How designing a process to identify clear problems with fuzzy solutions has led to the launch of Clearcover, Moonrise, and Relay Platform (and more).

“We’re not off in some ivory tower, building whatever we think is exciting – and it’s important for the core business to know that.“

Ryan Rist and Sherry Eckholm help lead the Venture Build effort for American Family Insurance ("AmFam"), the Madison-based private mutual company that offers property, casualty, and auto insurance, commercial insurance, life, health, and homeowners coverage, as well as investment and retirement-planning products. 

Venture Build is part of AmFam's corporate development function and is primarily devoted to building up new ventures that align with how it expects the market will evolve over the coming years. As Sherry says, “our job is to consider and prepare for various plausible futures, not just the most plausible future.”

Given the scale, ambition, and thoughtful of their approach and the results, thus far Clearcover, arturo.ai, Relay Platform , Moonrise, Opterrix, 

In this talk we discuss: 

• How starting with investing laid the groundwork for a successful incubation effort
• Successful innovation efforts require investing properly and accounting for risk
• Balancing creative thinking, fast decision-making, and customer focus
• Holding venture projects to ambitious benchmarks
• Strategic value is driven by strong financial results
• A heavy emphasis on design-thinking has been the trait that most distinguishes it from peers. 
• Ideas are a dime a dozen
• Their use of milestones and checklists 
• The importance of consistent and meaningful support from the very top (CEO Jack Salzwedel)

Enjoy!

Disclosure: AmFam Venture Build is a customer of Radicle. 

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STU: Ryan and Sherry, I really appreciate you two taking the time to chat with us today. I’d love if you could introduce yourselves and Amfam Venture Build.

RYAN: Sure. I'm Ryan Rist, the Director of our Venture Build team at American Family Insurance.

SHERRY I'm Sherry Eckholm, and I manage the design team within AFI Build. 

STU:  What is Venture Build and what does it focus on?

RYAN: AmFam Venture Build's mission is to build up new ventures that align with how we expect the market will evolve over the coming years.

STU: Why is building new businesses important to AmFam? 

RYAN: AmFam wants to remain on the cutting edge. Leading our industry and meeting customer's expectations are integral missions at this company, and we’ve found that building plays a vital role in both of those. But it took time for us to learn how, exactly, to build effectively. So in the first few years of establishing our division, we were partnering with startups and other businesses in the ecosystem, we were making acquisitions, we were putting together a venture capital team, and we were running a ton of experiments. But we were not building. 

Eventually, we had run enough experiments to perceive clear opportunities in the market. Having researched startup studios and the increasingly popular practice of building businesses, we realized that having an in-house build operation was the best way to address those opportunities. 

And honestly, I’m glad that this was our evolutionary trajectory. I wouldn’t recommend that any innovation team start with a building arm from day one, because that kind of work demands a lot more time, maturity and patience than everything we were doing when we were founded. 

SHERRY: I recently heard one of our leaders say that our work around innovation is our insurance policy against irrelevance. I think that idea hits the nail right on the head. As an organization, we do focus a bit on planned innovation, which anticipates a future that largely resembles what we’ve got today, just with new technologies and subtle, incremental advancements. But we’ve also got to be equipped for a future in which planned innovation suddenly isn't as relevant as we thought it would be. As we’ve seen with COVID, things can suddenly turn on a dime and cause massive disruptions throughout the market. So our job is to consider and prepare for various plausible futures, not just the most plausible future. 

STU: Can you tell us a little bit more about the lessons you took from your initial work that then informed your decision to launch a build strategy? What did partnering and acquiring teach you about building? 

RYAN: When I look back on our evolution – which, by the way, is still ongoing – I see that we were very fortunate to invest in startups from an early stage. If we had started by setting up an innovation lab in an ivory tower, I don't think we would have ended up where we are, but we chose to get our hands dirty and invest in startups. Now, in order to be a smart investor, you have to see and speak to a lot of companies, you have to establish a good reputation amongst entrepreneurs, and you have to build your network. We knew that. And in the process of developing a capable and reputable scouting operation, we started to adopt, embrace, and truly understand both the entrepreneurial mindset and the investor mindset. 

Listen, no matter your situation, you’re not going to find much success in innovation if you don’t know how to invest properly and account for risk. By investing in startups and educating ourselves about the opportunities out there, we ensured that we knew exactly what building a project from the ground up would entail.

And once that mentality was sublimated into our culture, we became much more nimble than most corporate venture teams. We knew how quickly companies were moving and how little investment they were taking on. That mentality, which emphasizes creative thinking, fast decision-making, and customer focus, has been a foundational part of our evolution. Using those tenets as our philosophical pillars has helped to unlock and open up each new stage in our development – building, in my opinion, is one of the more advanced stages in that process. 

SHERRY: And it all felt completely organic. Whenever we made an intentional step forward, we would look back at the steps we’d taken and decide what our next step forward would be based on our trajectory thus far. We were building this whole enterprise as we went. There was no predetermined blueprint. 

And Ryan is exactly right – our division has reached its current level of maturity in large part because we never attempted to build an ivory tower of innovation. There’s an undeniable trend of large businesses that try to become innovative by building that ivory tower, because they know it’s the quickest, simplest fix. We see it all the time: business leaders go to conferences; they have off-site meetings that they tout as “the next frontier;” they put new investing mechanisms in play. But then, as soon as those same executives see that innovation takes time and won’t bring immediate returns, they decide that there’s no point. So I feel very fortunate that AmFam had no expectations of returns within those first two, three, or four years. They gave us the time we needed to keep our fingers on the market’s pulse and build something truly sustainable. 

STU: How do you determine which markets you’re most interested in? Do you focus on markets that are adjacent to AmFam’s core business operations?

RYAN: Yeah, we're currently focused on adjacent markets. But we have built insurance businesses in the past. One of our earliest forays into venture building, as a matter of fact, came when Kyle Nakatsuji, one of the principals on our venture capital team, presented an idea that he hadn’t seen rolled out in the market. He ended up using our investment to scale the concept and create Clearcover, which is now a sizable and successful insurteh that's doing some great things. 

So we’re not and we’ve never been averse to building in insurance. At this point, though, we as an organization have five insurance companies that are all innovating in their own way, we feel as if our attention is best spent elsewhere. Now, it can be a real challenge to build and invest in a project that could cannibalize part of the existing business model – it’s a very real risk some corporate venture arms run, and it’s also part of the reason some big companies are reluctant to venture build in the first place. Instead of shying away from that, though, we’ve found a way to feed the core business with new capabilities and data streams, both of which function as the raw material of insurance.

So as long as we can use insurance builds to develop more data insight, along with the tools and technology to make sense of it all, we’ll still have some degree of success building businesses in the insurance space. And, quite frankly, we do have an inherent advantage: we have a pipeline of customers; we have existing data assets; and we have existing channels that we can work through.

When we’re looking to build in a new space, our only criterion is that our investment in a startup could increase AmFam’s value proposition to our customers. We’re currently looking, for instance, to expand our offerings for auto, home, and life insurance and, really, every product we provide. And we, in exchange, have a lot to offer to the startups we work with. We've got an amazing pipeline of customers and a relatively low customer acquisition cost. All of this is to say that we’re only going to invest in areas in which we can support a startup project while also enhancing our core business. 

STU: How do you define success for venture builds, and how do you weigh financial and strategic return? 

RYAN: Having worked in innovation for a while now, I’ve come to believe that it's still critically important to have ambitious financial goals. A lot of innovation organizations choose to punt on the financial side and say, “Well, we're generating activity or strategic value, or we’re learning more about the market, and really that’s all that we can reasonably expect.” But tons of business leaders aren't able to quantify those kinds of benefits, and they end up having very understandable aversions to innovation investment. I mean, who can blame them? Ultimately their job is to turn a profit, and if they can’t exhibit how an innovative startup will help accomplish that, they’re not going to be able to justify working with that startup. So I really do think that venture projects have to be profitable in order to be truly successful. We should be holding these projects to ambitious benchmarks and expecting that they’ll perform at that level in a certain time frame.

As long as you're focused on the right projects, that strategic value will come, but it has to be driven by strong financial results. This way, by expecting the project to perform to market, you’re setting yourself up for success, and you’ll avoid throwing good money after bad. That high standard makes financial return more likely, and the strategic value of your investments becomes icing on the cake. 

STU: What gives you guys confidence that you'll be successful? Is there a particular process, approach or philosophy that gives you confidence that venture build efforts will be successful?

RYAN: Well, I'm excited that Sherry is with us today. As the leader of our design team, she brings a wealth of experience across industries, and that experience goes a long way toward quickly identifying customer problems and establishing customer traction.

A lot of startups can't afford to bring in people like Sherry, who tend to gravitate toward top-end design firms because they enjoy working with a variety of clients. But our heavy emphasis on design-thinking has been one of the traits that most distinguishes us from our peers. Our design team consists of so many amazing people who are able to get into the field and ensure that we're not building anything that people don't want. And Sherry leads that group. 

SHERRY: Yeah, our build team is relatively small and nimble, and a large portion of that – five people, to be exact – is our design team. That’s not even accounting for the people who come in to help out over the course of the year. We’ve chosen to focus so heavily on design in order to ensure that we deeply understand the problem and the customer’s desires. 

With all that being said, this is still a game of numbers. We have to keep the front end of the innovation pipeline full at all times, because as you work through and validate some new ventures, others will inevitably fail. And when that happens, it’s important to have on deck potential projects to which you can quickly pivot your attention. 

There's been tons of press recently about the emergence of design-thinking in business, and yet there still aren’t many large enterprises that have a designated C-suite position for design or design-thinking. But at AmFam, even though that hasn’t happened yet, they've still managed to bring on some extremely talented, experienced people, while encouraging us to make bold creative decisions. 

RYAN: There are a ton of organizations that claim to be customer-centric, but many of them aren’t using the right tools to follow through. Honestly, skilled practitioners of design-thinking consistently offer the most effective customer-centric methodologies. There’s just no doubt about it. And you can always tell who knows what they’re doing – it’s one of those trades where the 10,000 hour rule really applies. I guarantee that a design expert at work would look nothing like me fumbling around and trying to navigate their work.

STU:  Can you talk a little bit more about process? How do you go from identifying a consumer problem to introducing a potential solution? 

SHERRY: There's a simple, cookie-cutter answer to this question that I’ve heard tons of times: we go out, we talk to customers, we understand their needs, and we use our applicable assets and capabilities to address those needs. When it’s all said and done, we’ll have found the intersection of desirability, feasibility and viability.

But that leaves out a key part of the equation – the enterprise. Understanding and fulfilling Amfam’s needs is just as critical to us as solving the customers’ problems. For us to do our job, then, we need clear, effective communication from our leaders. And we've been so lucky, because our leaders have had no problem helping us identify thematic areas that we should explore and real customer problems within those areas. As a result of that guidance, we’ve had incredible success partnering with some of AmFam’s key leaders and operating companies. 

That support has also legitimized our operations within the company – the leaders we work with stand firmly behind us and demonstrate that we’re solving real problems and building valuable new projects. Without that thread to connect venture operations back to the core business, outside-in innovation would lose a lot of its effectiveness. Because, again, we’re not off in some ivory tower, building whatever we think is exciting, and it’s important for the core business to know that. 

RYAN: Our emphasis in building used to be on ideas, but we’ve since realized that ideas are all over the place; they’re a dime a dozen in this industry. If you set up a workshop, you can generate plenty of ideas in a couple of days or a week. 

Instead of coming up with ideas, we always begin the process of building with what we refer to as “Clarity of Problem, Fuzziness of Solution.” Sherry’s team identifies and clearly delineates the nature of a problem, so that we understand exactly what we’re trying to address, but that comes with an open-ended acknowledgement that we don’t have a solution in mind. Now, this structure demands a certain amount of patience and humility, because that fuzzy solution will only start to come into focus when we’ve spent a lot of time in-market with our customers: in their homes, in their cars, following them around Home Depot, and wherever they're buying. That's where design-thinking shines. 

Once we’ve identified a solution, we start prototyping. And listen, there are so many ways to validate a solution without ever having to write a line of code. All we have to do is get people lined up with their credit cards and ready to buy before we start pouring resources into the build phase.

The small, full stack engineering team that makes up our build operation then gets to work, and their job is anything but easy – they have to develop something that will quickly appeal to paying customers, all while keeping their eye on scalability. And Sherry's team is an essential part of that transition from prototype to build. Once they’ve fully built the product, we can start rolling it out into the market. 

Our expansive entrepreneurial network is also a major source of support throughout this process. Every project is assigned an Entrepreneur in Residence at its very earliest stage – the earlier we put an EIR on the team, the more successful they are. And that's because experienced entrepreneurs, simply put, know what they’re doing – they know what investors want, and they know the appropriate benchmarks at each particular stage. They bring a keen sense of how to solve problems and a tenacity that really galvanizes everyone around them. 

And so our whole process relies on this confluence of contributors: design thinkers, experienced entrepreneurs and full stack engineers. It's a pretty rigorous process, with seven to 10 different milestones and checklists that determine when the investment team, which Sherry and I are both on, releases incremental funding. And it's all modeled after how investors in the real world think.

STU: Many innovation efforts are focused on building businesses that are 100% owned by the parent, but you also incubated Clearcover. Where does Amfam fall on that spectrum? Can you speak to the advantages and disadvantages of both approaches? 

RYAN: We have tried both approaches. So arturo.ai, Clearcover and Relay Platform are all pure spin-outs, which means that we gave up some of our equity to bring in other investors and incentivize the team. We've also done builds where we maintain complete control: Moonrise and Opterrix are two examples of that. Whether it’s an exact science or more of an art – and truth be told, it’s a bit of both – the process of picking the investment approach is never easy.

I'll give you an example. Businesses that feature artificial intelligence or any kind of machine learning as a central component of its business need to already have a vast trove of data if their plan is to hoard that technology. If they don't have that reserve of data, then ultimately they will end up with a pretty crappy technology. And so by offering that technology to others, AI businesses increase their supply of training data, which means that the technology will improve quickly. Now, new AI technologies usually present winner-take-all or winner-take-most opportunities – because of that, in some of these cases, it makes sense to spin-out a project in order to create and capture the most value. We have to bring in other investors and, with them, larger data sets. Arturo is a perfect example of this.

In the case of Relay, we decided to spin-out the project because there's a ton of consolidation in the reinsurance space and skepticism from customers about control of platforms. Customers were looking for a platform that wasn’t controlled by a single entity, which meant that the success of that platform was predicated on its independence. 

We always make these decisions on a case-by-case basis, and they’re consistently challenging. When do we give up control? When do we keep control? Once we relinquish control over a venture, the only way to recover it is by buying it back on the market, and we all know that that can be extremely expensive.

STU: Can you talk a little more about EiRs and the role they play in the build process? Where do you find them? Why would they look to build something with AmFam? 

RYAN: Well, we find them all over the place, and they tend to be people who have ample experience building businesses. These are people who are passionate about building projects, but they’re not sure what they want to do next. They've run out of ideas and they also might have reached a point in their careers where they want some stability. So we offer them an opportunity to work and have some fun.

We've had a lot of success bringing in entrepreneurs who are very experienced but, you know, probably haven't had a $500 million exit. These are people who still want to work or need to work, but don't know what they want to do next. With the help of partner companies such as Prehype, we have built up a national network of qualified people who are looking for their next gig and could serve as EiRs. Once they’re brought on, EiRs serve as the team leader or project manager, and they remain in that leadership role until the project is ready to start scaling. At that point, they can decide whether they want to keep going with the venture or return to the job market until they find the next gig. This setup has proven very appealing to those sorts of entrepreneurs, and we've been able to attract a lot of them. 

But it’s not just this arrangement that attracts entrepreneurs to work with us. A bunch of EiRs who come in to work with us are aware of our top-notch design team and all of the resources we have that they probably wouldn’t find anywhere else. These entrepreneurs are so excited to collaborate with people like Sherry, who has her PhD in Linguistics and has worked for top end firms such as Doblin. The people on our design team have tools and techniques that are hard to find anywhere else, and our EiRs know that.

Finally, of course, AmFam is a large company, which means we have plenty of assets that we can deploy to each venture’s advantage. The fact that we can unlock the vault and open up access to customers, data, reference design and industry experience puts entrepreneurs in a position where they feel set up for success.

STU: I’m curious to hear how you design incentive structures.  With innovation investments there are numerous stakeholders: founders, external investors, and corporate sponsors. The pie is the same size as with a typical venture, but there are more people picking at it. How do you balance that?

RYAN: That’s a great question. We have to balance it carefully, and we want to make sure that we’re setting realistic expectations with every major stakeholder early on. A lot of the entrepreneurs who we work with understand that we function as another co-founder, since we help get the business up and running, and we plan to continue supporting it. With us in their corner, entrepreneurs have access to funding and capital that would otherwise be harder to attain. Considering this, we receive the same amount of equity as the other co-founders. And we're always happy to share cap tables with them to make sure we’re on the same page. 

In other cases, when we own a majority interest in a venture, we develop compensation plans that the entrepreneur will sign on to. Obviously, this arrangement isn't going to work if we don't have a team that's passionate and dedicated to the project, so the onus is on us to build compensation and ownership plans that get the right team motivated to grow this project to its full potential. 

STU: When you look back at your efforts over the past couple of years, what project or accomplishment are you most proud of?

SHERRY: You know, I’m proud of the fact that we're still here, and that the value we bring to AmFam becomes more and more apparent every day. There are so many innovation groups, arms and divisions across all industries, including insurance, that have seen their doors close. And we’re still here. Our talent pool continues to grow and people are starting to come to us in search of support. So I'm very proud of that. 

STU: Do you think that success can be attributed to some of the methodologies and philosophies that you spoke about earlier, like customer-centricity? Or does it have more to do with the way in which you establish relationships with the other stakeholders in the organization? What do you think accounts for the fact that you’re not only still here, you’re growing? 

RYAN: I think it's due a multitude of factors, along with a bit of luck. We’re so lucky to have a CEO, Jack Salzwedel, who has been at the helm for a decade now, and who has always been one of the most outspoken advocates for our work. He consistently allows us to experiment and fail as we continue to hone our craft and refine our ideas. 

Now, if you look at the numbers, most C-suites turn over significantly every few years – we haven't had that. We've had consistent and meaningful support from the very top. If we hadn't had that, I think this whole situation could have been a lot different. In my opinion, our focus on the market and entrepreneurs is secondary to the unconditional support from the top that we’ve been so fortunate to have. 

STU: Did you have to earn that support, or were you blessed with someone who fully understood the imperative of investing in innovation, despite its risk profile?

RYAN: We've had a couple of very special leaders, Peter Gunder and Dan Reed, who have been running our division for some time. They’re the ones who nurtured and cultivated that support from the top. They knew that insurance isn't a space where you can convince an enterprise to wait five years for a return on investment, but they were able to reconcile those expectations with the risk that comes with venture work.

Peter did such an amazing job at applying his investment background to innovation. He would always talk about how “You have to pay the King his shilling,” which means that if we were working on a project that had a three-to-five year horizon, we better be working on something that could deliver immediate value. If we weren’t getting the King his shilling every month, we could end up in trouble. 

As a result of that philosophy, we ended up with a portfolio of activity and results that delivered hits, year after year, and after enough years, we had compiled a greatest hits album. That collection of hits, in turn, has engendered more support from the top. So thanks to Jack, Peter and Dan, we had the time and encouragement we needed to be able to deliver value. And that’s a huge reason we’ve gotten this far.

STU:  In venture capital, there’s this concept of a J curve. You develop a portfolio by making a bunch of investments: the worst investments will go out of business in a year or 18 months, while the best investments don't start bearing fruits until year three, four or five. How do you “pay the King his schilling” in that first year or two when you don't typically see more traditional returns until later on? Is it by communicating clear expectations and establishing signposts so that the executives can know what to expect 12-18 months from your start date?

SHERRY: This goes back to what I was saying about understanding the needs within the organization, listening to the leaders, and fulfilling their needs. As long as the leaders know that you’re working for them and trying to solve the problems that they have presented to you, you’ll have an easier time sustaining engagement from those higher-ups. Even if it takes three to five years for a project to add conventional value to the enterprise, those leaders will have been along for the journey, and they’ll fully understand that because you’re working within the ecosystem of a larger problem, it’s going to take time to do it well. 

RYAN: This is why it's so important to choose what you build with absolute prudence. The advantage of doing venture building within a company as big and diverse as Amfam is that a project like Opterrix, which will probably need seven to 10 years to generate sizable returns through a valuation, is still delivering tens of millions of dollars in immediate value because it's also built to enhance and improve the core business. By listening to our leaders, we can simultaneously help them and buy ourselves more time to build out a project. 

With that mindset, we don't have to wait to reach the typical value benchmarks in order to prove that our projects are valuable. We manage to thread that needle by building projects that help bring value to the core business in the near term.

STU: Lastly, how can people find out more about your efforts? 

RYAN: They can just contact me or Sherry directly.

SHERRY: Yeah, feel free to reach out to us on LinkedIn.