Tech startup of the month.

INITIAL LIGHTBULB: About 20 years before taking higher math to the insurance industry with Valen, Dax Craig and Richard Vlasimsky met as junior high school students in Tulsa, Okla. In 1993, Craig moved to Boulder to pursue an MBA. One of his school projects turned into a successful antenna company, Xertex Technologies, which he sold to market leader Centurion Wireless Technologies in 2000.

Meanwhile, Vlasimsky was working in software, as a consultant for Accenture and as a developer and product manager for other companies. After Craig fulfilled his commitment to Centurion in early 2002, he "wanted to get back into entrepreneurship," and gave old friend Vlasimsky a call. The pair had talked about starting a company together for a decade, and the time for a new venture--Valen--was right for both of them.

For CEO Craig, his involvement with Valen arose more from "opportunity than experience," while CTO Vlasimsky's know-how with artificial intelligence and data mining provided the basis for the company's technology.

IN A NUTSHELL: Valen's engineering team developed software to help companies make core business decisions, with the initial market being the insurance industry. The company's first product, Risk Manager, runs on an algorithm-based platform called Decision Studio (which will also underpin future Valen products for other industries).

"These algorithms are based on a branch of statistics known as statistical learning theory," explained Craig. Whereas traditional statistics presumes the answer to a question is known, "statistical learning theory actually assumes you don't know the answer. You fit an outcome to a model, rather than a model to an outcome."

An example as it pertains to Risk Manager: "An insurance company is guessing about risk when they underwrite a new client," said Craig. "(Underwriters) tend to focus on one or two variables. We actually take the entire set of potential risk characteristics--100, 200, 500 characteristics--and give the underwriter complete and total recall of that company's entire history across hundreds of thousands, even millions, of policies."

Using historical data from real underwriting departments, Valen's proof-of-concept tests yielded improvements in loss ratio (the ratio between losses and premiums) of 1.5 percent to 8.9 percent when using Risk Manager to recommend which policies to underwrite. A strong underwriting bottom line has become increasingly important for insurers, because "what's happened in the financial markets over the past couple of years has really put a re-emphasis on underwriting," Craig noted.

The pricing model for Risk Manager is performance-based. "We try to set up pricing mechanisms with our clients where our interests are aligned," said Craig. "We make money when they make money, and when they lose money, we don't make as much money."

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THE MARKET: The $1 trillion U.S. insurance industry spent almost $20 billion on IT in 2002, according to International Data Corp. While insurance is Valen's current target vertical, the company plans to move into other markets in 2004 and beyond, including financial services (especially for the loan-approval process), logistics and quality control. The insurance industry came first because "the competitive landscape was nonexistent and the need was dramatic," said Craig.

FINANCING: The 12-employee Valen closed on a Series A round of funding in September 2003. The lead investor was Cherry Creek Venture Partners; terms were not disclosed. Craig said he did not anticipate pursuing a second round.

VALEN TECHNOLOGIES INC.

WWW.VALENTECH.COM 

FOUNDED: AUGUST 2002