The Ticker

Everything You Need to Know About Lemonade Going Public

The insurance tech company IPOs at a $1.5B valuation. Is it worth it?

Lemonade co-founders Shai Wininger and Daniel Schreiber. Photo: Ben Kelmer

Welcome to The Ticker, a series that examines everything you need to know about companies going public.

Today, Lemonade, which put a high-tech spin on renters and homeowners insurance, is going public. With its vivid color palette, vocal founding team, and chirpy chatbots, the company, founded by former Powermat executive Daniel Schreiber, and Fiverr founder, Shai Wininger, has shaken up a dusty industry. It has also raised a lot of venture funding in the process — about $480 million.

With shares expected to price at $29, the company, listing under the ticker LMND, is now valued at roughly $1.64 billion. Is that a steal for a company that was valued at more than $2 billion in its last funding round? Or is this yet another case of clear-eyed public investors pouring cold water on venture delirium?

As the company goes public, here’s what you should know about the business.

This is a classic Softbank company

Since its founding in 2017, much of the startup landscape has been molded by Softbank’s Vision Fund, for better and worse. The firm’s “investment by gavage” approach has become such a hallmark that you can spot a SoftBank company without even looking at its cap-table. With its hypergrowth (juiced by paid marketing) and unprofitability, Lemonade bears Masayoshi and Co.’s fingerprints. As of the first quarter of 2020, Lemonade grew revenue 138% year-over-year, which is especially impressive given the disruptive arrival of the coronavirus. But expenses have also mounted, resulting in deepening losses. In 2018, Lemonade found itself $52.9 million in the red — a year later, the deficit had swollen to $108.5 million.

All this to say, it’s not surprising that of the $480 million Lemonade has raised in funding, $420 million of it came from SoftBank.

It has a huge technical advantage

Though it is almost a rite of passage for every emerging growth company to tout their technological bona fides in an S-1 filing, Lemonade appears to be doing more than mere posturing. The company’s use of technology, data, and machine learning has produced a meaningfully differentiated product that is able to provide quotes in minutes and complete claims in seconds. In one much-ballyhooed case, Lemonade granted a payout for a stolen Canada Goose jacket in three seconds, a world record. They’re able to operate at that speed thanks to the unique data gathered across a customer interaction — as many as 1,700 data signals are collected during onboarding alone.

In a sleepy, analog industry in which 93% of homeowners’ insurance policies are still sold by agents, Lemonade’s technology stands out.

It has a smart approach for mitigating risk

Insurance is all about controlling risk, particularly when it comes to the bottom line. In the case of a catastrophic event, a badly run insurer could find themselves on the hook for millions worth of damages, causing a default. That’s one of the reasons insurers turn to reinsurance, palming off a portion of premiums in exchange for passing the risk to another company.

Lemonade takes this to another level in the pursuit of stable gross margins. Through their reinsurance arrangements, Lemonade eliminates risk on 75% of their policies, while also throttling their maximum individual payout at $125,000. They lose upside in the process, but the effect on gross margin stability is meaningful: Based on Lemonade’s risk modeling, gross margins should only vary by about 3% in 95 out of 100 years.

There’s one other effect of this structure worth noting: It’s capital efficient. Insurers have to keep significant cash on hand to ensure they can pay credible claims, often as much as $1 for every $2 received in premiums. By relying on reinsurers, Lemonade is able to shrink the cash on hand needed to $1 for every $7 in premiums received. For a growth company looking to use funding to scale efficiently, that’s extremely helpful.

It’s spending a lot for its customers

Targeting millennials has its benefits. They’re often new to insurance, meaning they have no established loyalties, and are not drawn to bundle existing policies with future purchases. They’re also particularly enamored with technologically savvy solutions and slick brands. Both suit Lemonade. The flaw in this strategy? Millennials’ spending power.

Compared to previous generations, millennials have relatively meager assets and low homeownership rates. That’s part of the reason it makes sense that Lemonade’s core product is renters insurance — it’s a product that fits the financial reality of a less moneyed cohort.

That’s been a solid strategy to date, but it may not hold up in the years ahead. Lemonade spent $89.1 million in sales and marketing in 2019, and though marketing efficiency has improved, low-value premiums and subpar retention mean that its lifetime value per customer (LTV) is just 1.26 times greater than its customer acquisition costs (CAC). That’s not particularly impressive.

It’s also why the company is so keen to sell a “graduation” narrative. Several times in the S-1, Lemonade expounds upon its designs to capture users as they “graduate” from renting to owning. This is critical given the difference in premium prices: average renters pay Lemonade $150 per year; homeowners pay $900. While theoretically sound, the data doesn’t support the company’s ability to execute on this strategy yet. Of the 12,445 homeowners insurance policies sold, only 9.8% previously bought a renters policy from Lemonade. That figure has improved over time, but as it stands, Lemonade hasn’t demonstrated an ability to expand LTV as customers build earning power.

Its margins are fairly low

Is Lemonade a tech company dressed as an insurance business? Or an insurance business dressed as a tech startup? Lemonade would like you to believe the former, at least when it comes to the company’s huge valuation. Even though the valuation is a step down from the last round, it’s still a relatively steep price to pay for a company that did $67.3 million in 2019 revenue. Taking 2020’s numbers, Lemonade appears to be on a $104.8 million annual run rate, implying a revenue multiple of 14.3x. That’s a markup a fast-growing SaaS company might expect to receive, but Lemonade is no SaaS business. Rather than 80%–90% gross margins, Lemonade lands around 18%. While there’s room for them to improve margins in the future, they’re a long way from the capital efficiency and reliability of a pure software play.

All told, founders Daniel Schreiber and Shai Wininger have built an intriguing, accelerating business. Lemonade is a true disruptor, altering customer expectations in a fragmented, $5 trillion market. That’s worth a great deal, and may make them an attractive acquisition target down the line. But if the company is to stand on its own feet in the public markets, it may need to shed the worst tendencies of SoftBank businesses, and angle toward profitability.

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