How Commercial Insurers Can Adapt to the Unique Needs of Digital Startups

Many businesses today are digital-first or digital-only. They’ve abandoned the traditional brick and mortar storefront for an existence in the world of pixels and bytes. Global shutdowns driven by COVID-19 have further hastened business’s moves to a digital environment.

There are benefits. Digital startups can often respond more quickly to challenges and opportunities. Without a central, physical place of business, these companies often have remote, far-flung workforces. Their teams may work from home.

Yet even digital startups must be grounded in real-world items like servers and real-world concerns like shipping infrastructure and pricing. To adapt, commercial insurers need to remain aware of how digital companies diverge from earlier startups, as well as how they remain the same.

What Do Digital Startups Look Like?

“The Startup is a temporary organization designed to search for a repeatable and scalable business model,” say Steve Blank and Bob Dorf, entrepreneurs and authors of “The Startup Owners’ Manual.”

A digital startup relies on current digital technologies while seeking to push the envelope with digital innovations. Digital startups include companies with big ideas and several rounds of funding. They also include individuals launching their own blog, YouTube channel or digital product from home, writes Ivan Kreimer at Foundr.

Digital startups can be funded or supported by digital accelerators and conventions, as well. One example is the Digital Startup Accelerator program co-created by Forbes and Global Startup Ecosystem. In 2020, the program focused on helping Nigerian businesses enter the digital startup space, says Tom Davis, chief growth officer at Forbes. When the novel coronavirus disrupted meetings in physical spaces, the Disrupt SF conference moved its startup exhibition to a digital space called Digital Startup Alley, Marquise Foster at TechCrunch writes.

Startups have begun embracing digital models for a number of reasons. One is that “traditional pathways for job creation and growth...are at risk of not producing enough jobs in the future,” explains Ali AbuKumail, senior private sector specialist at the World Bank. Digital innovation creates new avenues for business growth and corresponding job opportunities. These opportunities also offer the flexibility of remote work in many cases.

Many digital startups also face lower operating costs by moving their workspaces to a digital environment. By foregoing a brick and mortar headquarters, these companies avoid costs like rent and utilities. They also expand their access to talent beyond their immediate geographic area.

Challenges Faced by Digital Startups

An analysis of failed startup companies by CB Insights listed 20 top challenges that startup companies struggle to overcome. By far the most common cause is lack of market need for the startup’s products or services (42 percent). Second on the list was running out of cash, which ended 29 percent of startups. Another 23 percent of failed startups didn’t have the right team, while 18 percent faced pricing or cost issues.

According to Moya K. Mason, 137,000 new businesses start each day, or about 50 million each year. Another 120,000 each day close their doors. Startups, small businesses and other new enterprises in the business world face a tough road.

Centering a startup in a virtual space seeks to avoid some of these common causes of startup death. For instance, by foregoing physical office space, a startup can protect its cash reserves and direct them toward development and marketing of its products. A digital startup can also build the right team from a larger pool of talent, since it is not bound by geographical concerns.

How the Right Insurance Coverage Helps Digital Startups Succeed

The CB Insights list did not include accidents, injuries or unforeseen losses among the top twenty reasons startups fail. In other words, lack of insurance coverage is unlikely to be the reason a digital startup doesn’t succeed on its own. Yet lack of coverage can contribute to other causes of demise, like lack of cash or pricing and cost issues.

Regardless of their value proposition or growth focus, digital startups rely heavily on computer hardware, software and the internet. Doing most or all of their work digitally leaves them vulnerable to cyber attacks.

A 2017-2018 report by Keep Security says 67 percent of small and medium businesses have experienced a cyber attack. Insuring against digital risks can be a key factor in whether or not a digital startup can survive a security breach. The act of choosing and placing insurance can also prompt some startups to rethink their approach to cyber security and improve it.

It’s particularly important for digital startups to have cyber risk coverage when the product or service they’re exploring is digital itself.

“Source code is a startup’s entire IP,” writes Arun K. Buduri, founder and president of B2B cybersecurity solution Pixm. When that source code is compromised, a startup may be left scrambling to reposition itself or fail trying. While many online repositories like GitHub are free and simple for startup teams to use, they may not offer adequate security. Working with an insurance professional can help startups better understand the risks their source code faces and how to mitigate them.

Finally, while a digital startup may not have a brick and mortar office, its employees and founders still work in their own physical environments. Protection for assets like computers and phones may be important to ensure the startup can continue its business. Consideration of issues like workers’ compensation coverage for a company whose employees all work from home in different states can become complex as well. Insurance companies can offer education in these areas, providing the information startups need to become customers.

How Commercial Insurers Can Thrive in a Digital Startup World

Commercial insurers that focus on startup companies open a conversation with a large pool of potential insurance customers.

Startup growth drives a significant portion of the U.S. and world economies. Fast-growing startups account for only 15 percent of all companies, but they create nearly half of all new jobs, say Bryan Ritchie and Nick Swisher at the University of Notre Dame.

A 2017 report by Michael Mandel, chief economic strategist at the Progressive Policy Institute, found that in regions with lots of startup activity, overall private sector job growth increases as well. For insurers, this may mean that established small businesses grow alongside startups sufficiently to seek insurance coverage for the first time or to expand their existing coverage. Both scenarios offer opportunities for commercial insurers to build and strengthen customer relationships.

Insurers who seek to find customers among digital startups will benefit from understanding how digital startups differ in their risk profiles from traditional startups. They may also benefit from focusing on risks that don’t change when a startup becomes digital-first or digital-only, like risks of cyber attack or the loss of assets like servers or proprietary digital information. As these businesses continue to grow, so will their need for insurance.

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