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Understanding Hippo’s valuation in a post-Lemonade IPO world

Are public markets frothier than today’s private markets?

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Image Credits: Nigel Sussman (opens in a new window)

Startups that fit under the broad umbrella of insurance technology are having quite a year.

In early 2020, insurtech marketplaces raised hundreds of millions of dollars, and as the year continued, more insurtech startups saw their fortunes rise. But these busy and lucrative recent quarters are perhaps best demonstrated by Lemonade’s IPO.

The rental and home-insurance startup went public in early July, pricing at $29 per share ahead of its raised IPO range, which valued it at around $1.6 billion.

Despite a strong IPO pricing run, Lemonade was still worth less than the $2 billion valuation it had previously earned from private investors. The debut looked like an example of public markets taking a bite out of private investor enthusiasm, a cooling off for a hot startup.


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But when Lemonade began to trade, its shares soared 139% on their first day, closing at $69.41 per share and valuing the company far above its final private price. No matter what price bankers and institutional investors had managed to agree on, the investing public had quickly repriced the company for a multiple of its IPO price.

Today, Lemonade is worth $78.50, or around $4.31 billion, according to Google Finance.

This week, fellow insurance-selling insurtech player Hippo announced that it had raised a Series E worth $150 million at a $1.5 billion post-money valuation.

But while the moment appeared laudable, Hippo also announced that it had gross written premium — the value of insurance products sold, before certain deductions — of $270 million in the preceding 12 months, a figure that had grown 140% over the prior year.

Lemonade, in contrast, had gross written premium of $116 million in 2019, up around 147% from its 2018 result, and $38 million in Q1 2020, putting it on an annualized pace of $152 million at the end of March. It was worth $1.6 billion at IPO, and north of $4 billion today. The mismatch in the size and value of the companies was interesting to say the least.

To explore both Hippo’s round and the apparent pricing discrepancy between this private firm and the public Lemonade, The Exchange got on the phone with Hippo’s CEO Assaf Wand to dig in.

Are the public markets too frothy? Are private investors too conservative? Both? Let’s find out.

Hippo

Hippo offers homeowners’ insurance, which Lemonade also offers, though the latter has a historical focus on renters’ insurance. Regardless, the firms are sufficiently related to warrant comparison.

TechCrunch spoke with Wand about his round, learning that it was raised during COVID-19, which meant that some VCs were effectively offline, or tending to their own portfolio companies. Still, after fundraising over Zoom, Hippo and Wand aligned terms, investors and valuation in a way that it felt made sense and put the capital together.

The company “welcomed FinTLV, Ribbit Capital, Dragoneer and Innovius Capital as new investors in the oversubscribed round, which had significant participation from existing investors,” it said in a release.

Wand said that round was “fair,” with all parties leaving something on the table.

In its preceding round, Hippo raised $100 million at a $1 billion post-money valuation. So, the company’s pre-money valuation rose by $350 million and its post-money valuation by $500 million since its July 2019 Series D. That’s a lot of value creation in a year, and in a more normal public market world, you might think that Hippo had done rather well for itself.

But the mismatch between what Lemonade is worth and what Hippo is worth is hard to parse. Annualizing Lemonade’s Q1 gross written premium result, here’s how the two firms’ compare:

  • Lemonade valuation/gross written premium multiple at $4.31 billion and $152 million: 28.4x.
  • Hippo valuation/gross written premium multiple at $1.5 billion and $270 million: 5.6x.

And we’re making Lemonade look a bit less expensive by using an annualized premium figure, and Hippo more expensive by using a trailing premium result!

The gap between the two multiples that you see above is the gap between public-market enthusiasm and private-market pragmatism today. The world has flipped upside-down from the era of private unicorn valuations that were filled with hot air, bullshit and public markets that wouldn’t buy into hype over hard revenue growth.

So what’s going on? According to Wand, there’s some irrationality in the public markets (TechCrunch Fact Check: True) but even more, there’s been a boom in the public market value of consumer brands over the public market value of fundamentals. Wand cited the value of Tesla in contrast to the value of other, larger car companies as an example of his point.

His implied argument is that Lemonade built a great consumer brand, something that other members of the insurtech world have told me over the past few months; his peers agree with him on at least the strength of Lemonade’s in-market consumer mindshare.

So did Hippo underprice its Series E? Our read is that it didn’t, not really.

Lemonade had gross margins of 18% in Q1 2020, which means that its revenue is nowhere nearly as profitable on a per-dollar basis compared to say, SaaS incomes. So, the gross written premium multiple that Hippo achieved in its new round, taking its growth into account, feels reasonable. It is Lemonade’s public valuation that doesn’t fit with the market’s normal valuation of lower-margin revenues.

Regardless of what we think, both companies are now very well capitalized. We will see what they manage to get done, when Lemonade reports earnings and the next time we can get Hippo’s CEO on the phone.

More bullish public markets than private simply was not on my 2020 bingo card. What a year!

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