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Hey guys! This week’s unconventional take comes from a company we featured many moons ago - Gradient AI, and their CEO Stan Smith. (PS: as always we also have our required reading at the end of this edition!)

Gradient AI uses AI to help insurance companies predict which claims will become expensive problems, allowing them to take early action and save their customers a potential $1.1 trillion.

When Stan was deciding which segment of the insurance market to tackle, he did something counterintuitive. He deliberately went after workers' compensation, which at the time was the worst-performing line in all of property and casualty insurance.

(Combined ratios of 100%+ mean the insurance company is paying out more than 100% of the premiums they’re receiving… not good)

This may initially make sense - Gradient AI helps people save money, so they should serve the segment which is losing the most money as they need it the most. But in reality, selling anything into businesses that are loss-making is very difficult (for obvious reasons).

So why did he do it then?

BTW: Stan probably would have arrived at the decision a bit earlier if he used Notion to organise his thoughts, and it just so happens Notion is sponsoring this edition of Scale 🤷 Check them out in the links below! 🙂 

Why the worst, not the best?

Insurance companies were desperate to fix their workers' comp problems, and they were bleeding money every quarter. The first reason Stan wanted to win this market first was because of the outsized impact his software can have.

"If you make their combined ratio 1%, that's 1% on the bottom line," Smith points out. "It really has high leverage in this space."

Stan knew that standing out in the software industry (especially in InsurTech) is nearly impossible today. The only thing that makes you stand out is impact, and proving impact is really difficult.

And it’s even more difficult in already profitable businesses. Improving a segment’s profitability from 25% to 30% is great, but even more impactful if you can take someone from -5% to 0% (they’re no longer loss-making!)

For Smith's early clients, the impact was immediate. Gradient's AI could identify over 90% of high-cost claims within 30 days, while human adjusters typically caught only 15%. The ROI was so clear that pricing discussions became surprisingly straightforward.

Smith remembers one meeting with a CEO who came prepared for tough negotiations: "He looked at the ROI estimates and our price, and he goes, 'This is fair.' I just looked at him and said, 'Are we done?' He goes, 'Yeah, we're done.'"

Fly under the radar

Another reason was that by targeting the most problematic sector, Smith also cleverly sidestepped established competitors. While consulting giants like Deloitte charged millions to build custom models for large insurers, the mid-market was completely untouched.

These companies had the same problems but couldn't afford enterprise-level solutions because they were too busy trying to figure out how to save money today rather than build some futuristic, bulletproof insurance model.

"The bottom, the mid-sized to low end of the market was completely wide open," Smith recalls.

This approach gave Gradient AI room to perfect their solution without battling entrenched competitors, while building a valuable dataset that would eventually become their competitive moat.

Le Rocketship 🚀 

Starting with the worst-performing sector created a powerful launching pad for expansion. Once Gradient proved they could solve the most difficult problems in workers' comp claims, they expanded to underwriting, then to health insurance – eventually making health their largest segment.

At this point, they were known as the guys who got stuff done in a big way, the case studies of their past were of completely magical turnarounds enabling the next sale to come that much easier.

This methodical expansion followed a natural progression: master one difficult area, then apply those insights to adjacent problems. Each success built credibility for the next challenge.

What this means for you

The next time you're evaluating market opportunities, resist the urge to follow the money into already thriving sectors. Instead, look for where you can have the largest impact. Proving out a large impact will give your business the next opportunity it needs to keep growing, whilst giving you the ability to fly under the radar from your competitors.

The most compelling opportunities often hide in plain sight – in the areas others avoid because they appear too difficult.

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See you next week!

Rahul & Aryaman