Getting Customers to Prepay to Start Up, Then Building a $300M Business: RMS CEO Hemant Shah (Part 3)

Sramana: So you had the idea that you could approach your customers and ask them if they felt the problem was significant?

Hemant Shah: Yes. Rather than shying away from the risk, they could have an alternative that was better than burying their heads in the sand. Some of them were so worried, they would not even face the risk. We brought models based on rigorous science to let them evaluate the risk even though there was not a lot of data compared to other types of risks they had to insure against. We were able to bring in physical science to fill in the gaps that would let them make better decisions, which would let them allocate more capital with more confidence.

The end result would be their providing a better product to society, which is the entire point of this exercise. We captured the imagination of a few early adopter clients who provided us with customer funding. They would actually prepay for development of prototypes.

Sramana: What was the first insurance company to give you a prepaid contract?

Hemant Shah: One of the first was a company that is now part of the Munich Reinsurance Group, which is the largest reinsurer in the world. The company that paid us for a contract was a specialty insurance company. They used to provide earthquake insurance and lens insurance. There were a few companies who were in that early adopter group.

Sramana: There are a lot of insurance companies out there. How did you get to the companies that believed in you? Was there anything specific you did? The model you are talking about is something that we teach. We believe strongly in customer validation. If you are really solving a customer pain point, then the customer will be willing to write you an advance check.

Hemant Shah: That model was not our original plan. Plan A was to get VC funding due to our brilliant idea. It didn’t work out that well.

Sramana: That model does not work out that well today, either. VCs are generally looking for validated business plans. If you thought VCs were risk-averse then, they are far more so now. The way you built your business is actually the textbook manner that we advise people to follow.

Hemant Shah: One of the things we did early on demonstrated how naïve we were. We would go to the library at Stanford and research the insurance industry. We read lists and rankings, and we found a conference in Honolulu that was run by a society that had a focus on earthquake insurance. A couple of us went out to Honolulu with our IBM software. We just got a hotel room, and I ran around the lobby introducing myself.

I met another young guy who worked in the reinsurance business. Our model captured his imagination, and we started giving demos at this conference. That led to follow-up meetings. That is where we found our foothold. We were fortunate that there was a coherent industry. We could more than just imagine a customer. We knew who they were and we found a conference to meet them at and we had a prototype demo to show them.

One of the first major follow-up meetings after Honolulu was with Munich Reinsurance Group in Princeton, New Jersey. They wanted a demo, but we did not have any money. I had the audacity to call them up and tell them that if they would hire us to show them what our software could do, we would call it a pilot and charge them $20,000. We would teach them about earthquake risk and show them our capabilities. We also told them that if they liked our model, we would credit their pilot funds against any future licensing they purchased. That gave us working capital to buy plane tickets and hotel rooms.

This segment is part 3 in the series : Getting Customers to Prepay to Start Up, Then Building a $300M Business: RMS CEO Hemant Shah
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