[Raised $80 million] Ep.111 - The First 100 with David McFarland, the co-founder of Coterie Insurance | B2B2C Sales Model | Partnership Marketing | Embedded Insurance

David McFarland is the co-founder of Coterie Insurance, which is on a mission to transform the commercial insurance market for small and micro-businesses. Using an innovative digital platform, Coterie makes insurance easier, faster, and more accessible for businesses and their 32 million employees nationwide. Coterie has now raised a total of $80 million since its 2018 inception.

Today, Coterie has more than 40,000 clients.

Where to find David McFarland:

• Website: Coterie Insurance - Small Business Insurance
• LinkedIn (1) David McFarland | LinkedIn

Where to find Hadi Radwan:

• Newsletter: Principles Friday | Hadi Radwan | Substack
• LinkedIn: Hadi Radwan | LinkedIn

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Transcript

Let's do it. Broadcasting from around the world. You're listening to the first 100. A podcast on how founders acquired their first 100 paying customers. Here's your host, Hadi Rodwan. David, good to have you on the show. How are you doing today? I'm doing well. How are you doing, Hadi? I'm doing great. Thank you for asking, David. Another insurance fellow. I've recorded a couple of insurance episodes this week, which is hilarious for me because over the past year, I wasn't able to get any insurance fellow to join the podcast, but I'm very excited. David McFarland is the co-founder of Cutterie Insurance, which is on a mission to transform the commercial insurance market for small and micro businesses and you're using digital innovative platforms to make it easier to buy this type of insurance and even more accessible because there's more than 32 million employees nationwide sitting across all of these small and micro businesses. And for you to do this, you've raised 80 million today. So David, take us back to your early aha moment. How did you decide to go into insurance? Yeah, I was slightly tricked into getting into the insurance space. I was in college and I fell in love with mathematics like most people. And in the math program, I happened to kind of stumble on actuarial science. And yeah, like most of us in college, we get a few drinks in us and started taking actuarial classes. And while I was taking these classes, having no really even understanding of what an actuary actually was. a girl came up and asked me if I was studying for the actuarial exams and like every blue-blooded college idiot I said absolutely I am then I started studying for the actuarial exams and managed to pass and that kind of started my career in the insurance space. Amazing story, usually the least of someone's expectation when you're in school to go into a regulated Boring industry, but you've done it and there's so many upsides for it because you become disciplined in the way you think about Risks, which is what governs everything in life if we go back to the early days of Kotri How did you start Kotri? How did you meet your co-founders? And why did you choose to go into the commercial space specifically for small and micro businesses? Yes, so the idea for Kotri actually started years before I actually started the business, I was working at a company called the National Council on Compensation Insurance, which handles all the workers' comp for everything going on in the US. It was there that I saw this big problem where small commercial was operating at really favorable loss ratios. In other words, the premium we got in was more than adequate to cover the losses associated with these small businesses. Yet, no one really wanted to touch them. The agents and the brokers were f******. fairly disincentivized, right? It took them basically the same amount of time to write a $25,000 policy as it took them to write a $2,000 policy. And yet they're making less than 10th of the amount. And so you had this giant neglect of a very large portion of the market share out there. And so what ended up happening is, fast forward to today, we have 32, 33 million small businesses where half of them are uninsured. And the agents and brokers are inundated. with these small businesses coming in every day. Hey, I need a policy because my landlord says, you know, I need general liability or I'm selling at a farmer's market or whatever. It all requires insurance, but they can't get it because the agents don't want to touch it. It takes them hours or days. And so I saw this problem and the loss ratios were good. There wasn't much price sensitivity. It was just, I had to figure out how to make everything flow through really well. The other thing about me is that I'm a fairly efficient person. I like to find little areas where processes can be improved. And so I looked at what was needed to write these, to sell to these small commercial players and the data that was needed. And I said, most of this data exists. Well, we don't have to have an insurance application to ask people. Cause you know this, how do you like, when you ask people stuff on insurance application, they. It's not that they're unscrupulous, but there's like a realm of reality. They're incentivized to go to that lower end of the realm. Right. And I said, well, what if we just ask for like stuff that you can't commit fraud on, right? Like just business name and address. And we go out and we get the thousands of other data points onto business. And we come back in a second, run it through our underwriting rules and say, yep, we'll write the business for this much. We can even give policy recommendations. We find out, you know, it's a cafe, you know, turns into a bar at six o'clock. When all of that idea came together, I was like, we need to do this. We can shorten the quote to buy time. We could run a good loss ratios because we're removing bias from the application process and the underwriting process. And if we can do things from an expense ratio to service it well, we can scale this business really well and create real contribution margin. And so that was the idea for Kodori. I knew I wanted to start an insurance company to do this. And so I went into actuarial consulting, figured out what would be the workings of insurance companies. I led both commercial and non-commercial actuarial unit, a legacy insurance company. I helped start a personal auto insurance company. And then I was like, okay, I feel like I have enough intelligence to figure out how to do this. Amazing. And one of the key things when you're starting a startup is to find the right co-founders. So how did you find the right fit with you? So you have the operational expertise, you have the product expertise. What was missing and how did you find them? I really needed someone who is fairly blocking and tackling. I think for people who are subject matter experts, in my background, I'm a fellow in the Casualty Actuarial Society. I've been in the insurance space. I know insurance really, really well. But if you don't have someone who can like do the blocking and tackling for you, that back office stuff to like just. make sure all the trains are running on time, it's really, really difficult. You can't extend yourself that far. And so I moved to Cincinnati. Cincinnati is a great insurance town. It's got some of the biggest commercial insurance riders in the nation. Moved to Cincinnati and started just having a thousand coffee dates. I reached out to anyone who would have a meeting with me and thankfully it's the Midwest and the United States and everyone is nice enough to sit and have a coffee with you. And it's really awkward when you don't have any money. You're like recruiting people and you tell them, no, you're not interested in them. Like, I didn't want to be a part of your broke business anyway, but you end up finding the right person for the time that you need them right then. And so I found Kevin, he helped me out from the very beginning. He really set up a good foundation to, to launch Coderion. He was really helpful. And then subsequently needed someone more on the biz dev side. And so that's when I found Tim. few months later and worked out really well. Amazing. So take us back to your early days when you set up the company, you have the tech stack, you have the product. How did you go out and decide what model to follow? Do I go direct to the consumer? Do I go through agents and brokers? What was your assessment process? Yeah, the assessment process was really around where is the problem. I'm a big believer that valuable companies create value. So you create value and if you create value for a large number of ends and large number of people, then you're going to be a more valuable company. So I looked at this and I said, where are the 33 million small businesses going to get their insurance today? 94% of them still go to the agent and broker. The others are, you know, some are going to direct to consumer. Those are sometimes a little bit more transient. There is opportunity as well in the embedded space. And so what we did is we said, all right, let's create an architecture such that we can integrate in the places where it's going to be most convenient for the small business customer. And that was, let's integrate into the agents and brokers, and let's integrate into the systems that the small business customers use, because we can potentially leverage that data in ways that no one else is. And so that's exactly what we did. We integrated into the systems that they use, and we integrated into every single place where there was an agent or broker. And we were able to capture this data from the systems that the small businesses use. to make it easier for the agent and broker. And since 95% of these small businesses still go to the agent and broker, we were able to capture a good bit of market there. A follow-up question on this. So how did you navigate the long sales cycle when you were approaching not the brokers, but maybe the partners, because those don't have insurance as their core value proposition. So it's a longer sales cycle. You have to find the right gatekeeper. How did you navigate that space? Frankly, that's an area where I had no experience in, right? The whole like enterprise sales type of thing. I ended up working with someone. I have someone on my board who is an expert at enterprise sales and being with people who actually know enterprise sales and people who pretend that they know enterprise sales is night and day. One of my favorite interview questions that my board member would ask, he would ask the candidates, so what are you a sniper? Or are you just some like, you know, accuracy by volume guy? And they're like, oh, I'm a sniper. And he's like, yeah, this guy's not the right guy. You can't have this like arrogance that you're like, oh yeah, I can really just target one customer. And no, that's not how it works. You have to go in like accuracy by volume, anyone who will talk to you, talk to them. And then you get in that organization and you have to convince every single person in that organization that this is absolutely the right fit. That's the way to do enterprise sales. It is not just. put all of your eggs in one basket, and yeah, it's gonna go well. That's not a thing. On the broker side, so the broker side, you have connections, you can talk to them. How did you manage to navigate as well the challenge of them moving from an old habit of doing business, maybe by email, into something that is more technologically adept? We took a little bit of a shortcut. What we did was we first integrated into... a bunch of systems that the brokers already used, stuff that they were already comfortable with. But in those systems, we made our product the easiest to buy. So with everything else, they would go into these systems and they would see, let's say, the Travelers of Hartford. And if they clicked on the Travelers of Hartford, they get launched over into the Hartford dashboard, the agent portal, and they have to enter in all the information, etc., etc. What we did was... We said, all right, we're going to appear in the system and you're going to be able to bind right there. You don't have to get logged into another. You can actually do everything right there with a limited amount of information, kind of like an express checkout. And no one else in the insurance space was doing that. We did that. And then we integrated into everywhere else. These brokers wanted to be, we integrated into their agency management systems. We worked with Ivins to do Ivins up below, like all these things, just to make it stupidly. embedded and convenient for the agent and the broker. And when we took that approach, people not only like the fact that they could get this small commercial stuff off their desk and literally our median submission to buying time is 59 seconds, right? Like, so they could, they could do that quickly, but it was already part of the processes they used every day. So we didn't have to change any of their processes. We just came into that. We embedded into their existing processes, which made for good traction. Amazing. So take us back to the first hundred. How did you get those? Oh, it's just, I think the hardest thing in the beginning was credibility, right? Like who are you? Some, you know, insurance startup who no one knew who I was. No one knew where our company was. People said, you know, cottery. And I was like, it's cottery. But that happens. And so in the beginning, you kind of have to build a little bit of rapport. You know, you got to build credibility. And really, I don't want to say you take anyone who will come to you because you have a reputation to... It's a standby, but you're not going to sign, or at least we weren't able to sign, the massive national insurance brokerages and carrier agencies and all this other stuff that we're able to sign now. And instead, we took the approach of like, let's create a product that's actually solving a problem. We know that this is valuable. This is going to create value for the agents and brokers and others and the people who will adopt it initially. that'll work and that will help us build credibility long term. And so it was very much that classic startup story. By the way, a lot of entrepreneurs think the classic startup story is like, you have a great idea, you immediately reach product market fit and you just have this hockey stick grow them to the right. No, it's bamboo, right? Like, it's nothing, it's nothing, it's nothing, it's nothing, it's nothing, it's nothing, oh, okay, now it's going. There's a lot of just like hitting and hitting and moving and pounding your head against the wall, hoping that it takes off. and eventually something happens where it's just like, oh, now it's the time, and it goes off to the right. Just a quick word from our sponsors and we will be back. Today I'm gonna tell you about a podcast called Beyond ERP, which has an interesting premise. It talks to C-suite executives about NetSuite implementations and cloud technology. They aim to create a valuable resource for the current and aspiring business leaders to learn and experience from them. I would urge you to check it out. It's called Beyond ERP. If you go back to the early days and as you're thinking about where you got your first 100 and you followed a model of a B2B2C, what was the hardest thing about building an insurtech? At the time, no one really believed in the model that we were focused on. So most people were really interested in full stack insurance carriers who were going to go into the personal line space. And We came in saying that we did not want to be a full stack carrier. We wanted to be on commercial lines, which was a neglected space anyway. And we wanted to do it in a B2B2C way instead of D2C. D2C was all the rage back then. And really just believing in yourself, believing that, no, this makes sense. This makes sense from an economic standpoint. This makes sense from a product standpoint. This makes sense from a need standpoint. and trusting in that and going forward with blinders on in some respects, to continue moving forward and just pounding your head, even though you don't really see the traction. It takes a lot of endurance, kind of faith in yourself. And I think that can be the most difficult part for a lot of people, but I don't really see it. I don't know, it never felt super difficult. There were days where it was hard. But when you are solving a problem that you know is real, and you see that it's creating value, even in small ways, you're like, no, this is gonna work. I believe it's gonna work. And as long as you're not a delusional, but maybe I am just long-term delusional, and it worked out, so it's like, oh no, I wasn't delusional. But I think just having that endurance, having that ability to keep going, even when everything else is kind of signaling, maybe not, that can be. some of the hardest times, especially in the beginning. I mean, you know this, right? Like those highs and lows in the beginning are tough. Absolutely. So you've built an insure tech. There's two elements to it, the insurance part and the technology. The insurance, you figured it out. You have the products, you have the licenses, you have the partners, you have the distribution angle. The technology is sometimes also challenging because how would you navigate the build versus buy? Since we're at the end of the day selling an insurance product. We're in the business of protection. Technology is good. It makes us faster, cheaper, better, but it's not the core thing for the customer. So how did you also think about, do I buy an off the shelf solution and drive my product through it, or do I build a full stack technology, which essentially would cost you more money? Maybe. So how did you look at that? This has been an area where I have fought with many people about, and I'm a firm believer If you want to do something different, you can't do it the same way as everyone. And that sounds really obvious, but it's, it's an area that a lot of people don't understand. That doesn't mean you have to do everything different. I want to be clear. And that's where I think a lot of entrepreneurs get too idealistic. They say, if I want to be differentiated, I've got to do everything different. No, you don't need to build a new Salesforce. You don't need to build a new CRM. We can use someone else's CRM. But there are. absolutely strategic areas where you do need to be different. And figuring out the real problem that you are solving, carve it out, draw a circle around it, figure out the technological needs that are going to make it so you can solve that problem in ways that no one else can, and that's where you differentiate. The beautiful thing right now is almost everything is a microservice. Architecture is such that you can microservice pretty much everything out and you can say, You can be very, very specific and say, I want to differentiate on this and these other microservices I will buy off the shelf. And if you do that, one, you're gonna spend much more efficiently and two, you're gonna save yourself tons of time and headache trying to like recreate a freaking CRM when you don't even need to do that. 100%, I mean, that resonates with a lot of founders that I've talked to and the insurance. There's always this conundrum between what is strategic. and I need the IP in-house and what's non-strategic and I can buy it off the shelf. So that's a great way of phrasing it. What's the principle that you live by that has helped you in your journey? Make decisions that are first order negative, second order positive. I'm a big believer in this. What I mean by that is there's a lot of things that are first order positive, second order negative, right? Like eating a large cake by yourself, right? It's gonna feel really good initially. Your tummy's out of it. Or like, you know. heroin to really stretch the spectrum. But the other side is like what's first order negative, second order positive. It's going to hurt in the beginning, but long-term it's going to pay dividends. Working out, right? Like exercising children. I have five children. They are absolutely like first order. Now you're like very hard in the beginning, but long-term there are benefits. Saving for retirement. You save today. So you don't have to eat cat food when you're 80. And these are things that I've found to be immensely helpful in my company as well. I've seen a lot of companies say, ah, you know, we really wanna smooth out our growth trajectory, so we're gonna amp up spending on certain things that, you know, like basically pad the stats. And what you do, it's short-term positive, but it's long-term negative, because you refuse to look at your ugly self in the mirror and say, ooh, I gotta fix that. Instead, you'll like pay to just like put a patch on it. and then you don't have to talk to your board about it, you don't have to talk to other people about it, and you say, oh, just look how nice, it's so hockey stick growth. But when you actually dress yourself down, look at yourself in the mirror and you say, oh, I gotta fix that, that's when you grow. And having those uncomfortable conversations with yourself and with others, where they can really see that you are not that great at certain things, makes you get better at them. And yes, it's absolutely first order negative. It's gonna hurt. You may cry a little bit some days, but long term, you're going to reap the benefits. What's the best advice you have been given by your board? Best advice? This one's pretty tactical. It's not as philosophical. I'll go two. One was we were trying to figure out the best time to really put our resources towards the building a really revolutionary experience for the agent broker channel. And it was one particular board meeting where we were like, hey, now's the time. It was during COVID. We had some stuff on the agent and broker channel, but it wasn't as delightful as we would have liked it. We were struggling on the resourcing side, given we had just raised and COVID just hit. No one really knew what we were doing. And we had a really good conversation around that. That changed the trajectory of our business. I'm very thankful for it. The other one is when the InsurTech boom really died in 2022, at the beginning of 2022, and we had just raised a Series B, they made the recommendation to do a significant riff. It was. tough, first order negative, but second order positive. It has put us in a very strong position over the long term. And we were one of the first companies to do it. No one was laying off people at the time. And we just said, look, when we look at the model, it's based on assumptions that we do not believe are real today. So we have to change what we think is, conform the model to reality. Reality will not conform to your model. When we looked at that, we said, yeah, we've got to do something here. And even though we had tons of money in the bank, everything was going well, we let go between 20 and 30% of our staff. And man, everyone looked at us like we were crazy. It was way before everyone was doing it, but it was one of the best decisions we've made. Thank you for sharing these amazing stories with us. So you started working with an old company, Jewelers Mutual Insurance established in 1913. So it's almost a hundred year old company. You went to ClearCover, which is a startup by them, and then you started your own company. So essentially you're moving from a low risk, low reward company to a low risk, high reward. And now you're in a high risk, high reward because now you're the founder. What type of mindset? did you transition through so that you decided, I mean, I'm now ready to start my own company because the spectrum of risk is increasing from low risk to high risk to high reward, high risk. I'd love to hear your thoughts on how you thought about it. Maybe I'm not a very good actuary. I don't think about the risk component that much. And it sounds a little odd. I've always been a big fan of learning. And I feel like if I learn, if I gain knowledge and understanding, then... It was worth it, even if it quote unquote fails. And every job that I've had, I've always gone into usually leaving a better opportunity, a better monetary opportunity. But I sought the next thing so that I could grow so that I could learn. When I had the opportunity to help start ClearCover, it was risky. It was just me and the co-founders and one other guy, but I knew what I wanted to learn. I thought that was more valuable than the monetary side of it. And if it didn't work out, I still learned a lot and I felt like I was reasonably employable. With coterie, I actually, talking about risky, but my wife, so I had two children at the time and my wife was in her third trimester with our third. And most people are like, you really need to think about this, David, but this is not a good idea. I was like, oh, it'll be okay. And thankfully it was, but yeah. I didn't want to be one of those guys who, you know, when I was 60 years old, saying like, oh, I had this really great idea and then someone else did it and yeah, but I could have done it. I was like, if I, if I'm, I, ugh, that just, that, that thought, being that guy, just sounds awful. And so once I figured that, I was like, it's more of a risk to be that guy. I'd rather just go in if it fails. Big deal. I tried it, but thankfully it's gone pretty well. So I guess that's how I look at the risk side of it. That's an amazing way to look at it. One last question. What's next for David and Kothri? We're out raising our Series C right now. Thankfully, it's going reasonably well. We're continuing to grow. We're continuing to just try and make the biggest impact on the small commercial space through our partners and delight them, bring more and more value to them. Right now we do it, business owners products, general liability, professional liability. We want to continue to expand that, make it easier for people to get the insurance that they need in the place that they need it. And gonna be a lot more of that over the years. Amazing. Thank you for stopping by. I love your story. I love what you're doing. How can people reach you and are you hiring? Reach out on LinkedIn. You can find me there. Coterieinsurance.com is our website. And we are hiring. A few areas, not a ton of hiring, but a little bit here and there. Amazing. We'll put those in the show notes if people want to connect. Thank you again, and we wish you the best of luck in your journey. Great. Thanks, Addy. Thank you so much for listening to the first 100. We hope it inspired you in your journey. If you're enjoying the podcast, please subscribe to our podcast on Apple iTunes, Stitcher, Google Play, or Spotify, and share it with a friend starting their entrepreneurship journey. Leave us a five-star review. Your support will help spread our podcast to more viewers.