Andrew Lockley – Exponential Investor (United Kingdom) –
We’ve covered several companies that have raised money this way – and some have gone on to do very well indeed. You can see the details of one such firm, here; their value growth has been remarkable.
Crowdfunding is an ideal way to get started, with investing in fast growth tech ventures. To help you profit from this novel market, I’ll soon be hosting a private call. If you’re serious about adding fast-growing firms to your portfolio, you need to be on it.
The beauty of this way of investing is that it suits everyone’s budget. Whether you want to put in a tenner, or hundreds of thousands, you’ll find a ready home for your cash. What’s more, you’ll have the fun of backing some of the UK’s most interesting investments – getting in right at basement level.
Today, we’re focussing on one tiny tech firm. This isn’t a live crowdfunding investment, but it’s exactly the kind of firm we’ll be appraising, on our forthcoming call.
Today, I’m going to tell you all about Stable.
Back when I studied economics, I learned all about unstable agricultural prices. Growers plant according to last season’s market prices – which leads to cyclical over and under-supply.
Add in the complications of weather, disease and pests – and farm planning turns into a financial headache. This muddle is a great opportunity for innovation – and it’s no surprise that technology is disrupting this market.
Today, I’m talking to Richard Counsell, founder and CEO of Stable – a startup that’s looking to help farmers cope with fluctuating prices.
AL: What is Stable?
RC: Stable is an Insurtech company that helps family farms around the world to protect themselves from volatile commodity prices.
Prices and crop failure are still the two main reasons farms succeed or fail, yet the risk management industry was last disrupted in 1848, in Chicago. This is where we saw the first innovation in derivatives for trading agricultural products.
AL: What problem is Stable addressing?
RC: Commodity prices will always be volatile, due to inelastic demand and supply. Crops always take time to grow, no matter how high the prices are. Likewise, many products are perishable – so they can’t be stored, when prices are low. Historically, most family farms were mixed farms – with crops, livestock and milk for sale. This mixed farming provided a natural hedge against price falls in any single commodity. As farming modernised and became more capital intensive, most family farms specialised. This allowed them to benefit from economies of scale – but it increased their vulnerability to fluctuating prices.
AL: Aren’t governments heavily involved in agricultural markets?
RC: For the last 40 years, the EU’s Common Agricultural Policy (CAP) insulated farmers from volatile prices with quotas, import tariffs and price intervention. However, in the last 10 years the CAP has become more market-orientated. Public subsidies are increasingly spent on rewarding farmers for environmental work, rather than on price support.
For UK farmers, Brexit will almost certainly result in less public funding for farmers, meaning that the prices they receive will become increasingly important. This creates an immediate and significant opportunity: to deliver a simple and modern hedging solution, using the latest technology and design.
Overall, 12 million European farmers are now exposed to volatile prices – but without a risk management tool that is simple to use – and affordable for all farmers, worldwide.
AL: How exactly does Stable work?
RC: The UK government, (DEFRA) has been collecting and publishing farm commodity prices since the Second World War. We took these under-valued indices, and analysed the data behind them – using one of the UK’s most powerful computers, ‘Blue Joule’ at the Virtual Engineering Centre in Liverpool. This enabled us to use our machine learning expertise to price the risk of a price fall and dynamically allocate capital across the 12 commodities.
We then built a very simple “chat bot” user experience for a farmer that makes insuring the farm against a commodity price fall quick and easy as insuring your car. It takes less than two minutes – and farmers can pay the premium quoted by instalments, to spread the cost.
Stable’s index insurance approach avoids the complex Know Your Customer (KYC) regulatory and knowledge-based barriers for farmers. It also reduces operating costs for Stable. The only thing the farmer can lose is the premium paid. This familiarity with insurance provides a huge advantage over derivative-based solutions, that farmers find confusing and risky.
AL: How do farmers make a claim?
Any payment due to a farmer is made automatically. It works without any claims process, three days after the index is published. The result is a product designed and built from the ground up for farmers, rather than financiers.
AL: Tell me about your team?
RC: As the founder and CEO, I have a unique background that combines farming and software. My family have farmed in Somerset for centuries – but I spent the first 15 years of my career working in technology, ending up running a Chicago-based mobile data company. I was lucky enough to win the Barclays Bank Entrepreneur of the Year.
While working in Chicago I became fascinated by risk management for farmers, and how ‘normal’ it was for US farmers to hedge future prices. As a UK farmer, I couldn’t believe how complex it all seemed. I found it hard to imagine many farmers in Europe using exchanges that – despite their farming origins – now seem to be designed for speculators. It became very clear that risk management was an industry crying out for disruption. There was a need for a simpler, lower risk and more farmer-focused solution.
I was lucky enough to be awarded a prestigious Nuffield Farming Scholarship in 2016, which led to further research work at the University of Liverpool. The project grew over time – and the team is now made up of world-class data scientists and quants (quantitative analysts). They have done the financial engineering work on the government indexes we use. These are the basis of how we calculate farmers’ losses, and price the risk. This team is led by Professor Hirbod Assa, who has a PhD in Agricultural Economics and a PhD in Financial Mathematics.
AL: Why aren’t futures used in Europe?
RC: Futures are the most well-known risk management tool. They’re extremely effective for larger agribusinesses – but there are a number of limitations. Farms in Europe are typically smaller than in the US – with an average farm size of less than 50 hectares. Because of the time and costs involved, brokers will not work with any farms smaller than 400 hectares. Only 5% of EU farms are over 50 hectares and only 1% globally. This creates a substantial opportunity to democratise risk management for family farms and create a global “mobile first” risk management company for farmers.
AL: Why exactly can’t small farms use futures?
RC: Using futures in Europe requires opening a “retail” financial account with a broker, with all the associated checks, fees and restrictions. Most brokers will require a £10-50,000 deposit, just to open an account. The farmer then needs to maintain a margin account, to support their trading positions. Here, there is a chance they could actually lose more than they are trying to protect!
AL: So what’s the competitive advantage?
RC: By contrast with futures, Stable offers a simple insurance alternative. The farmer can get a free online quote from our ‘Chatbot’ in less than two minutes, insure as little as one tonne and the maximum they can lose is the premium they have paid. It’s as simple as insuring a car – or tractor!
The farmer simply answers three questions:
Then, an instant premium quote is generated for payment online.
If the index price falls below the price selected, the farmers lost income is replaced in less than three working days – without any claims process or paperwork.
AL: Why hasn’t an index insurance solution been tried before?
RC: Insurance requires the wide pooling of risk to be sustainable. The major problem with commodity prices is that prices are systemic – if the price of milk falls in Somerset, it also falls in Suffolk. Systemic risk keeps insurers awake at night, so until now it’s never been considered.
AL: How did Stable overcome this systemic risk issue?
RC: It all started with an idea that was inspired by an old English farming adage: “Up Corn, Down Horn”. Translated into more modern terminology: “within a one year period, farm commodities prices are not very correlated”. We realised that if this ancient farm saying could be proved mathematically, then we would have an opportunity to remove the systemic risk.
Stable then spent two years researching commodity prices. In particular, we looked at the precise correlations between each commodity over time. Just like a traditional mixed farmer, we wanted to explore the level of diversification we could generate between each commodity.
To do this we partnered with the University of Liverpool’s Institute of Financial and Actuarial Mathematics. Our data scientists used machine learning and multiple algorithms to run millions of simulations – analysing decades of Government data. This ground-breaking work eventually enabled us to build a complete insurance platform. This can deliver a simple solution for farmers and a sustainable product for our underwriters. Just like many insurtech startups, Stable runs the platform and owns the clients – but passes the underwriting element onto underwriters and reinsurers.
AL: What’s next for Stable?
RC: After two years of work with the team at Liverpool University, we’re now working with underwriters to launch Stable in the UK in 2017 – before rolling out across Europe.
The Chatbot delivery, and automated claims settlement, lowers operational costs and makes the product very scalable. We can sell direct – or via partners. Our partner firms are likely to include banks and co-ops, which have an existing relationship with our target market.
The interest from banks has been considerable. They have as much to gain as the farmers – because Stable brings more robustness to their borrowers’ businesses. Over time, we hope to be able to lower the cost of borrowing for our customers – to the point where Stable becomes cost-neutral. You can think of this a little like taking out buildings insurance, when you get a mortgage.
To date, the R&D has all been funded by European Grants and angel investors. Now the insurtech platform is complete, we’re looking to close our seed round, expand the core team and get the Stable platform into sales.
AL: How are things looking for the firm?
RC: We have a great chance to build a big business for our shareholders, while helping families invest in their future with confidence. That feels like a pretty cool thing to be part of! It’s a privilege to be part of a team that’s incredibly motivated to solve a real problem for millions of family farms across the world.
Is this a strong and stable investment opportunity? Let us know: email@example.com
…and don’t forget to book your place on our private call.