Lemonade targets down-round pricing in impending IPO

The unicorn's valuation range is not impressive

Earlier today, insurtech unicorn Lemonade filed an S-1/A, providing context into how the former startup may price its IPO and what the company may be worth when it begins to trade.

According to its new filing, Lemonade expects its IPO to price at $23 to $26 per share. As the company intends to sell 11 million shares in its debut, the rental and home insurance-focused unicorn would raise between $253 million and $286 million at those prices.

Counting an additional 1.65 million shares that it will make available to its underwriting banks, the company’s fundraise grows to $291 million to $328.9 million. Including shares offered to underwriters, Lemonade’s implied valuation given its IPO price range runs from $1.30 billion to $1.47 billion.

That’s the news. Now, is that expected valuation interval strong, and, if not, what might it portend for other insurtech startups? Let’s talk about it.

Not great, not terrible

TechCrunch is speaking with the CEOs of Hippo (homeowner’s insurance) and Root (car insurance) later today, so we’ll get their notes in quick order regarding how Lemonade’s IPO is shaping up, and if they are surprised by its pricing targets.

But even without external commentary, the pricing range that Lemonade is at least initially targeting is not terribly impressive. That said, it’s stronger than I anticipated.

The proposed Lemonade IPO valuation range is not impressive because even at its top end, the company’s valuation is lower than it was when it last raised capital as a private company. To illustrate that, here are Lemonade’s various valuation points given its IPO price interval, compared to its final private valuation:

  • Lemonade at $23/share, no underwriter’s option: $1.26 billion.
  • Lemonade at $23/share, with underwriter’s option: $1.30 billion.
  • Lemonade at $26/share, no underwriter’s option: $1.43 billion.
  • Lemonade at $26/share, with underwriter’s option: $1.47 billion.
  • Lemonade’s final private premoney valuation: $1.7 billion (source).
  • Lemonade’s final private post-money valuation: $2.0 billion (source).

No matter how the company prices inside of its current IPO pricing interval, the resulting valuation is sharply under its preceding worth. Indeed, at the very peak of its current IPO range the firm is pricing at around a 25% discount to its $2 billion, post-money private valuation set in April of 2019.

However, it is still an attractive price range for the company, by my read. Here’s why:

  • Lemonade’s total revenue in Q1 2020 was $26.2 million (GAAP).
  • That puts it on a run rate of just over $100 million ($104.8 million).
  • At a max valuation of $1.47 billion, Lemonade would be worth just over 14x revenue.
  • That is an attractive multiple for a SaaS company, with high margins.
  • SaaS companies feature gross margins of 70% and up.
  • Lemonade is not a SaaS company, and had gross margins of 18% in Q1 2020 (21% on an adjusted basis).

Instead of declaring that Lemonade’s currently proposed IPO pricing is a real disappointment in comparison to its final private valuation, I’d more herald it as a win in terms of what the company may be able to command as a public shop. By doing so, we do note that SoftBank probably overpaid for Lemonade equity in April 2019, however.

The company’s first IPO price targets could have been much worse. We will know more when the firm either prices formally, or changes its range. But, for now, Lemonade looks like it will still be a unicorn after its public debut.