Shielding Business from Wild Weather
Imagine a Vermont ski shop limping along during a warm February, or a seaside B&B enduring incessant summer showers. It's the sort of problem businesses have faced forever: The weather does not always cooperate, and is sometimes downright hostile.
Until recently weather-dependent enterprises have just had to stick it out. An untested startup with a formidable Silicon Valley pedigree has another idea.
WeatherBill, a risk management company, wants to sell weather derivatives to protect small businesses. Enterprises already have insurance against catastrophic events like earthquakes and hurricanes that destroy buildings and upend lives. WeatherBill hopes they'll pay for protection against less calamitous conditions that can still bite into revenue.
Betting on Balmy
Take that ski shop. If the owner wants to protect against an overheated Feb. 3, he can log onto WeatherBill and buy a contract that would earn him reimbursement for a warm day. Plugging in some numbers recently, a contract for a $500 reimbursement for a Feb. 3 temperature average above 50 degrees cost $35. To recoup $500 for the day's temperature maximum topping 50 degrees, the contract price was $118.60.
An algorithm cooks up the prices based on historical weather data, factoring in climate change. WeatherBill's fewer than 30 employees include computer scientists and mathematicians who are alumni of Yahoo! (YHOO), Google (GOOG), and Bank of America (BAC).
Whether the owner receives the $500 depends only on the temperature. If it climbs over 50 degrees and he still sells skis, it was a good day indeed. If the thermometer tops out at 48 and no one comes in (maybe there was some sleet?), he's cold and broke. WeatherBill also sells contracts that pay out for excess cold and for too much (or not enough) rain.
Hedge Funds, Get Your Risk Here
"The beauty of WeatherBill is that there is no underwriting here," says Krishna Kolluri, a general partner at venture capital investor New Enterprise Associates (NEA) and WeatherBill director. "There is no subjectivity here."
At the moment, WeatherBill is financed by undisclosed investments from NEA and others. NEA alone controls sufficient resources to invest tens of millions in a new company. That's no meager bet, but it's obviously far less capital than a big-time insurance company has at its disposal.
WeatherBill, however, is not an insurance company. It plans to finance its expansion into larger contracts by selling its accumulated risk to hedge funds.
If it is to succeed, WeatherBill has to spread out its risk judiciously at a time when climate change is causing some very capricious weather. While January brought early cherry blossoms in Washington, D.C., it also yielded killer snowstorms in the Rockies.
Climate Change as Free Advertising
"The goal is to have a perfectly balanced book of risk," says CEO David Friedberg, a former Google executive. "So that for every day we sell of rain, we sell one of dry." Since that's unlikely, contract prices fluctuate depending on the company's exposure to the elements.
Even if WeatherBill can predict the weather with sufficient accuracy, a trick that has proven elusive throughout human history, the company still needs to convince businesspeople that they need to shell out for another expense. After all, they're selling something businesses have always managed to survive without.
In this, Friedberg figures climate change will work as free advertising. "Volatility is good for us," he says. "The more weather is volatile, the more people are cognizant of it, and the more people are going to feel the risk."
WeatherBill started taking orders this month, so it's too early to judge if its analytics will be able to meet customer needs while maintaining an acceptable degree of risk. Still, the idea is of the moment. Kolluri says the company has debuted at an auspicious time, when technology can accommodate unprecedented anxiety over weather. He calls the market climate, inevitably, a "perfect storm."