Joan Schmit, professor of risk and insurance at the Wisconsin School of Business, talks about risk management in business. As the program lead of Creative Destruction Lab-Wisconsin Risk Stream (CDL Risk), Professor Schmit discusses the objectives of the program, and gives examples of how connecting mentors and entrepreneurs through it is helping to improve society.
Joan Schmit, professor of risk and insurance at the Wisconsin School of Business, talks about risk management in business. As the program lead of Creative Destruction Lab-Wisconsin Risk Stream (CDL Risk), Professor Schmit discusses the objectives of the program, and gives examples of how connecting mentors and entrepreneurs through it is helping to improve society.
In this episode, you’ll learn:
7:55 What’s the role of startups and founders in shaping the future of risk management?
13:01 Benefits of CDL Risk mentorship to entrepreneurs focused on risk and insurance
17:56 How can you participate in CDL’s mentorship program? Who are the mentors?
Non-profit organization that Joan is passionate about: World Central Kitchen
Professor Joan Schmit holds the American Family Insurance Distinguished Chair in Risk Management and Insurance at the University of Wisconsin, Madison, where she has been on the faculty since 1988. Professor Schmit has published extensively in insurance and legal journals. Among her areas of expertise include insurance regulation, microinsurance, reputation risk, enterprise risk management, and the interaction of law and economics in an insurance and risk management context. She is a lead with the Creative Destruction Lab-Risk, focusing on the Risk stream. With a goal of “transforming society’s ability to manage risk,” the stream is designed for seed-stage organizations with ventures focused on risk.
Creative Destruction Lab is a nonprofit organization that delivers an objectives-based program for massively scalable, seed-stage, science- and technology-based companies. Currently, CDL runs 16 Streams in 10 locations globally (five sites in Canada, three in the United States, and two in Europe). Ventures who are accepted to the program work with mentors to sharpen objectives, prioritize time and resources, and raise capital.
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Joan Schmit: I have always known that insurance can support society and be an avenue of good. Today, I also feel that insurance is one of the more exciting areas because of the innovations that are coming forward. So, the startups are a part of that, whether they are independent or they are part of larger organizations. And I think it's critical to the success of the risk management community.
Gopi Rangan: You are listening to The Sure Shot Entrepreneur, a podcast for founders with ambitious ideas. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision. Welcome to The Sure Shot Entrepreneur. I'm your host Gopi Rangan. I'm here with Professor Joan Schmit, the American Family Insurance (AmFam) distinguished chair in risk management and insurance.
She's also the department chair for risk and insurance at the University of Wisconsin and the program lead for the Risk Stream at Creative Destruction Lab, which is how I met her. She recruited me as one of the first mentors in the program. Risk is an important topic for me and for a lot of us. We're going to talk about what that means from an academics perspective.
We're also going to talk about how she views entrepreneurship as a career path for students and others. What can we do to make it easier for founders and entrepreneurs to build businesses? How does CDL's accelerator program support startups?
Let's first start with getting to know Professor Joan Schmit. Where are you from and how did your early life shape your outlook?
Joan Schmit: I have grown up in Wisconsin. My parents both grew up in Wisconsin as well. I'm the fifth child of five and my parents were a little bit older when I was born - when all of us were born actually - in part because they met just before my father went off to war in WWII. Not knowing that it would take four years for him to return, they decided to wait to get married. My dad was 35 and my mom was 26 when they were married, and that's a little bit older than most people at that time.
They were both fortunate in that they were able to attend and graduate from university. It's surprising that my mom, especially, was able to do that. Neither one of my parents came from any kind of money, but she received a scholarship and was able to go to the Milwaukee Area Teacher's College, which is now UW Milwaukee. My father received a scholarship as a runner and he went to Marquette. So, I have these Wisconsin connections through and through.
And then there is also an innovation and a love of learning that they both brought with them. They both clearly made sacrifices to go to school and they instilled that in all of their children. The joy of learning is something that I got from my parents. In addition, I would say that they are innovators. My father's father was one of the first automobile dealers in the state. The dealership started in 1910. You can imagine what they went through to make the company successful. He started with his brother and then they ended up having two dealerships and each brother took one. When the great depression occurred, my father went to help his father, and with his brother, took over and made it successful. When he returned from the war, he was able to start yet another dealership. So, the Schmit name is well known in Wisconsin for its innovation. In 1910, there were many people still riding horses. My dad would tell the story of going out and teaching people to drive by taking the new car out to the farm, having the farmer drive him back to town, and then the driver had to get himself home. That's how people learned to drive. Yet, they were able to be successful and generate this new life.
My mother, while she was waiting for my dad to return from the war, she had many different jobs. She helped the officers learn morse code, mathematics and history. She also worked in a bakery for a while and before my dad returned, she taught third grade. She became a housewife in part because she was forced to stop working. Once a woman was married, she lost her job. But she always remained active, engaged in doing work for the community and writing letters to the editor. That's what I came to as a child.
Now, as the fifth child, anyone who has multiple children knows that parenting becomes less strict as there are more children. So I got the easy route and I was allowed to do activities that my sisters and brother were not able to undertake. I went to the University of Wisconsin, got an undergraduate and master's, then worked for a Fortune 30 company and it ended up being the company that was the prime contractor for the space shuttle when the space shuttle first took off. I was able to see innovation there as well. We did not know if the space shuttle would return to earth. It did luckily and everyone in the building was jumping for joy when it returned safely.
I learned quickly that I wasn't meant for the corporate world. I returned to the academic world, went to Indiana University, got a PhD there, and then started teaching at the University of South Carolina and ultimately returned to Wisconsin where I've been on the faculties for more than 30 years.
Gopi Rangan: Wow! What an amazing story beginning from how your parents met and I can see your dedication and your inspiration. Everything comes from that family upbringing. You have been a professor for almost four decades now. You've been teaching risk - the topic that is on the mind of pretty much everybody.
What does risk mean to you? How do you define risk?
Joan Schmit: Yes, we define risk as variability, and then I add there's variability in future outcomes over a specified time period so that we can measure it. That variability can lend itself to positive outcomes. Without risk, there is no return. What we tend to be concerned about most in my discipline, however, is the negative outcomes. Trying to predict so that there's less variability, and even when we can predict, trying to prepare for the negative outcomes. That includes trying to prevent negative outcomes or when they do occur, making them smaller in size and ultimately paying for the outcomes that do occur. That might be insurance, but insurance is just one method of managing risk. There is a variety of different ways to pay for risk and to manage it.
Gopi Rangan: Why is it important for us to understand risk and manage it for ourselves, both in our personal lives and also in business?
Joan Schmit: What I try to talk about with students is that when we don't know what's going to happen, we have difficulty in planning. We waste resources in planning for what might occur. And those lost resources mean that we cannot do as much with the resources we have. The better we're able to predict what's going to happen, the better we're able to use our resources effectively.
Now, many people focus on the negative outcome, and that that is the risk. That's not how I think about it. We always want to have fewer resources go to losses. We want smaller losses because that's an expense and everyone wants to have lower expenses. But the real risk management is in trying to deal with the uncertainty of what's going to happen and to use our resources most effectively.
We can see that today in so many different places. With cyber security, we use resources to try to prepare for a cyber attack, for example. If we knew that there was not going to be an attack, we could use those resources more effectively elsewhere, and use them for cyber-related items more directly, the better we can predict. That's really why risk management is so critical to successful business - to make excellent decisions based on the information that we have.
Gopi Rangan: Risk is not always bad. If we learn how to manage resources and predict outcomes, then it becomes easier for us to make good decisions. That's such a broad topic and such an important topic. We deal with it on a daily basis and also at a macro level and how we shape our community. Is there any specific area of risk that you specialize in? What is your area of research?
Joan Schmit: I tend to focus on the property and liability area. I've been fascinated by legal issues, so that's where most of my research has focused. I've also done work on regulation; that's related to legal issues to try to identify when regulation is helpful to society and when it might not be so helpful. Lastly, most recently I've been working on areas of micro-insurance, which are small valued policies that typically are not very desirable for insurers to offer because there are fixed costs and when the small premiums are paid and you have fixed costs, then there's very little of the premium that goes to pay for losses. That's not desirable for people to purchase those policies. So, I've been trying to identify ways to make micro-insurance more available because the people who need those small valued policies typically are in low-income cohorts.
The more people who can standardize what's going to happen to them (insurance is one of the main ways), the easier it is to get people out of poverty. Trying to find ways to make these small policies meaningful to individuals will then open up their economic opportunities, and that's desirable for everyone.
Gopi Rangan: You've already touched on many interesting trends that are hot right now: micro-insurance, cybersecurity, those types of topics. When I started my venture capital firm, I thought about risk as the foundation for the firm and I made it the front and center focus of my investments. One of the reasons why I did that was I felt that the existing industry, the insurance industry, is comprised of large organizations that move very slowly.
What is the role of startups and founders in shaping the future of risk?
Joan Schmit: I think that you're absolutely correct, Gopi, that altering the large insurers is such a challenge. To have people think differently and to be able to move quickly is a challenge. The startup community forces that movement. We see that some of the large insurers have created their own venture arms, and often those venture arms are located away from the headquarters. They have separate boards and operate relatively independently so that they're not too stuck in the large organization and are unable to move.
I'm so excited about the innovations that are coming forward. I have always known that insurance can support society and be an avenue of good. Today, I also feel that insurance is one of the more exciting areas because of these innovations that are coming forward. Startups are a part of that, whether they are independent or they are part of larger organizations. I think it's critical to the success of the risk management community.
Gopi Rangan: This perfectly leads into our conversation about Creative Destruction Lab. Your engagement with CDL started around the summer of 2020 and we are now going through the second cohort of startups at CDL Risk. What is the objective of this program? And as a program lead, what is the goal that you've set for the program?
Joan Schmit: The Risk Stream has a tagline of 'helping society manage risk'. Society is a key component because it's not about making profits or supporting existing organizations. It's about supporting society's ability to manage risk. This is our second year. We're about to have our fourth session for the second stream. My goals are to expand the opportunities to participate in CDL Risk, especially, and to connect with others CDL sites to enhance the entire program. From that, I'm hoping that we will identify areas of potential support where we can make a difference in society.
So, we've had two organizations that are focused on parametric insurance and that's what many micro-insurance initiatives are. Parametric insurance is when the trigger to pay doesn't come from an individual's loss, but rather some event that we can identify in society. So with crop insurance, that may be that there's too much rain or too little rain, or too much wind or too little wind, or other kinds of items that are just identified in an objective way. Therefore, the product is not dependent on the effort to determine whether or not loss has occurred. That has some issues where some people get paid when they haven't had a loss and some people have a loss and they don't get paid, but the more effort we make to have the parametric insurance function effectively, then we can offer these products more efficiently and extend the availability of insurance more broadly.
That's the sort of area that I think can really be beneficial. Any time we can make a system more efficient and take out the costs of trying to manage the risks, so we're making the situation less risky, less variable at a lower cost, then we can use our resources more effectively. Again, going back to the definition of risk and why risk is important. If we can determine some of those areas where we can make life more efficient, and enable more people to manage their risks, society benefits. So that's my goal.
CDL as a whole has an interest in improving the economy. So, we are looking for massively scalable opportunities. I personally also have the desire to do good and I believe that everyone connected with CDL has that same goal. We had a process for CDL with COVID, for example. There was rapid testing that the CDL sites as a whole undertook. Now we're talking about a CDL security where we are trying to address security more broadly and we're inviting multiple sites to participate.
The Risk Stream is ideal for that because of the issues of cybersecurity as being a key component of security. So, if we can be involved in improving security for society as a whole, that would be ideal. To try to be more precise about what my goals are, my goals are to encourage the startup community to find ways that we can improve people's lives, especially those who are in lower-income categories, and to improve society, generally speaking.
Gopi Rangan: You talked about innovation from the very beginning and how it was part of your life. Innovation in this industry, in risk, is now very heavily weighted on founders and entrepreneurs who build new businesses because many of the large companies don't invest in R&D. We're looking forward to new ideas coming from the startup ecosystem. It's a great initiative to bring founders, mentors, investors and advisors together in this program.
How is the program structured? Who are these mentors? How many startups do use screen and how many of them join a cohort? What happens in the program?
Joan Schmit: Well, I will say that the Risk Stream has the very best mentors of all of the streams that exist. There currently are now 11 sites that have Creative Destruction Lab locations. Most of them are in Canada. CDL was started by Ajay Agrawal, who is a professor at the University of Toronto and then he expanded from Toronto. This year is the 10-year anniversary of the start of Creative Destruction Lab. He initially began in Canada and then added Oxford and Paris and then Atlanta, Georgia, Texas, and Wisconsin. Last year, we added Seattle. We've just added Estonia, and with Estonia comes the security that I just mentioned.
Everyone says that our mentors at Wisconsin, the risk mentors, are by far the best and, you know, Gopi that you were the first individual that I invited to become a mentor here, and then we expanded from there.
There are three kinds of individuals that we ask to be mentors. There are prior founders who have been successful and have had successful exits. Kyle Nakatsuji, the CEO and Co-founder of Clearcover, is one of our mentors. John Raguin, who founded Guidewire, is a mentor as well. We also need investors. So, that would be you and other people similar to you. And third, we have people we refer to as operators - people in the industry who might have some experience with innovation or would be able to offer support. We currently have Terri Vaughan. She was the CEO of the NAIC. We have people from American Family Insurance, Thomas Weist from Tokio Marine, and other people who are in the industry who can offer their expertise.
The mentors are intended to help the founders determine three of the most important objectives they need to complete within the coming eight weeks. The idea is that we are trying to create a market for judgment.
Ajay Agrawal was noticing that so much of the activity for innovation happens on the two coasts of the United States, the Bay Area, and Boston. He thought that was kind of crazy because ideas come from anywhere. Money generates everywhere as well.
There are so many prior founders who have been successful, who locate in those areas that they can offer judgment or support to new founders. So the new founders move to those locations and they get the judgment from the existing founders and then they decide to stay. Well, Ajay thought: let's create that judgment but at different locations.
We invite the mentors, so far virtually, to participate in our program, and they are offering their judgment to the founders. The founders come through a number of different avenues. We try to advertise CDL widely. There are currently 16 different streams and some of them have multiple streams. The healthcare area is the one that has multiple streams. We try to advertise widely so that founders know of Creative Destruction Lab and apply.
Now, something that's important about CDL is that we are a nonprofit. We do not take any fees. We do not take any equity and we encourage founders to participate in accelerators and incubators, even while they're in CDL. So, we're trying to provide support to the founders and to the mentorship that's offered, and we don't put any restrictions on their other activities.
We bring together these mentors, who are high-quality individuals with expertise, with the venture founders. It happens once every eight weeks for about nine months, and we have one-day sessions where the founders describe their business and their objectives to the mentors; what's going well and what's not going well. Then, the mentors discuss amongst everyone what they think those objectives should be. What are the issues that they see with the founders' activities? What are the successes that are being observed? At the end of the day, the founders are asked to leave the room, and the mentors are given the opportunity to indicate whether or not they are willing to offer four hours of their time in the coming eight weeks.
That's the way this mentorship becomes real. The mentors will help with the pitch decks; how to talk with the potential investors and how to do work on the MVP or other activities that are necessary. Some of the founders have indicated that they have difficulty with sales. How do they talk to prospective clients about their business and get the sales, and how many sales should they have? That all goes on in those eight weeks between sessions.
Now, if no one raises a hand to offer the four hours, then the venture is not invited back. So, there's great competition to make certain that you come back and we are always delighted when that occurs. Sometimes the mentors feel that the founders are too early in their activities and therefore it doesn't make sense for them to continue and they can try again the next year. Sometimes the mentors feel that the founders are too far along, that they don't really need the mentoring. "Just go and do your work. You don't need us anymore." Sometimes, the founders are not particularly coachable and that is a problem that will probably mean that they don't return, but the vast majority of the founders are coachable. They listen, have great ideas and they will continue with the program.
I've said a lot. What questions do you have, Gopi, that I can try to answer about the process?
Gopi Rangan: Under your leadership, CDL's accelerator program is one of the most well-organized, most effective mentor sessions that I've experienced. I've been a mentor at many accelerators, like 10 plus accelerators over the years. I see the value for founders and I see the good use of the time for mentors as well. It's all coming together really well.
I'm curious to understand what you have seen that's most valuable for founders who go through the program. What do they get out of this program? It's already a big plus when an accelerator doesn't take equity. That's a strong positive, but are there specific things that you could highlight, maybe give examples of conversations that you have witnessed and founders who have shared with you what they got out of the program?
Joan Schmit: One item that comes to mind was a session where Kyle Nakatsuji was asked to comment on the activities of one of the ventures. He talked about the importance of not using 'and', but thinking about 'then'. I thought that was an incredibly powerful moment that everyone stopped and thought, "Wow. That is a great comment."
Instead of saying, "we need to do this and that and the third thing", it's about the timing. "First I do this, then I do the second, and lastly will come the third." That's the sort of activity that our mentors offer. Now, it depends on the organization. What's going to be most powerful? Many of them do want to to fundraise. We try to get them pre-seed. I just noticed one of the current companies had a $2.8 million fundraise. That's terrific. Many times the founders are scientists. They know the science but they don't understand how to talk to the venture capitalists or the angels.
So, Gopi, you have mentored these companies. What do you think they get most out of it?
Gopi Rangan: Kyle is a brilliant entrepreneur. Those kinds of messages when shared in the moment, based on the experience that Kyle has been through, it has a very high probability of resonating with the founder and they can do something with it. What he said were simple words, but the power of those words and the timing of it creates massive impact.
That's what I have seen the program do really well. As a mentor, it's an honor to have the opportunity to be a mentor and especially one of the first mentors to sign up. I've also invested in a couple of startups that have gone through the program with PAXAFE and TrustLayer. So, I'm becoming a bigger and bigger fan of CDL Risk Stream.
I'm curious to see what is your vision for the future for CDL risk?
Joan Schmit: Well, I've talked about having two streams. I think that we have enough excellent ventures that we could do that. And we could have one that's focused on insurance and one that's more focused on risk, for example. I don't know that we will do that, but that's something that I've thought about and I'm hoping that more founders are aware of CDL Risk and that they always come to CDL Risk before they are concluded. Whether they are successful or not, that they go through CDL Risk. As you said, Gopi, you want it to be the place where every new venture in the risk area must go through.
Currently, we've been inviting 20 ventures to join us. I think we could raise that to 25 and our support still be of the same quality. As I indicated, we try to advertise. We go to all of the tech organizations and let people know about us. We try to reach out to ventures when we know of them and we encourage them to apply.
From that, we got about 150 applications last year. We interviewed about 70 to 75 of them and then whittled it down to 20. If we get more high-quality ventures, I could see it growing. I definitely think we could go to 25. One of the issues though is we're trying to get it all done in one day and the amount that we're asking of all of you mentors is enormous. If we add ventures, it makes it a little bit more difficult for you to get to know the companies in the first place.
Gopi Rangan: It is true. It's a long-term commitment on the part of mentors, but that also filters mentors who really care and they want to be there. Only those mentors stay with the program. I'm really excited to see how this program has evolved. It's great to see that the quality is consistently improving. Like I said, I would like to make this program the first program that any founder thinks about when they're building a business that measures, manages, distributes or transfers risk. This could be one of the foundational topics that will really shape society and that's the mission that you have outlined for the program. I'm excited to see how this program evolves in the future.
I want to switch to the last segment of our conversation and ask you about your community involvement. As a university professor, you're already going way beyond your scope within the academic world, into the practical world, working with founders. But is there any specific community activity or a nonprofit organization you are particularly passionate about?
Joan Schmit: I know that you always ask this wonderful question. Of course, right now we are all focused on what's happening in Ukraine. I have given to, and have been following World Central Kitchen, which does such amazing work to bring hot food to people when they need it so desperately. José Andrés' comments about having a long table to bring everyone together is powerful and inspiring.
There are some other organizations here that I'm involved in. One is the East Madison Community Center. It's a neighborhood center for low-income individuals. I am so incredibly inspired by the people there. They provide afterschool activities to keep the kids out of trouble. They also provide activities for elderly people during the day so that they're not just sitting in their apartments. They offer places for people to have little gardens so that they can grow fresh vegetables and eat effectively and on and on. I've been a board member of the East Madison Community Center, and it's again, an opportunity to offer people a way to get out of the low-income status to build a true community and support one another. That's an organization that I feel pretty strongly about.
Gopi Rangan: Joan, thank you so much for sharing your candid views, starting from your childhood days and how that shaped your outlook; your definition of risk and why that's important; and as a professor, how you emphasize research and innovation in this topic; and lastly, the power of entrepreneurship and how that brings innovation to this sector that is large, important and is the backbone of our society. Thank you so much for sharing specific examples based on your experience. I'm very, very inspired.
Joan Schmit: Thank you, Gopi, and you are a key component to it.
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