Most South Africans know Discovery for its health insurance business connected to the wellness programme, Vitality. Those 2 businesses are the catalyst for what the company is today & were founded in the first 7 years of the business — the venture years. The story of Discovery is an anecdote of a true Venture Scale business.
“Venture scale startups have big total addressable markets, monopolistic endgames, high growth potential and they are scalable. What does this mean?
Discovery fits the narrative of venture scale:
Big TAM – Every individual in South Africa needs healthcare, from newborn babies to the elderly. Yes, affordability plays a role but health insurance generally needs to cater for all.
Monopolistic Endgame – Discovery Health Medical Scheme has a 40% market share in private healthcare.
High Growth – All facets of the business grew exponentially; customers, revenue, employees etc
Scalable – The company went from an idea to a R2.8 billion business at IPO in 7 years.
I wanted to find a way to tell this story, it’s one of my favourite stories. I believe South Africa is a great country to start a venture scale business. It’s possible to go from 0 to 1 without the need to expand to other markets. I believe South Africa is a big enough market for the right venture scale business without the need to think about expansion & sell the Pan African dream for at least the first 10 years of the business. There are certain lessons in the Discovery story that might be applicable today.
So the story…
Discovery started when Adrian Gore, a young Actuary leading product development at Liberty Life, at the time the biggest insurer in the country, was bitten by the entrepreneurial bug & wanted to start a new kind of insurance company, one focused on healthcare & rewards. So, for the first few months of 1992, Adrian went up & down from Liberty’s headquarters in Braamfontein to RMB’s headquarters in Sandton trying to convince RMB’s Executive Chairman, Laurie Dippenaar to invest in his idea. At the time RMB had a dormant insurance license, Adrian wanted to leverage that to build his company. So in March 1992, armed with a R10 million cheque, Adrian quit his job at Liberty Life for a desk & a notepad in RMB’s office.
To make this work, Adrian needed to find a co-founder, create a product, build a team & find a way to sell it. He recruited his friend & former colleague Barry Swartzberg, a man equally as talented and 2x more tenacious. Adrian & Barry created this new company & named it Key Life. But they still needed a product & a team. Over the next few months Adrian & Barry developed a product, the innovation: The Medical Savings Account. The product, called discovery was launched in February 1993. Along the way Adrian & Barry were then joined by John Robertson & Stewart Whyte to build out operational capabilities.
The second innovation after the Medical Savings Account (MSA) & dynamic underwriting, was distribution. Insurance products were sold largely via agents at the time but Key Life — now called Momentum Health because of RMB’s reverse merger with Momentum Life in July 1992 — wanted to distribute its discovery health insurance product(s) via a network of independent financial advisors. They struck a deal early with Nashua Mobile to sell their products to their employees. The model was business to business to customer (B2B2C). The only problem now was that they were stuck at 1800 policies sold through June 1993. This was because they did not have product/market fit. They needed to iterate & change the product to reach product/market fit. They iterated & ultimately grew to 3300 members with R1 million in annual premium income (revenue) by the end of 1993 — the business was profitable by 1995.
From 1995 the business grew exponentially, Adrian & Barry hired & retained exceptional people along the way. On the product side, they hired & trained an army of young actuaries like Alan Pollard (now an Executive Director & President of Product & Innovation for Vitality Group) & Hylton Kallner (now Executive Director & CEO of Discovery SA). In 1996, on the sales side, they hired Neville Koopowitz to head up marketing & distribution. Neville played an integral part in establishing Vitality in 1997, today Neville is CEO of Vitality UK.
By 1996 Momentum Health had 46000 members & 200+ employees, growing fast. The company entered the closed scheme market by signing up to administer 3 big corporate schemes that gave them further distribution of the discovery health products. The company invested in technology by developing a proprietary claims system which would allow them to pay out claims in real-time. They achieved this in 1997.
In 1997 Adrian was approached by a private gym chain called the Health & Racquet Club to see if they could not enter into a joint initiative that would see Momentum Health sell their discovery health plans to the Health & Racquet Club members. Vitality was introduced in October 1997, the purpose: to reward the members for living a healthy lifestyle by incentivising them through a free gym membership & other rewards. Today Vitality has 4.6 million members.
By the end of 1998, Momentum Health had generated R867 million in gross annual premium income with a net after-tax profit of R33 million & over 1000 employees. Momentum Health then rebranded & changed its name to Discovery Health in anticipation of an IPO. Discovery Limited 1999/07789/06 went public on the JSE on the 21st of October 1999 at 745c (R7.45) per share, with a total issue of 380 million shares, floating R324 million worth of shares. By the end of 1999, Discovery Health had 608 822 scheme members, R1.4 billion in revenue growing 72% YoY & a net after-tax profit of R52 million growing 58% YoY.
Lessons For Startups