Lemonade, a fintech backed by SoftBank (OTCMKTS:SFTBY) selling renters’ insurance, has filed to go public. Fortunately, the Lemonade IPO looks like a winner.
Investors have been snapping up tech IPOs in 2020, and Lemonade is a prime example of what they like. According to its S-1 filing with the U.S. Securities and Exchange Commission, it had $63.8 million of revenue in 2019, and $25.3 million for the first quarter of 2020.
The company’s losses have widened. Lemonade reported a net loss of $108.5 million last year and $36.5 million in the first quarter. This net loss will likely increase again once it becomes a public company.
While $100 million is listed as the raise, that’s a placeholder. A Series D funding round earlier this year was built on a valuation of $3.5 billion. The company is based in New York and will list on the New York Stock Exchange under the symbol LMND.
What’s the Deal With the Lemonade IPO?
Lemonade uses artificial intelligence bots and a mobile app to sell renter’s insurance to millennials. It’s a fast-growing business but underserved by agents. The company’s software also handles back-office functions like fraud detection. The idea is that customers can get coverage in minutes and claims can be paid in real time.
The market for such a solution is there. So-called “insurtech” or insurance technology companies are cropping up in a variety of niches. Root Insurance sells car insurance. Hippo sells homeowners’ policies. Replacing financial intermediaries with technology is one of the things clouds and devices do best.
The Lemonade niche also looks ripe.
Rentals are an increasing part of the housing market. Speculators moved from buying distressed houses a decade ago to building for-rent housing in recent years. Even many well-off consumers are now apt to be renters.
Only 37% of renters, however, had property and casualty insurance coverage in 2014, with most policies costing $200-$400 per year. State Farm dominated the market in 2017, with a share of almost 20%.
Lemonade has raised $480 million privately, and did an equity crowdfund at OurCrowd. SoftBank’s Vision Fund has dominated the later funding rounds. The last such round raised $300 million.
What’s Wrong?
With plenty of private equity in the bank, the question is why Lemonade is going public at all?
One reason is that SoftBank needs a win after the debacles at Uber (NYSE:UBER) and WeWork. But Lemonade’s gross margins of just 20% are being eaten up by marketing expenses, $19.2 million in the first quarter alone.
Still, the Federal Reserve’s injection of capital into the markets has made this a good window for IPOs, especially those with a tech angle. Shift4Payments (NYSE:FOUR) had a successful IPO on June 5. ZoomInfo (NASDAQ:ZI) had an even more successful IPO on June 4.
Critics will note a lack of diversity in the executive team and note a lack of dilution for founder Daniel Schreiber. He previously launched Powermat Technologies, which is in the wireless charging business.
The Bottom Line
The Lemonade S-1 describes a company in a good, growing niche that is moving toward profitability.
If the company can earn a profit, it has a solid future. Technology is taking over all financial markets. Technology can help increase penetration in renters’ insurance, where customers are often younger than average.
Lemonade, however, is a tech company. It could use more experienced insurance hands to drive market share. The IPO will give it the financial heft to get them.
The company may also not be public for long. I expect Lemonade to be snapped up within a few years by a current player, possibly State Farm, which is a mutual company, possibly Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), which could use a tech platform like this.
For an investor with risk capital and time to wait, this looks like a good deal.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
