It may not seem like it at first, but insurance and seed funding have a lot in common. Especially if you’re a minority. Last week, UK startup Marshmallow raised $30M at a $310M valuation to help customers across the country secure fair and competitive insurance rates. Marshmallow was created to help everyone, even those without a credit history, obtain affordable coverage.
Marshmallow never prices on race, gender, ethnicity, or belief. They also don’t use credit scores to determine an applicant’s rate. Instead, Marshmallow’s algorithm pulls applicant information and bases the rate on that person’s vehicle, where they live, their driving experience, and how the applicant uses their car. It’s revolutionary.
The insurance industry traditionally charges young drivers with inconsistent address and credit histories a higher rate. It’s broken. Banks operate in a similar fashion when business owners apply for loans – if you’re young and or have inconsistent addresses and credit histories, it’s going to be harder to get that money.
In 2017, The Federal Reserve published a report titled, Report to the Congress on the Availability of Credit to Small Businesses. According to the report, black-owned businesses were turned down for loans at a rate twice as high as white businesses. Less than 47% of applications were funded. To make matters worse, the report also indicated that roughly one in four black-owned businesses abstained from applying for a loan because they felt like they would be turned down if they applied.
So far, less than 3% of startup funding has gone to Black and Latinx founders in 2020. Minority founders need these bank loans but because of the way the system is currently structured, they just aren’t getting them. Marshmallow’s algorithm has the power to catalyze a paradigm shift – if they don’t need credit histories to cover drivers, why should banks focus so heavily on credit histories when underwriting small business loans?
If banks start taking a more holistic approach to small business loans, more minority founders just might get what they need to get their ideas off the page. If more minority founders can get their ideas off the page and on to the pavement, then maybe, just maybe, more VCs will take interest and that 3% goes up.
So, is Marshmallow’s algorithm the solution to VC’s diversity problem? Who knows. But it could be a start. Let us know what you think in the comments, we’d love to hear from you.
JD, MBA, resident Petrol Head and Autoholic. Sebastian is dedicated to providing an uncompromising view into the auto industry and taking every chance he can to make sure rear wheel drive, manual transmission, ICE vehicles never disappear. He also has proximate knowledge of many things including blockchain, venture capital, and the importance of diversity in today’s startup ecosystem.