Ahead of its expected IPO pricing later today, SoftBank-backed insurtech startup Lemonade has raised its expected price range. After initially targeting $23 to $26 per share in its debut, Lemonade now intends to sell its equity for $26 to $28 per share.
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The new range boosts Lemonade’s expected value, a boon for insurtech startups like Root, Kin, MetroMile, Hippo and others. Had Lemonade been forced to reduce its pricing, the valuations of its contemporaries could have come under pressure when they went to raise more capital. But with Lemonade noting that the market will bear a higher price for its equity, it’s a good day for startups looking to rebuild insurance products in a digital-first manner.
This morning, let’s work out the Lemonade’s new valuation range, compare it to the company’s final private valuation and figure out if we can understand why the stock market may support the company at its new price. After that, we’ll share a few notes from folks about the IPO and how they think it might go, just for fun.
Upward
Lemonade intends on selling 11 million shares as before, so the company is not targeting a larger bloc of shares to disburse. At its new price range, Lemonade will sell shares worth between $286 million and $308 million, a few dozen million more at the top end of its new range than it had anticipated with its first IPO pricing interval ($253 million and $286 million).
The company has two valuation ranges: one without the 1.65 million shares its underwriters may purchase at its IPO price if they choose, and one including those shares. Without the extra equity, Lemonade is aiming at a $1.43 billion to $1.54 billion valuation; including the extra equity, Lemonade is worth $1.47 billion to $1.58 billion.
All of Lemonade’s new possible IPO valuations still land under its final private valuation. SoftBank valued Lemonade at $2 billion, post-money in a mid-2019 venture capital round worth $300 million. Of course, if Lemonade prices well (at the top of its range, say), and opens strongly when it trades, SoftBank could be made effectively whole from a valuation perspective. We’ll see.
That’s the news. Now let’s talk about impacts.
For the billions of dollars of value stored in Lemonade’s contemporaries, the gauntlet of the company’s IPO is not yet fully run. If Lemonade finally prices under its new range, or stumbles out of the gate when it begins to trade, some of the work that the unicorn has done to anchor insurtech revenue to a functional valuation could be undone.
But today, with Lemonade’s small positive repricing, the company has set a floor for revenue of its sort. We can calculate it:
- Revenue: $26.2 million Q1 2020.
- Revenue run rate: $104.8 million.
- Valuation, top-end of range: $1.58 billion.
- Possible insurtech revenue multiple: 15.1x.
That’s very high! The company had a net loss greater than its revenue in Q1 2020! It’s gross margins were 21% on an adjusted basis in the same quarter! Wild.
I can’t read these numbers without thinking that the public markets are about to value Lemonade as if it was a SaaS company, when it isn’t. It does have recurring revenue, but as we can see from its gross margins, not all recurring revenue is made equal.
Some other views
I’ve written a lot on this issue so it’s time for some other voices. Collecting from the inbox, here are a few that stood out.
David Spreng, Founder and CEO of Runway Growth Capital:
“I’m sure it’s very exciting for SoftBank and Lemonade to look out at a $5 trillion market opportunity that appears ripe for upheaval, as we see with insurance. However, with an economy that comes with many unknowns (due to COVID-19), it’ll be important to see if the stock is priced appropriately out of the gate. With so many unknowns in the market and broader economy, Lemonade’s valuation will likely see some downward pressure. Couple that with the post-WeWork world that values profitability above all else, something Lemonade has not been as focused on to date, and you may pick up a bit more downward pressure out of the gate.”
This is about as negative a take as you can ever really get from people on the record.
Hunter Hartwell, a Principal at Forté Ventures:
At the end of the day, Lemonade is a traditional insurance carrier that many would argue has better enabling technologies (e.g., claims bots) and brand awareness than incumbents. The incumbents would tell you that Lemonade is overpaying for that brand awareness (Lemonade’s expense detail from the S-1 points to the same conclusion), but the LTV of Lemonade’s millennial customer base may outweigh the near-term spending spree.
I’ve largely been evaluating the IPO valuation in two parts. First, there is the multiple on Net Earned Premium (aka revenue), which can be used to compare carriers to one another, and then there is the premium placed on the enabling tech, brand value, growth rate, etc. Most carriers have an EV to Net Earned Premium multiple of between 1x and 2x, so Lemonade’s “standard” valuation would be around $160 million based on their LTM Net Earned Premium of $79 million (as of 3/31). With a target EV of >$800 million for the IPO, Lemonade is effectively arguing that they deserve another 8x to 9x of premium for all of their differentiating factors mentioned above.
Whether you believe that the above “premium” represents a good value or not really boils down to whether you buy into the company’s story around customer retention and customers “graduating” from renters policies to higher value homeowners and umbrella policies.
Hartwell’s point about graduation is something that I’ve heard time and time again while trying to learn about the insurance market. A good question is whether Lemonade shares more on its graduation rates as time goes along; what it did share in its S-1 was a little light, by our read.
Robert Le, a PitchBook tech analyst covering insurtech
“With the IPO, Lemonade is entering the public markets at a precarious time. While the company has experienced strong growth in terms of gross written premiums, its scale is still very small relative to incumbents. In order to garner investor interest in the public markets, we believe Lemonade will need to significantly expand its operations in terms of geographic coverage (currently only available in 27 states and D.C. in the U.S., Germany and Netherlands in the EU) and product lines (currently only renters and home insurance) as well as deliver better operating metrics (its loss ratios are still too high). Furthermore, having only launched less than four years ago, we believe that their underwriting models are not time-tested and may not be robust enough to weather any catastrophic events.”
One side to this is that if Lemonade wants to expand geographically as Le expects, an IPO would provide it with the cash it needs to do so. The timing of the IPO may be more reasonable than we thought, initially.
More when Lemonade prices and trades. This one is exciting and we are watching.
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