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It takes a certain tenacity, or gumption, for a technology entrepreneur to lure venture capitalists back to the table after a flameout such as eCoverage. Six years after his online auto insurance company burned through $16 million and was sold to General Motors Corp. at a loss to investors, 36-year-old David Riker has managed to attract to his latest venture some of the same investors who lost money with eCoverage. "He was a guy who ran a company with too high of a burn rate and was burned, and now you have a guy who can keep a company lean," says RRE Ventures LLC partner Stuart Ellman, who invested in both eCoverage and Storm Exchange Inc. "He understands dilution and what that means to management." Indeed, Riker fits the profile of the "serial entrepreneur" to a tee. In the mid-1990s, he bankrolled his first startup, Riker Networks, on his credit cards but pulled the plug after it failed to win regulatory approval for its system of networked communications between bankers and institutional investors. ECoverage stalled in the middle of raising a $50 million Series C round as the Internet boom collapsed in 2001. As Ellman puts it, Riker is "maniacally focused on succeeding."
Riker's latest venture is Storm Exchange, which uses software to help clients hedge against weather risks. Although he dreamed up the startup during his honeymoon in 2005, the idea behind the company is rooted in Riker's experience with eCoverage. Ironically, after eCoverage went belly up, he took a job with a traditional insurance company, joining the very industry eCoverage had mocked several years earlier with in-your-face, full-page advertisements in The Wall Street Journal. In 2002, Riker became chief technology strategist for the St. Paul Travelers Insurance Co. in San Francisco and then vice president of product development and a director of strategic development for Marsh & McLennan Cos. But his entrepreneurial itch didn't go away, and it just got worse when he noticed the excitement growing around the emerging business of weather hedging, which provides financial instruments to offset weather-related risks faced by a range of companies. In March 2006, Riker left Marsh & McLennan and founded Storm Exchange, which attacks the problem of hedging against the weather with financial risk-analysis software that tracks weather patterns and generates data relevant to a particular industry. Amusement park clients, for example, have a set of metrics surrounding ticket sales, concessions and souvenirs that may vary according to the weather. If it's raining in the morning, people may decide to pass on a trip to the park, but if it's raining at 3 p.m. patrons have generally already bought their tickets. Storm Exchange's software determines which information is relevant for a business, enters a client's financials and then extrapolates the type of weather they should hedge against. Through a partnership with Galileo Weather Risk Management Ltd., a unit of White Mountains Insurance Group Ltd., Storm Exchange can even implement the investment contracts needed for the hedge. Given the concerns about global warming and the increased importance of growing crops for biofuels, weather patterns are getting the attention of chief financial officers as well as traders. Riker estimates that in 10 years, weather will become an $80 billion a year market. Several investment banks, such as ABN Amro Bank NV and Credit Suisse Group, have weather trading desks. Other weather hedging startups include WeatherBill Inc., which has raised $12.5 million in venture funding. The Weather Risk Management Association reports that the value of weather-based contracts traded worldwide in both over-the-counter and exchange-traded markets grew from $8.4 billion in 2005 to $45.2 billion in 2006. "When you look at the growth trajectory of the market, an analogy would be looking back at the evolution of the derivatives market in the early '70s," Riker says. "The derivatives market grew due to increased volatility caused by stagflation and moving inflation variables, while corporations needed to lock down consistency in earnings. We're starting to see a lot of the same things occurring in weather." In running his new business, Riker is focusing on using capital efficiently. He raised a $3.6 million Series A round in December 2006 from VC firms RRE Ventures and Venrock and angel investors David S. Rose and Jefferies & Co. vice president Robert Lessin. That money launched the company and the products, and now the focus is on driving sales. Riker, who says Storm Exchange wants a Series B round, notes that he is expanding carefully. "Timing is everything, but more importantly with regards to how I started Storm Exchange, I used a disciplined and methodical approach," he says. "You have to be disciplined on how you build market traction and how you measure success. I have to justify every dollar." Riker also has abandoned San Francisco for New York, where he's close to the financial firms critical to Storm Exchange's business. Although the Bay Area is a great place to start a company, the ease of taking a cab across the city to meet with clients and partners outweighs the benefits of doing business on the West Coast, he says. As for exit opportunities, Riker plans to repeat the strategy he used in building his previous companies--focus on building a viable business. "The opportunities for exits or an initial public offering exist once you've proven your profitability and proven the opportunity, so the only focus should be on building the company," he says. If the hard lessons from his earlier startup experiences are taken to heart, Riker might prove that the third time's a charm. See related features:  Deal Video
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