Giving us a brief introduction to yourself and to USAA.
I joined the company a little over seven years ago and have been with corporate development the entire time. The early part of my career was spent in consulting at Price Waterhouse, and after about seven years of living out of a suitcase I decided I wanted to get into a more finance-oriented career. So I ventured to your side of the pond and undertook an MBA at London Business School to springboard a career change. After business school, I spent about two years doing capital investment review and eventually made my way to United Services Automobile Association (USAA) in 2010.
I feel extremely fortunate to work for USAA. My role as a corporate development professional feels like the culmination of everything I have learned and experienced to date. Looking back, my time in consulting exposed me to strategy, technology, package software and project management, and that experience has really helped me understand and evaluate new companies and technologies. Then the experience in capital investment review provided additional exposure to financial analysis, due diligence, reading and interpreting transaction documents.
So now I have the opportunity to work with a great team at USAA, and bring new innovations and promising investment opportunities forward for the benefit of our members.
USAA was founded by the military for the military. In 1922, 25 army officers came together with the goal of insuring one another’s vehicles when no other insurance company would.
It sounds ridiculous today, but these military officers and their military lifestyle were seen as too risky, so they threw their money on the table together and self-insured. So we are structured as a mutual insurance company founded by those 25 army officers.
From those beginnings we followed the same military values our founders prized. Service, loyalty, honesty and integrity. Over time we have expanded the breadth of who we serve, expanding our eligibility to other branches of the US military, enlisted personnel and military families.
We have added additional property and causality products such as homeowners’ insurance, renters’ and valuable personal property. We also offer life insurance and annuities. We have a direct consumer bank that offers deposit products, credit cards, mortgages, auto and consumer loans, among other products. We also have an investment management company that offers broker services, mutual funds, wealth management and retirement planning services.
How does innovation fit into corporate development and the fund you run?
The dollars we are investing are off balance sheet. Our chief investment officer has committed in excess of $300m to strategic investments. The vast majority of our net worth is invested in highly-liquid assets. We do allocate a small percentage to less liquid assets such as venture capital. This is where the corporate development team comes in.
The corporate development group got its start in 2010, as we were partnering TrueCar, a digital automotive marketplace that connects buyers and certified dealers. We made a minority equity investment in TrueCar, so we could share in the upside and value creation. That was back in 2009 and was our initial investment; and 20-plus investments later we are still going strong.
Can you confirm the size of the fund or the budget?
Just to be clear, it is not a fund, but the chief investment officer has committed over $300m to our strategic investment program. Thanks to several successful exits, we are considerably under this threshold, so our investment potential is only constrained by the number of attractive ideas we are able to identify.
What key technology and new business models do you see as an opportunity or a threat for the business?
We have four key investment themes. The first is fintech – technologies relating to payments, lending, investing and such, that enable USAA to provide simpler more effective financial solutions for its members.
InsureTech, is another key theme. These are technologies that enable connected cars and homes, wearables and opportunities that are really transforming the future of our insurance products – auto, property, life and health.
The third we call it security, data and artificial intelligence (AI), and think of these as solutions that are enabling secure authentication, identity management systems, fraud prevention, personalisation, underwriting, risk detection. Things of that nature.
The fourth is enterprise infrastructure. So the first two and possibly the third are really more member-facing solutions. Enterprise infrastructure enables solutions for members, employees and communication technologies
What I see now in a lot of organisations and corporate venture units developing what i term innovative new value chains – how technology and startups are being brought together in different forms to create new business models. Are you seeing those things occurring in the types of investments and sectors you are interested in?
We are with our members when they are making important financial decisions, and we know, probably, buying a house is the most important financial decision a person makes in their life. And buying a car could be if the person is not a homeowner but buying a car is likely to be the second most important financial transaction our members enter into. So we want to be there to support them, really from the time they see the vehicle until the time they sell it.
We have done this by partnering and investing in leading startups. TrueCar concerns researching, finding and purchasing a vehicle. We also have an investment in a really neat company, RepairPal, which is around maintaining and repairing a vehicle during the full ownership period. We want to provide our members a way to make sure they are having quality repairs done, getting price discovery and certainty as well as quality repairs.
Another is Automatic Labs. It was recently acquired by Sirius XM but we were investors. They provide vehicle telematics services. A primary use case there concerned teen safe drivers. We know when new drivers start out they do not have the experience that older drivers do, and are more accident prone. So we partnered Automatic to install devices so parents could help coach their teens to make them safer and better drivers.
Another investment is around collision. We partnered a company called Snapsheet which is using mobile technology. Members can take a picture of the damage to their vehicle using their mobile phone or tablet, and have their claim settled efficiently and conveniently.
Describe some of the experience and skill of other team members?
We have a great team in corporate development from a variety of disciplines. We have eight professionals focused on strategic investments, and then two highly-qualified support personnel that help out with a variety of activities. The backgrounds of our investment professionals are varied, but everyone generally possesses an advanced degree as well as practical experience, understanding how companies operate, and assessing startup business models.
We also have a couple of individuals on our team who possess extensive operating experience at USAA, which is really critical in helping corporate development understand key business gaps and priorities, and assess fit for new technologies.
Within the broader business we have two main entities that play key roles regarding our strategic investment activities. The first is a working group of key business executives that help inform where we should consider investing. This group meets roughly once a month, and is a forum to discuss new investment ideas, obtain business support and receive direction, candidly, regarding our focus areas.
The second is our investment committee. We have a cross-functional group of the most senior executives at USAA who guide our investment decisions. We seek their formal approval prior to making an investment, and periodically review our existing portfolio investments with them, discussing both the financial and operational performance.
I should note that business sponsorship really is key for us. Any time I take a new opportunity to my investment committee, the business sponsor is at my side. Generally, when we are conducting a portfolio review, my investment committee is really as interested in hearing from the business sponsor about integration progress as my report on the financial results.
Do you find that the core business is sufficiently strategic and looking further out than just looking for a solution to today’s problems?
Generally, I would say we are very forward-looking and it is something our members require from us. They are forward thinking and tech-savvy, and we have seen they adopt new technology at a pace much faster than the average consumer, largely because they are highly mobile and digital.
The military moves around quite a bit, and things that were, I would say, a legacy hindrance to our business, in terms of not having insurance agents and not having bank branches, was initially detrimental to us. But the way the future has evolved, it has been extremely favourable to us in terms of dot.com and mobile. People do not want to go into a bank branch anymore, so the fact that we never had that bricks and mortar cost structure has evolved favourably to us.
We also have a direct insurance model with a large contact centre in San Antonio, and other cities with a high military concentration. That used to be a negative to our distribution model, but has really turned out favourably.
How do you support the ventures?
First, with an operating agreement. Startups would like to have us as investors, but would love to have USAA as a customer. An investment by USAA is obviously not a guarantee of an operating agreement – the portfolio company still needs to win and continually earn our business. But with that said, we are a strategic investor and we seek to partner our portfolio companies.
Second is really subject matter expertise. Many startups have great ideas, but may lack insurance, banking or investment industry experience. So a portfolio company has a partner with both the corporate development team and I have generally found our lines of business executives are generous in sharing their time and expertise.
We try to invest under terms that really encourage the success of a company. We want our portfolio companies to excel and be the dominant player in their markets. So we do not ask for terms that try to limit their market potential or exit opportunities.
We possess an excellent track record for follow-on investing. We have a long investment horizon, and are capable of continued funding for promising businesses.
The last is around press releases and customer reference calls and things of that nature. We are extremely protective of the USAA brand, which has been carefully cultivated over the past 90-plus years. But we know the value of the brand of USAA for startups, and we try to be thoughtful in our publicity.
We have a mix of board director and observer roles, and try to be thoughtful about which we pursue. For investments that are core to USAA, we are willing to dedicate the time and attention required of board directors, because we view these as critically important.
Board directors and observers are members of our corporate development team, and not lines of business, so we have tried to minimise any potential conflict of interest. We never want even the appearance of being conflicted, because as representatives of the shareholders, we are assuming the duties of care and loyalty seriously. Personally, I have the privilege and responsibility of sitting on three boards, and I am an observer to one other.
How do you measure your financial and your strategic performance?
We have a dual mandate of strategic and financial returns. And as a recovering consultant I like to think of it as a two-by-two matrix, with the X axis as mission fulfilment, and the Y axis as opportunity for financial return. So the top right box is where we want to be, high-high. And the bottom left box, low-low opportunities are an easy pass.
Where we may differ from others is we are also likely to pass on the top left box, the high financial return but low mission fulfilment. It is just outside our remit and we want to be very thoughtful with our members’ money and not expose ourselves to strategic drift.
On the lower right box, high mission fulfilment with moderate to lower financial return are opportunities that we will consider, especially if there are ways to improve the financial return profile.
In terms of strategic return, let me go back to the TrueCar example, we are looking at things like the amount of money USAA members are able to save off the manufacturer’s suggested retail price by utilising our car-buying service. We also know that when members are buying a car, they frequently need an auto loan or they may reprice their auto insurance. So we look at the take rates of members that are utilising our car buying service on our core products such as auto loans and auto insurance.
Then regarding financial return, we’re looking at traditional metrics like internal rate of return, cash on cash. I do not want to underemphasise the importance of financial return, because while I mentioned the dual mandate, the requirement for acceptable financial returns really is critical, because without it the program is not sustainable.
What do you do to relax?
I am blessed with a beautiful family, wife and two elementary school age boys, so they keep me fairly occupied outside the office. As a family, we enjoy travelling and sports. In addition, personally, there are 53, 14,000 foot summits in Colorado, and I am trying to get all of them. I have only got nine to date, so I have kind of got my work cut out.
You can listen to this and other interviews on a podcast, subscribe at gaulesqt.podomatic.com. Andrew Gaule is the author of Purpose to Performance; Innovative New Value Chains, and is CEO of Aimava, leading open innovation, venturing and corporate venturing programs to drive strategic benefit. If you have interview ideas, email andrew.gaule@aimava.com or James Mawson jmawson@globalcorporateventuring.com