Cooling Off the Cash Burn

How William Goldstein, CFO of Integro, an insurance brokerage, helped the firm modify its great expectations.

What was the original idea in forming the company?
The idea was to create an insurance broker that would be an alternative to Marsh and Willis [and Aon]. Going back to 2005, [Spitzer] was banging away pretty hard at the major brokers. Bob [Clements], along with a couple of other people, had the idea of creating a platform so that if there’s a sudden demise like there was to Andersen, there would be an entity and a vehicle that would quickly ramp up and capitalize. It would start by claiming none of the legacy problems.

We started to ramp up very quickly and went about hiring a number of employees in what we’d call national practice roles — product-line people who could help oversee the delivery of brokerage services to clients in certain industries or in certain fields like property, casualty, professional liability, health care. We also built out a very large corporate footprint, thinking that if 1,000 people were going to walk across the street in an 8-to-10-month period, we needed to have the backbone ready to support that.

As we’ve seen, Marsh has not crumbled. They’re still a viable entity. Aon, if anything, has gotten stronger since 2005. They’re both strong, solid financial institutions. But initially, we thought we needed to be ready for the rapid demise of these big brokers. In our first year, we grew from zero to about $25 million in client revenue, got a team in Bermuda, and also helped with the creation of an insurance entity called Ironshore, which focuses on complex risks.

We also did a small acquisition of a London wholesaler called Humphreys, Haggas, and Sutton, which has the ability to service very complex risks. It was a natural fit for us. Some of the folks had come from Marsh and had worked with some of our people in a prior life. So from ’06 into ’07 we started to really add head count, and we got up to 300 people by early ’07 and to nearly 400 by the end of ’07. Client revenue was about $45 million to $48 million at the time, but our expenses were significantly greater. Going into ’08 we were still growing at a 15% to 20% clip, but our expenses were far greater than our revenue.

Could you quantify the cash burn?
I would say we were burning through probably 90% of our capital. Now, having said that, we still grew. At the end of ’08 we had just shy of $60 million in client revenue.

To what do you attribute the burn?
Hiring people. And we went about a different method of growing the business than a lot of our competitors. We only did one acquisition. Our competitors oftentimes would buy books of business. We did it the hard way, by going about an organic growth model and bringing in people and hoping those people could move client relationships.

I think most of our competitors would have been very happy with a 20% organic growth rate year-on-year. But our expenses were moving at too high a clip versus our revenue growth.

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