It’s been a meteoric rise for the insurance carrier, founded in 2015 on the idea that how people drive — more than demographics — predicts their likelihood of getting into a car accident.
“We built a car insurance carrier from scratch with the price of insurance entirely based on driving behavior,” says Dan Manges, co-founder and CTO. “We’ve raised $175 million in venture capital. We’ve been working relentlessly on this over the past several years.”
Because car insurance is a $230 billion industry, gaining even a 1 percent market share makes you a multimillion-dollar company, he says. An industry that large that has been stagnant in terms of technology and innovation got people excited about what Root could accomplish.
Manges discussed the company’s funding journey as a panelist at ASPIRE 2018. Here are some of his observations.
How did you convince anybody to invest in your idea?
It was about finding investors who simply believed that we could actually do what we said we could do. We could price insurance based on driving behavior gathered via a mobile app. That was all we had at that point. We didn’t have a fully built product. We didn’t have product market fit. We weren’t even a licensed insurance carrier.
How much did you raise the first time?
Five million dollars. We raised our initial round of capital from Drive Capital, a VC firm based in Columbus. They don’t give you the entire $5 million all once. They committed to putting that much capital in if we were to hit milestones along the way. I think they recognized the type of disruption that can be possible in the insurance industry. They were excited about the team that we had together, and they were willing to take a chance on us.
When did the second round come about? What were the early days like?
Our second round was almost two years into the company. We spent a little over a year building the foundational infrastructure that we needed to launch. We sold our first policy in June 2016, which was a year and three months after the company got started. In some ways that’s remarkably fast. In other ways, it’s a long time to go before you have your first paying customer. That first paying customer is when our CEO bought his insurance policy. I bought mine 10 days later — I was the second one. We finished 2016 with very few policies in force.
Our second round we raised from Ribbit Capital, a VC firm on the West Coast (that focuses on financial innovation). Ribbit has invested in other insurance companies, favoring what they thought the future of insurance was.
It was a perfect description of what we were building at Root, which meant that we had very strong alignment. But, of course, that alignment in itself isn’t enough. You also have to have the business results. You have to have the customers. You have to have a product that is working. Ribbit was excited about what we were doing, and we ended up completing a $21.5 million Series B.
Describe your most recent rounds from 2018. When did they come about?
We raised a round of capital in March (2018). We raised $51 million. At the time, I think it was one of the largest venture capital rounds ever for an Ohio technology company. Then five months later, we raised another round of $100 million at the $1 billion valuation. That was purely due to the insane growth trajectory behind the company — especially realizing that Root was still only available in 20 states, which reached just under 40 percent of the population of the country.
How was your Series D investment different from your other rounds?
When we did one of our rounds, our CEO had to go and spend a month in California meeting with various firms, going to their pitch meetings, talking to the partners and trying to share what we were doing. Tiger Global Management was so incredibly excited about the progress we were making that they just came out to see us.
Our initial response was, ‘We’re not raising capital right now. Love what you guys are all about, but we don’t have a lot of time to meet. We’re focused on trying to build an exceptional company here.’ And they said, ‘We’re coming out to see you. We are coming to Columbus. We’re bringing our team to you because we want to talk. We think this is just an insane opportunity and we want to be involved.’
Did you give board seats to your investors?
Our VC firms in the first three rounds each have a board seat, but Tiger doesn’t take board seats. They invest capital and leave the management team to operate and run the business. They are not concerned with getting involved in the actual operations of the company.
Something we look for in each round we raised is the expertise they have. A lot of VC firms have a broad perspective on industries as a whole. For them to be able to share their lessons with us in terms of what’s worked well with other companies, what hasn’t worked well, what they’ve seen happen and what they’re seeing happening in the space across all their investments is a large contributing factor to us.
We have seven seats on the board. Investors have three of them.
If Drive Capital hadn’t made the initial investment, what do you think would’ve happened?
It’s quite possible that without Drive Capital being here in Columbus, Root wouldn’t exist at all. Maybe there would be some other startup somewhere else pursuing this idea because the idea itself is sound, but I think trying to set up shop initially here in Columbus, the amount of capital we needed initially to create Root was really only made possible by Drive Capital and their belief in what we could achieve.
Dan Manges is co-founder and CTO of Root Insurance. At ASPIRE 2018, he spoke on the panel “Picking Winners: How Companies Attract Capital,” sponsored by U.S. Bank and Clark Schaefer Hackett. Manges and co-founder and CEO Alex Tim were named one of the 2018 Dealmaker of the Year award winners.