DeadHappy Crowdfunding Round 2020 Due Diligence

All of the information given was obtained through public channels, no confidential information has been given here. Please consult the campaign materials for any information not within public domain. The campaign is due to launch tomorrow morning.


As this post was made prior to the campaign launch, please see my posts in the comment section, where I have summarised any learnings made after having assessed the pitch materials (pitch deck, etc).




TL;DR

Sector: Fintech/Insuretech

Stage: Generating revenue/Scaling


Dead Happy is a life insurance intermediary aiming to digitise and simplify life insurance. Their flagship innovation to date is a 'pay-as-you-go' policy model, contrasting the 25+ year policies that are commonplace in the industry.



✔️ High Growth (125% revenue growth YOY, 112% Growth in 'deathwishes' YOY, 7.8k policies sold as at August 2020 since launching one year ago. The pitch deck has given figures calculated in a somewhat misleading way)


✔️ VC involvement (Octopus Ventures & eVentures -backers of BoughtByMany, Farfetch, Zoopla, etc are investing in this round)


✔️Team A team of serial entrepreneurs and industry veterans (e.g. ex-ComparetheMarket/Beagle Street, etc)


✔️Transparency 15/22 KPIs were given, including revenue, etc. Even commercially sensitive metrics such as CAC:CLV can be obtained, but through a founder call or private message.



❌Competition Rival Yulife have secured more funding, and have executed well using a B2B strategy (Death in service). US competitors fabric, ethos, etc have reached scale and may enter Europe.


❌ No EIS relief EIS relief cannot be attached to a convertible note that pays interest.


❌Regulation Insurance is a heavily regulated industry, and this comes with risks. For example, the Insurance distribution directive is recent European legislation that fundamentally affects how DeadHappy can operate - a strong compliance team is useful here.


⚖️ KPIs & financials DeadHappy's unit economics, coverage approval rate, churn, cash burn etc are middling; neither spectacular (excluding the revenue growth here!) nor awful. Most of these metrics are confidential, you will likely have to request the commercially sensitive metrics through a founder call.


⚖️Convertible note The convertible (a loan that eventually turns into shares) is uncapped, meaning there is no limit to how overpriced the eventual valuation could be. Normally this would make the convertible a glaring red flag, but the convertible converts to preference shares - the most senior (valuable) share class, which is a plus.



Team 👪🧠💪



💡 Malcolm Ferguson led the investment at DeadHappy. He is partner (most senior role in VC) at Octopus Ventures, and was their hand in many other insuretech investments (BoughtByMany, ByMiles, etc). His involvement de-risks the team in my view.

Product 📱💻🛍️

DeadHappy is an insurance intermediary; they sell policies to consumers and take commission. As part of their business model, some revenue will be derived from ads (via 'deathwish' sponsors) and White-labelling their platform to insurers. The actual insuring (i.e. the paying of claims) is done by their insurance partners Gen Re - a Berkshire Hathaway company- and Covea. These insurer partners have great credit ratings/solvency, loss ratios, etc - this basically means they are financially sound insurers, which helps attract (and retain) customers.


DeadHappy's flagship innovation is their unique policy/underwriting model. it's effectively a pay-as-you-go/microinsurance policy - your premiums are not 'level premiums' per se (i.e. the same for a long time); they are priced on your risk of death over ten years (rather than the normal ~~25+ years) and customers then renew/are re-underwritten annually. The result is that DeadHappy premiums cost on average £14.78/month - but they increase 5% per year; In the first few years, this ends up being cheaper than the industry average of £23.25). In the insurance industry, they would call DeadHappy's policies -at their core- ten year term insurance policies, arguably the simplest product in the industry.


Furthermore, DeadHappy have focussed on providing a simple, digitised experience (e.g. quick, online coverage process). This, along with their playful branding, is a sharp contrast to the typically long, sombre, complex coverage process (it can sometimes take weeks, and involve a medical examination) via an expensive in-person meeting with a broker/financial advisor. I think this image from their campaign summaries their process best:



DeadHappy's simplistic coverage process/approach (i.e. only four questions for simplicity, at the same time foregoing information important for underwriting) does mean that DeadHappy don't offer more sophisticated/tailored insurance products (e.g. whole-of-life insurance - basically lifetime policies). This simplistic approach leads to DeadHappy's acceptance rate being 70%, which has been a major pain point for some consumers. Similarly, DeadHappy have a maximum coverage amount of £350k, which can be a non-starter for more affluent consumers, thereby restricting their market. For example, US-based life insuretech Ladder offers coverage up to $8m. Lastly, their 'Deathwish'' product, although fascinating, isn't (strictly speaking) legally enforceable, which could lead to friction/disputes over time.



Most of the poor trustpilot reviews (which are, thankfully, few in number) are based on DeadHappy's low acceptance rate


Nonetheless, DeadHapppy have created a loved product with a strong product market fit (NPS score ~84, well above industry average, Trustpilot score >4, etc) . High NPS scores often promote word-of-mouth growth, which is often the cheapest form of customer acquisition. Traction has been impressive, with 120k deathwishes since launch ~1 year ago.


💡KPIs are extremely important in assessing how the product performs in meeting consumer needs. For example, the claim settlement ratio (% of claims that are paid out) is key to a positive customer experience, and therefore DeadHappy's success in the long term. It is probably too early to look at DeadHappy's claim settlement (i.e. they have no dead policyholders), though, but there are plenty of KPIs to consider before investing. See the KPI section for more information.


💡I do wonder if DeadHappy's millennial oriented branding constitutes poorly-targeted marketing. (this could lead to high CAC, etc) Most life insurance consumers are older (at a stage in life where they have mortgages, family/dependants, etc). In fact, the over 50s life insurance market is an entire market in itself, which requires completely different policies, etc. DeadHappy competitor Yulife have leveraged family-focussed marketing to great effect.



Defensibility


Insurance distributors aren't terribly defensible - there are low barriers to entry (anyone can set up a website, although the regulatory hurdles might be a disincentive) and no competitive advantages. There are some switching costs, although DeadHapppy's policy structure actually makes switching easier (i.e. you're asked to renew yearly as opposed to having a lifelong policy).


Should DeadHappy eventually become an insurer, they would be more defensible through barriers to entry (high costs involved in becoming an insurer), etc. There is a possibility that brand could prove a moat too, in the same way consumers choose the cheapest provider they know (i.e. not just the cheapest) on price comparison websites.


Competition 🏎️🏁🏆


The competitive Landscape of life insurance distribution,:


Typically, consumers get general (non-life) insurance online through Price comparison sites (sometimes called aggregators) such as Comparethemarket, MoneySupermarket, etc. These sites haven't had much success with life insurance, though. In the life industry, getting insured by a costly meeting face-to-face with an Independent financial advisors (IFAs) is the norm.


There are companies that blur the lines between the aggregators and IFAs, such as Beagle Street, Lifesearch, etc - let's call them digital brokers. Beagle Street (owned by ComapreTheMarket.Com) are considered to be market leaders, having a 15-20% share of the online life insurance distribution market, according to the Institute and Faculty of Actuaries.


You then also have insurers (i.e. the companies that actually payout the claims) that are direct-to-consumer, preferring to cut out the middle-folks and sell their policies themselves. Aviva is probably the best example of this.


The insurgent competition (i.e. the insuretechs) typically try to fundamentally change (i.e. disrupt) one of the categories above, or make their own (DeadHappy, Yulife, Anorak, etc).


💡Banks used to sell life cover ('bancassurance'), but since the PPI mis-selling scandal, they have withdrawn from the market due to having realised the risks associated with insurance distribution.


In the image below, i've highlighted a D2C insurer (Aviva), PCW/digital broker (Beagle Street/Comparethemarket) and fellow insuretechs (Yulife & Anorak). the IFA market is quite fragmented wiith many small firms; It would be misleading to use the commercial insurance brokers (Marsh, Aon, etc), so ive left out the IFA sector on the chart altogether. Please note the table below is not an exhaustive assessment.



I've found that almost all the competitors are indirect in nature - there aren't many other companies trying to be a D2C life micro-insurance intermediary.


💡There is a significant opportunity for DeadHappy to expand/diversify - e.g. policy riders ( e.g. critical illness cover, premium waivers), digital wills, even telematics/wearables (e.g. a fitbit connected to your insurer) etc. The wills, trust and probate market alone is worth another £1bn and could see DeadHappy compete with the likes of Farewill, The Co-op, etc. Like Lemonade did with renters/homeowners insurance, DeadHappy want to eventually become an Insurer, to have greater control over the policies they sell. This comes at the cost of greater risk (e.g. regulatory capital requirements, insurance risk on balance sheet, etc).



💡 As demonstrated by DeadHappy's US peers (Mainly Ethos, Ladder, Bestow, and Fabric - potential threats if they expand globally) - the market could develop to accommodate more than one player, i.e. it may not end up being a 'winner-takes-all market', so stiff competition isn't necessarily a deal breaker.


Let's look at DeadHappy's growth.




As above, If DeadHappy continue their growth trend (~100% YoY), they could reach one million deathwishes by late 2023. This is broadly in line with their forecasts, although their forecasts use a more optimistic rate of growth.


⚠️Deathwishes *do not* equal the number of policies sold - they are simply a marketing campaign As at August 2020, DeadHappy have sold 7.8k policies.


💡 Distrubtion partnerships will be key to DeadHappy's growth going forwards. (e.g. partnering with mortgage brokers, as most people take out life insurance after getting a mortgage)


KPIs 📊 📐🗄️




DeadHappy shared all the information I need to make a decision and more, only withholding the extremely commercially sensitive data - which I completely understand. I won't repeat any of the data as it's confidential, but I will say that on the whole their numbers were either in line with (or slightly worse than) industry averages.


Valuation 🏷️🛒📊







All round valuations are rough estimates based on companies house filings and public information (news articles, etc). I have assumed DeadHappy will raise a total of £2m from their crowdfund, and that the shares convert at a £24m valuation (as per their terms; a £24m valuation applies if DeadHappy reach their two year convertible maturity date).



Comparables/Revenue multiple


There are relatively few tech players in insuretech, and their financials are kept close to their chests. This makes finding an ideal benchmark/comparable very difficult. For this reason, I've used Anorak. Anorak are basically a UK based robo-IFA; it's an app/platform that uses banking data (open banking) to give a personalised life insurance policy recommendation. I've had to estimate their valuation as it's not public information.


Anorak; £0-1m revenue (unknown growth); 30(E) employees ; £20M(E) valuation

This leads to a revenue multiple of x20+, which would have DeadHappy valued at ~£22m (annual revenue run rate of ~£1.2m x 20).


It sounds reasonable, but i have to caution that this could be a flawed comparison in my opinion, as there isn't much information (Growth, etc) available on Anorak - or any other competitor for that matter. Since few other comparables with known metrics are available, I prefer to use the 'expected return' method this time.





Expected return


Fair valuations can be determined by deducing what valuation would give a reasonable return (often considered as an amount equal to your total portfolio). This ultimately depends on your exit valuation estimates, etc; It is a highly speculative process.


Consider the chart below for an idea of potential returns for DeadHappy investors at certain ‘starting’ valuations and exit (taken from other insuretechs) valuations:


💡 Please be mindful that this chart doesn't account for the (often large) negative effect of dilution! If in doubt, just halve the cash returned on exit to simulate dilution (i.e. rather than £1k on exit, assume £500 on exit). Furthermore, be mindful that 10% market share is an extremely optimistic projection - it has been shown above to highlight the importance of market size (i.e. total addressable market) in speculating the 'ceiling' of returns.


💡SingaporeLife (Singlife) are unique in that they are a 'full stack' insurer - i.e. they insure and distribute their policies - DeadHappy's ultimate goal is to do the same.


💡Be mindful that Lemonade operates in renters/homeowners insurance.





30x is often touted as commensurate reward for venture risk (this is because a 30x return would 'return the fund' for a classic VC fund portfolio size of 30).


This valuation method would suggest that:


- If you believe DeadHappy is the next Singaporelife, a ~£9m valuation is fair

- If you believe DeadHappy is the next Lemonade, a ~£66m valuation is fair



⚠️ As DeadHappy are using a convertible without a valuation cap, knowing if DeadHappy are fairly valued in this raise is a very speculative task. We are effectively guessing what DeadHappy's market valuation will be when the convertible converts. If DeadHappy grow x100 in the next two years (the convertible maturity date), you will still effectively only get a 20% return (the convertible discount) in most cases. This is why i'm not too keen on uncapped convertibles.


Exit outcomes


Listed financial services/insurance companies are buoyant despite COVID, lending to a potentially strong IPO market (e.g. Lemonade).


At the same time, There is fairly low M&A activity in this (insurance distribution) space:

  • Brolly - insuretech app acquired by Direct Line for undisclosed sum in 2020

This doesn't rule out M&A, but the possibility of an IPO should be considered.



Terms 📝🏛️🤝🏼

DeadHappy are offering a convertible. A convertible is an instrument that eventually gives you shares, just not at 'today's' valuation, but instead gives you shares at a valuation set sometime in the future. The convertible has the following key terms:


  • Discount: 20%

  • Interest: 10% after first year

  • Share class: Most senior (preference - i.e. 'first dibs' on any exit cash)

  • Conversion triggers: Exit, raise >£3m, automatically after two years

  • Valuation Cap: None


So for example: If DeadHappy raise £10m at a pre-money of £50m 3 months after you've invested , you will get shares that reflect a £40m pre-money valuation (£50m less 20% discount).


For me, the main drawback is the lack of a valuation cap. Investing would be like buying a coffee on the premise that you'll be charged a week after you've drank it. Oh, and that charge could end up being anything from £0.01 to £1bn+. The convertible will turn into preference shares, which are shares with all the bells and whistles attached (pre-emption rights, first dibs on cash, anti-dilution rights, etc) - this makes the valuation cap more tolerable, in my opinion.


Shareholder Communication ☎️📻✉️

As DeadHappy have not crowdfunded before, it is uncertain how frequent and detailed their shareholder updates might be. However, I will say that their honesty throughout their campaign is positive and bodes well for the regularity and transparency of their investor updates.


COVID-19 strategy


It is not clear how/if DeadHappy were affected by COVID. Across the industry, it has made remote (i.e. online) coverage processes more attractive. Some insurers have adjusted their underwriting process to gauge COVID risk in prospective policyholders.


DeadHappy have not expressed an interest in the future fund (although they did source 50k from the coronavirus bounce back loan scheme), being content with fundraising options and their ongoing discussions with VCs. It is unclear whether DeadHappy furloughed any staff, but they are not hiring at present, possibly indicating a hiring freeze in the short term.



| Not financial or legal advice | All opinions my own | Please do your own

research | Capital at risk |

| Startups are illiquid | Don't pay dividends | Suffer dilution | Usually fail |

| Even tax relief is at risk |

Disclosure: I am a shareholder of Seedrs. I have decided to Invest in DeadHappy's campaign.

Whilst I can't share confidential information, for any questions please feel free to comment in the forum, or even email me (admin@crowdfeed.net).



References (non-exhaustive)

  1. DeadHappy Companies House filings

  2. DeadHappy blog, website and social media

  3. Numerous articles and press releases on DeadHappy


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