year after year after year, you build something big. And SVB is a really good example of that. It’s impressive what they built.
Travis: A lot of people lose sight of that, that they look at SVB as the big established bank now. But it was started over a card game by people that were frustrated because the big banks weren’t serving them well, right? That was 35 years ago.
Scott: Yeah. Kruze, we’ve been at it for eight, Vanessa started eight years ago because. And sometimes people will, and I’m sure this happens to you with Vouch, which like, “Oh, you’re hot. You’re big now,” dah, dah, dah, dah, and they don’t realize how many years it took to get to this point. And it’s like the rock band that’s an overnight success after 10 years kind of thing. But that’s also what makes it fun and makes it worth, it’s all about the journey. And I don’t know. I find I learn so much about myself on the journey. It’s pretty cool.
Travis: Absolutely. If things didn’t go wrong along the way and you didn’t have the ups and downs of it, it makes it so much more rewarding. And to your point, this is years in the making.
Scott: Yeah. Before we talk about the kinds of insurance, can you just talk about the insurance value chain and start from that underwriting and maybe talk also, you guys have a really slick online interface that people go. So, like I was telling you before I turned the mics on, just today, one of our clients needs insurance. So, in our Slack, I was like, “Hey, email Travis to one of our account managers.” But what’s going to happen is our client will actually go through the online interfaces. It’s really nice and easy to use. Maybe you can talk about that, but also talk about how underwriting and how you work with the carriers so that people can get an understanding of the industry.
Travis: Yeah, absolutely. So, the biggest thing that people have a hard time wrapping their minds around with us is that the whole thing, end to end, takes seven minutes on average. This isn’t like, “Oh, get a quote in a couple of minutes and then we’ll figure it out over the next few weeks.” It’s no, you’re truly, hello, sign, you’re done and it’s active at midnight that night.
Scott: Wow. That’s amazing. That’s different, though, than other sites that I’ve used because there is a delay on other places. So, I think that’s a testament to you guys are vertically integrated.
Travis: Yeah. I’ll tell you how the value chain works today and then how we’ve changed it to make that work. So, it starts with, why do startups buy insurance in the first place? It’s typically because their landlord or their investor or their customer requires it of them. We do find repeat entrepreneurs are a lot more likely to get insurance at company formation because they’ve seen what can go wrong and that they’re going to need it. But typically, it’s because it’s required. And at that point, they might ask a friend for a recommendation, or they’re going to Google it at some point. And so that’s where you typically have working with a broker, whether that be a digital broker or legacy broker, ultimately, it’s a very similar experience where they’re going to collect some information and they’re going to take that application and then shop it around to a few different carriers. And those carriers, so this is for companies like Chubb and Hiscox and The Hartford. Very highly fragmented space. They’ll then bid on your business and that’s why it takes a few weeks. Now, sometimes you can maybe build some integrations, but even then, it still takes a while. And what you ultimately end up with is typically two or three different carriers in the back end of your insurance coverage. It’s really hard to do things like monthly billing as a result. I remember when we got our first coverage, we had to cut a physical check that they said they never got and all this kind of craziness.
Scott: That happens all the time, and it’s really hard to pay for stuff. I think you guys allow credit card payments, right?
Travis: Oh, yeah.
Scott: Actually, everyone’s listening is going to be chuckling, but that’s actually a big deal. Very few insurance products can you actually pay with a credit card, or if you do, you’ve got to call someone 800 number and it takes 20 minutes to do. So even that innovation is really nice. You can probably tell I’m a fan of what you’re doing, but yeah, it’s good that you guys came along and are changing the industry.
Travis: Well, I appreciate it. And actually, you might not know this, if you’re a early stage, so pre series A SVB client and you use your SVB credit card, you get $500 back on your next statement.
Scott: Oh my God, 500?
Travis: Yep.
Scott: Well, you’re buying general liability. That might be half the policy.
Travis: It might be double your actual policy. It’s up to 500, for the premium. But our entry-level GL starts at $200 a year. The cheapest in the market’s 350. And this goes back to the underwriting. We stripped out the stuff that startups don’t need. You look at the general liability business owner policies that startups are buying and it’ll include stuff like fine art coverage and do you have a pool on your site? It’s like, well, no.
Scott: Really?
Travis: Yeah. Not all of them, but some of them. And so, we strip out that kind of stuff. We then reshape the pricing curves, right? So, a lot of startups, imagine you’re an eCommerce company and you’re selling some form of physical good. Well, the pricing curves on that product liability are really steep out of the gate. So, you benefit from economies that scale as you grow, but you get hammered as a new company. And so, we fundamentally reshape those curves because we’re so narrowly focused on this space that we can do things like that. So that’s where controlling the underwriting really makes a big difference.
Scott: Yeah, that’s huge. And just so I understand the value chain, you guys underwrite it and then do you have dedicated carriers? Are you guys the carrier yourself? Are you just popping this policy that you just wrote into like a SPV or some type of account and just handling it? How’s that work?
Travis: For all intents and purposes for the customer, we look, feel, act like the carrier. What we’ve done, the regulatory kind of nuance behind this is what’s called a managing general underwriter. So, we design the policies, we design the claims process. Tasha, our Head of Claims is amazing. And then we work with Munich Re, the world’s largest reinsurer, that reinsures 100% of the risk so that your customer, you’re a Fortune 500 customer doesn’t look at it and say, “Well, who the heck is Vouch? I’m not taking a risk on some startup.” No, you’re taking a risk on the biggest reinsurance company in the world. And then we take our risk on the back end of that. So, we have that skin in the game that look, if you have claims, it’s coming out of our pocket too. So, we really care about helping you prevent those from happening in the first place.
Scott: Is it fair to say Munich Re and then you guys have a deductible with Munich Re basically, maybe the first couple hundred dollars or first couple thousand dollars or whatever the number is of claim or risk comes out of your pocket. So that creates that incentive where you have an incentive to underwrite good stuff.
Travis: A lot of people might do it that way. We actually wanted to get more aggressive and say we want to take more risk ourselves. So, you can almost think of it as we’re taking a pretty high percentage of every dollar claims. It’s really wonky how it all works out, but that’s how you should think about it.
Scott: Okay. But then that means your reinsurance costs are less so that Vouch can be profitable and all that kind of stuff kind of thing.
Travis: Yep. Yep. And that, frankly, we just feel like our interests are more aligned with our customers.
Scott: Yeah, that makes total sense. Total sense. Awesome. For some people, they might’ve wanted to hear the cool, sexy Vouch story. But for a lot of people listening to this, actually just going through the insurance products is really helpful. And I know I’ve had a million conversations with our clients about this stuff. So, it’s one of the reasons I wanted to record this was just, boom, you are talking to a bunch of founders right now. So, let’s start with the granddaddy of them all, general liability. And you said it perfectly, it’s oftentimes someone else’s requesting a policy from the startup and what I found and what I learned when we started signing leases was Kruze and our clients need general liability insurance when they’re going to sign a rental lease for office space. So maybe describe general liability a little bit and what people should be thinking about as they sign that, that policy.
Travis: Yeah, absolutely. So, general liability is typically that first thing that’s required as you’re building your business. It’s going to cover things like slip and fall around the office, or you have a client in and something, your coffee robot accidentally burns them or something. And then it also covers things like product liability. So, you have a physical good, that’s going to be covered as part of general liability, or even things like advertising injury. This is a product that was developed really for mainstream businesses that we’ve adapted to work really well for technology companies. But it’s the basic building blocks. Your coverage, it’s going to cost anywhere from like $200 per year to maybe 1,000, 1,500 bucks for an early stage company, depending on what they’re doing. So, it’s really that basic starting block. And what we also find is required by a lot of customers. And by a lot of, for instance, if you take on debt, it’s typically going to be required as part of that process as well.
Scott: What about, especially like us, we’re completely remote and we’re remote before COVID. But a lot of companies are going remote now. And so sometimes, we gave up our office space at WeWork. This is such a basic question, but it’s an honest question I have. Do you still need general liability if you don’t have an office?
Travis: Yeah. You do need general liability and frankly, it’s an affordable coverage. So, advertising injury, I think is a really important thing where we’ve seen companies get sued by Fortune 500 competitors because of one little line they had on their website saying they were the best product in the market. And it’s ridiculous, but ends up being a six-figure lawsuit that gets tossed out that you don’t want to have to deal with. Right?
Scott: Yeah.
Travis: So that’s when insurance comes in. Now the other thing that people don’t think about often with a general liability policy, so Scott, let’s say you take an Uber or Lyft, or maybe you’re driving to a meeting, which, who knows next time that’s going to happen. But if you were to get an accident because you’re driving for work, technically the business can be held liable. So, there’s something called hired and non-owned auto coverage that’s part of your general liability policy, it’s a little option you can turn on. It’s like a hundred bucks, but it’s like that base protection so you don’t need to get the insurance with the rental car at the airport and get scammed for it.
Scott: That’s super smart. I actually, in the very far reaches of my brain, I do remember that being an RGL. That’s really interesting. Okay. So, your basic advice is it’s a very affordable piece of insurance, startups should do it. Even if they’re remote, they should still be getting general liability.
Travis: Absolutely. And typically, that’s going to be paired with your property coverage and that’s one of the areas where we’ve helped make it more affordable is we know that 99.9% of startups don’t own their space. They don’t need fully robust property coverage. They need what’s called business personal property coverage. That’s where it’s your laptops, your desks, your monitors. Sam, in his last business, had a break in that they had insurance and were able to cover the claim. But it’s little things like that. Now what’s key there is, to your point, making sure that that policy works for your remote employees. It’s not just on the premises, it’s that you have off premises coverage. We’ve had customers that have moved all their property into a storage unit. So, we’ve had to work with them on making sure that that’s covered appropriately. And then the other thing to keep in mind is the claims matter a lot. We’ve had one customer, one friend of mine who had a laptop stolen, took six months to get the claim back from the carrier. We’re committed, we have a 72-hour fast track property claiming process and stuff like that.
Scott: Great. That’s great. Yeah, that’s insane, that’s crazy. So that’s where the property coming in, because that was actually going to be one of my other questions for you. And I’m kind of embarrassed that like I’ve forgotten some of this stuff, but we did have a break-in like three years ago and we did have a property component of our GL. That’s what I was thinking, it was part of GL. We did. I remember the broker saying, “Oh no, you’re covered on this,” and we had a bunch of computers stolen. Life in San Francisco, right? It happens sometimes.
Travis: Yep.
Scott: So those two go in conjunction together basically is the way I think about that.
Travis: Yep. Yep.
Scott: Okay, D&O, directors and officers liability insurance.
Travis: So, this is you raise your first institutional round, investor joins the board. They’re requiring you to get it, to protect their interest as a director, right? So, let’s say that there’s a lawsuit against the company. The directors are going to get named personally. So, this is protecting their personal interests, which is by the way, also protecting you as a founder. And so that’s actually, I’ll be honest, most companies don’t need it until they have that outside board member join. But if you’re operating in a regulated category or a highly litigious category, so FinTech, digital health, or maybe even gig economy, there’s a lot of litigation there right now, we really encourage founders to think about getting this coverage in place early to protect their own interests as well.
Scott: Yeah. Sometimes people don’t know, but venture capitalists who invest in the company are fiduciaries of the company, and same with the founder. A founder is on the board or the chairman of the board, they are a fiduciary of that company and that’s how they get sued. Right? That’s the mechanism.
Travis: Yeah.
Scott: So, it is a good thing. I usually recommend, after like they’re more of a target, like a good size series A or something like that, that’s the time to do it.
Travis: Yeah. Typically, that’s right.
Scott: What’s your recommendation?
Travis: Yeah, my recommendation would be to think about it earlier if you’re in a highly regulated category. For instance, Lambda School didn’t register in California so they ended up getting slapped with a fine. There can be regulatory actions like that. There can be, and this is all public, things that have been in the media, but a lot of the startup private market stuff doesn’t get publicized. What you see in the media is like Zoom, for instance, had a shareholder lawsuit because the share value declined after some of the security news that came out a few months ago.
Scott: Yeah.
Travis: And so, one just quick thing on what we’re seeing in the D&O market today, legacy carriers are hiking rates, 30 to 50%, because of the economic crisis and the claims they’re paying across the country right now.
Scott: Really?
Travis: Yeah. And public markets, it’s going up over 100%. This is an article in The Wall Street Journal the other day. And private markets are feeling that as well. We haven’t hiked rates, so obviously, come check out Vouch. So that’s really interesting. The other thing we’re seeing is to deal with the rate increases, carriers are putting huge exclusions in. So, we’re seeing major shareholder exclusions so that if-
Scott: Oh, God, that doesn’t work.
Travis: No, it doesn’t work at all.
Scott: You’re getting a class action lawsuit because of the stock price going down, you definitely need to be able to cover, if a major shareholder initiates that, you need to be able to cover that.
Travis: I saw a policy the other day for three million in coverage with a million-dollar deductible. What does that even do for you?
Scott: Yeah, yeah. Yeah, I believe that too. Wow. Yeah, it’s a crazy time. Okay, so let’s go to Arizona missions, which I typically recommend when companies start signing enterprise deals, like Fortune 500 is their clients and things like that because you’ll typically see that in a contract though. The big company is smart and they want to be protected, they want to have someone having holding the bag if there’s a lot of downtime or there’s a big air or whatever it is. Is that consistent with how you recommend it or how you think about it?
Travis: Yeah, absolutely. And it’s typically smart to have that paired with your cyber coverage because when your product is software, the thing that’s going to happen is there might be a bug in the code or whatever, right? If you have some downtime. So you want to have those things coupled together. Where we see things go wrong, is you have a different cyber carrier and a different E&O carrier and they start pointing fingers at each other, it gets ugly. To your point, you’re offering your customers the right advice because the big thing that we see is, let’s say you’re selling into Fortune 500 companies, you sign your first big, call it a 100K pilot. Well, that portion of 500 has insurance requirements crafted for much bigger, more traditional company. So, I’ve seen it where for 100K pilot, you’ve got to go buy $60,000 in insurance. The best way to negotiate is to get the coverage that’s right for your business upfront. And then that way, that risk manager in the middle of that organization says, “You know what? Yeah, these people really take it seriously. They’re prepared. I’m okay with a million in coverage instead of five, because you’ve been proactive.”
Scott: Because you thought about ahead of time. That is something I preach on the accounting side like you wouldn’t believe because when you’ve actually thought about this stuff and done things the right way, auditors, like IRS auditors or state auditors, think about the exact same way as the risk manager would at a big company. That’s really good to hear. And yeah, and we do encourage our companies to get that when they start signing up big enterprises. So that makes me feel good that we’re providing the right advice. And you talked about pairing that with cyber. I’m still slightly scared or nervous about that I don’t always understand cyber because I always worry that if there is an attack, then maybe the policy won’t come through. How should a cyber policy be structured and how do people protect themselves from getting exempted in the fine print or something like that?
Travis: Yeah. Well, we have some real cyber experts on our team, so we could probably have a whole conversation around that. I think the big thing is you have first party liability and you have third party liability. So, when you have a breach and the impact it has on you as a company, that’s your first party liability. And that can often be more expensive than people think about, it’s the forensics, repairs, all that. On the third-party side, you’ve then got to think about, “Okay, well I need to go notify all my customers.” So, the amount of records you have, not just the amount of records, I actually think a lot of companies use that for underwriting and I don’t think it’s a great proxy. But the amount of PII and the sensitivity of that PII that you’re carrying really matters a lot. Which systems is going to sit in, right? Are you using AWS Stripe? What are your third-party cloud dependencies versus what are you hosting on a proprietary basis? That stuff all really should factor into how you think about your cyber coverage. Now here’s one common misconception, is that fund transfer fraud, things like wire fraud, a lot of people think they get cyber and that they’re covered. Well, you really need to have a crime coverage as well. And this is something that’s very rarely required. We see it in some customer contracts, but crime coverage basically protects your cash assets in the bank. So, the primary use case that most people think about is called employee dishonesty, otherwise known as embezzlement, where we’ve seen some interesting stories there of employees using-
Scott: And before we turn the mics on, that we catch that one out of every 50 companies. It’s usually someone paying their own credit card, like someone who has control of the bank account pays their personal credit card.
Travis: Yeah.
Scott: And it’s usually a $10,000 a month thing, but there’s much bigger stuff like that. So that resonates with me, I totally get that. But I think where you’re going, I’ll let you continue because you have a much bigger fish there, on the crime side.
Travis: Yeah. We’ve seen, there are two examples that come to mind. One was an employee was using company funds to pay for their options. Right? I could see how they rationalized that to themselves.
Scott: Oh my God, that’s securities fraud too maybe, right?
Travis: Yeah. There’s a whole host this stuff there, which is ultimately covered for the company. The other one we’ve seen is where they didn’t turn on two-factor authentication. And this is the difference between cyber and wire fraud, right? Someone got access to their account, it might not have been through hacking into their systems, it could have been through other means. And they ended up stealing $400,000 from a company that had just raised five million. That’s pretty material.
Scott: Oh my God, that’s terrifying.
Travis: Yeah.
Scott: Oh my God. So, the crime aspect would cover that, not cyber, right?
Travis: Yeah. Always depends on the details, which policy is going to cover it. But that’s where these are just the things that people don’t think about. And it really helps to work with an expert. Last thing I’ll add. These coverages are really important for startups in particular. You think about it, we always tell companies, “Get covered before you announce you’re around.” That is when the cockroaches come out of the woodwork, right?
Scott: Oh, wow.
Travis: Yeah. We saw it. We announced our series A and all of a sudden, I get an email like, “Hey, this is Sam, can you wire me some money?” No, it’s not. And that happens all the time. And so always get covered before you announce you’re around.
Scott: That’s a really good point. So, there’s one more that I want to cover, which is EPLI, which is employment practices liability. And that’s if you are sued for wrongful termination or discriminatory hiring or something like that. Is that the ballpark of that one, and how does that work to protect the company?
Travis: So interestingly enough, you’re six times more likely to have an employment practices claim than you are to have a cyber claim.
Scott: I believe it.
Travis: But if you look at the awareness, cyber is much, much higher on people’s awareness radar. Employment practice liability, to your point, it really covers those examples where there’s a claim of wrongful termination, et cetera. Now, no matter how well you run your process, you have a great culture, you have a great HR team, et cetera, eventually you’re going have some of these issues. Over the course of a company, for instance, in any given venture portfolio, the claims data would say that about 40% of the venture funds portfolio is going to have an EPLI claim in the course.
Scott: Wow, that’s crazy. That’s probably a good thing about it, in terms of a venture capital portfolio too. That’s actually really smart.
Travis: Yeah. So, these are what we call high frequency, low severity claims, where the average claim is somewhere around $100,000. And so this is something where, for instance, a lot of PEOs will offer, the TriNets, et ceteras of the world, they’ll have EPLI coverage really baked into their platform. But oftentimes, we work with companies to add an additional layer on top of that with a lower deductible. So that, because these are typically high-frequency claims so that they’ve got the right risk mix for their business.
Scott: Yeah. That makes total sense. I recently just started thinking about that because our HR person was talking to me, we were doing an insurance checkup and she brought that up and I was like, “Oh gosh, that seems like a really good thing to do.” So, yeah, that’s really helpful. So we’ve gone through, if we count crime, that’s actually seven aspects of insurance that a startup should just be thinking about. This has been super helpful. I’m sure people who are listening to this are appreciative, but I’m just appreciative of someone who runs a startup and then someone who advises a startup. This has been really, really helpful for me, so thanks.
Travis: Yeah.
Scott: And I’ve kept you too long here, so I want to be respectful of your time. But for the next step, anyone who’s listening to this, how do they get in touch with Vouch, how do they get in touch with you and how do they get the ball rolling on their insurance coverage?
Travis: Yeah. So, you just go to Vouch.us. Actually, you can go to Vouch.us/kruze to get 5% off as a Kruze customer.
Scott: Very nice. I was surprised folks. You should see my face right now, it’s beaming.
Travis: But one, just quick thing on that, the whole thing takes seven minutes end to end. And the key part of that is we ingest the information with over 70 different proprietary risk profiles, and then we recommend the right kind of coverage for your business at that moment in time. Now from there, you can fully customize it. You can work with the team, jump on Zoom, but we do make those recommendations so you get the right coverage at the right time. And so, yeah, just head to Vouch.us.
Scott: I love it. I’ve seen the demo, it’s awesome. We’re referring clients over, big believer. And I got to say, I love that you have that family, you grew up in an insurance practice. You’ve just lived and breathed this pretty much your whole life. And I feel like you can see those little touches in both just the demo and how the system works, but also the messaging on your site and how you explain stuff. I appreciate you, I appreciate your time and I’m very excited about Vouch going forward. It’s going to be cool.
Travis: Hey, the feeling’s mutual Scott. Really appreciate you having me on.
Scott: Awesome. All right buddy, thank you so much.
Travis: Thanks, you too.
Singer: (singing) So when your troubles are mounting in tax or accounting, you go to Kruze Founders and Friends. It’s Kruze Consulting. Founders and Friends with your host Scotty Orn.

Kruze Consulting is regularly reviewed as one of the preeminent providers of finance, accounting, tax and HR services to high-growth companies. For our offices in San Francisco, San Jose, Santa Monica, New York and now Austin, TX, our experienced team serves venture and seed backed companies in diverse industries from SaaS to biotech to hardware to eCommerce.

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