When outsourcing goes bad, part 9 of 16

We just got $10,000 dollars!!!

Jul 10, 2024

If you have ever worked at a small startup, you are aware how exciting it is when the first customers show up, and the first sales are made, and the first money comes in. That seems to validate all of the hard work you've done up till that point. At many startups, you work very hard for a year or two before you make the first dollar.

Up to a certain point, a startup is just guess work. You guess a product might help a customer. You guess you might be able to help certain kinds of people. You guess there are certain circumstances under which people will give you money.

But then, one day, someone gives you money.

And then, if you are lucky, more people give you money.

And then more people give you money.

Startups are like that. The numbers are small but the excitement is big. It's like the day a child first learns to walk – the first day you make money, a bright future suddenly comes into focus.

I was speaking to Lucy at one point and she waxed nostalgic about the early days. She had a vivid memory, maybe from 2012 or 2013, the first time that more than $100,000 of insurance policies had been sold through the Luganesk system in a single day. That meant Luganesk got roughly $5,000 that day. I've no idea what their net profits are, but assuming 15%, that would mean they made $750 that day.

A year later, they had doubled in size. The first day they grossed $10,000, they bought some cake and had a little celebration at the office.

But Luganesk had grown several orders of magnitude since then.

At some point in 2019 they had their first day when more than $100,000,000 of insurance had been sold via their system in a single day. That means they grossed $5 million dollars on that day. Net profits might have been something close to $750,000 for the day.

Those $100 million dollar days were becoming more common. At current growth rates, by 2026 or 2027, $100 million a day will be their average. That implies they will gross $5 million a day, every day. That implies gross annual revenue of $1,825,000,000 and net profits of $273,750,000.

That tiny little startup is not so tiny any more. In a few years, it will likely be a legitimate behemoth.

For the leadership of AndersonRiskAssessment, it represents a lucky break. They had bought Luganesk by accident. Or rather, they had bought the Luganesk software by accident.

During the era of ZIRP (zero interest rates), AndersonRiskAssessment had pursued a strategy of growth-by-acquisition. That makes sense when interest rates are low: take on debt to buy growth. Who cares about debt when commercial interest rates are only 1% or 2%?

And so AndersonRiskAssessment had bought hundreds of small, regional insurance underwriting firms, welding them together into a giant underwriting firm, with gross revenues of $5 billion.

Luganesk had been a small, regional underwriting firm, and that's why AndersonRiskAssessment bought it. That Luganesk had been developing some innovative software did not initially register with the AndersonRiskAssessment leadership. In fact, in 2016, AndersonRiskAssessment hired an outside software development firm, and asked them to build something identical to Luganesk. That effort stumbled along for 3 years and ended in complete failure. The problem was simply too complex. Commercial insurance was too complex.

After that effort failed, it was brought to the attention of the leadership of AndersonRiskAssessment that they had bought a company that had an internal tech team that had been working on a similar project since 2008. So after 2019, the leadership of AndersonRiskAssessment decided to invest in Luganesk software, and give it the funding it needed to grow to a much larger level. This is when the tech team at Luganesk began to expand from 10 engineers to 30.

Now that interest rates have gone up, growth-by-acquisition is no longer such an attractive strategy. You don't have to worry about debt when you're paying 1% or 2%, but you do have to worry about debt when you're paying 6% or 7%.

More so, margins in the insurance industry are under some pressure. Most of AndersonRiskAssessment's divisions are stagnating. What got them growth for the last 15 years no longer gets them growth.

As it happens, Luganesk is now their fastest growing division, and it is getting big. It is making serious money.

At some point during 2021, the leadership of AndersonRiskAssessment had an epiphany: Luganesk is the future of the company. Luganesk will be the most profitable and fastest growing division for several years. Therefore, AndersonRiskAssessment needs to take it seriously.

Here is something I do not know: was Arwin hired before that epiphany, or after? That is, was Arwin hired to be the CTO who oversaw a bunch of boring IT departments, mostly running standard Microsoft software, or was Arwin hired to usher in a dazzling new future of tech innovation?

Given his behavior, it is tempting to assume the former. However, I can imagine the latter. I've known CTOs who are hired and instantly assume an almost adversarial relationship with their tech team. Sometimes this happens because they view the tech team as an independent power center that will threaten their ability to get things done. Other times I think stories about "tech debt" get exaggerated to the point that the new CTO assumes the old code base is a complete disaster that needs to be 100% re-written from scratch.

Sadly, I may never know the answer to this, the heart of the riddle.

Read the whole series:

1. But what do these glib little bullet points mean?

2. When the CTO does not trust their own team

3. Everyone is under pressure, everyone is too busy to help

4. They lie. They lie flagrantly. They lie all of the time, about everything.

5. That place is a total sweatshop!

6. The Old Team Returns

7. I am very, very proud of you. The work you are doing is amazing.

8. I blame you. You suck. You are the problem.

9. We just got $10,000 dollars!!!!

10. The Taj Mahal was built with blood