SoftBank-backed Lemonade wants IPO investors to think of it as a technology company. Here's why it really isn't.
Lemonade, the SoftBank-backed online insurance company that's preparing for a public offering, is trying to pitch itself as a tech company. In its IPO paperwork, it mentions the words "technology" or "technologies" more times than did Casper or WeWork, two startups that also tried to boost their offerings by pretending to be tech companies. The company also touts its use of artificial intelligence, machine learning, and other buzzy technologies. But it has little reason to be considered a tech firm — Nearly all of the company's revenue comes from selling insurance; technology development is only a small portion of its expenses; and it holds no patents. Visit Business Insider's homepage for more stories.
Online insurance company Lemonade is pitching itself as a tech company and hoping public investors will value it like one. It's not, and they shouldn't. The SoftBank-backed startup, which is preparing for its initial public offering, certainly uses technology in its business — most notably AI Maya and AI Jim, its chatbots that help customers sign up for service and file claims. But it has few of the markings of a real technology company. Instead, it bears much more of a resemblance to the Allstates and State Farms of the world. "That is the wool they're trying pull over the financial community's eyes, that this is a tech company as opposed to an insurance product," said Hugh Tallents, a senior partner at management consulting firm cg42 who focuses on the insurance industry. Whether Wall Street sees Lemonade as a tech company or an insurance firm will likely make a big difference in its stock price and valuation. Public investors tend to place a premium on tech companies because they typically have high growth rates and, over the long term, they often generate fat profits. So tech companies generally have a higher market capitalization than companies with comparable sales or earnings. At least in the private markets, Lemonade has been given something like a tech premium. Last year, in its more recent funding round, investors gave it a $2.1 billion valuation. That would value the company at more than 24 times its sales over the last 12 months. By contrast, insurance giant Progressive is valued at little more than 1 times its sales from the last year. Already, analysts have expressed skepticism about the company and investors may be indicating they have some doubts. Lemonade this week provided a proposed price range for its offering that would give the company a market capitalization that was at least 25% below its $2 billion private valuation. Lemonade talks a lot about "technology" In its IPO paperwork, Lemonade, which offers renters' policies and homeowners' insurance, tries to make the case that potential investors should consider it a tech company. Its documents are replete with buzzy tech terms including "artificial intelligence," "machine learning," "automation," "platform," and "big data." The latest filing uses the words "technology" or "technologies" 149 times. That's more than Casper or even WeWork, two other startups operating in old-line industries that tried to convince investors they were tech companies. "Lemonade is rebuilding insurance from the ground up on a digital substrate and an innovative business model," the company said in its opening pitch in its IPO paperwork. "By leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics, we believe we are making insurance more delightful, more affordable, more precise, and more socially impactful. To that end, we have built a vertically-integrated company with wholly-owned insurance carriers in the United States and Europe, and the full technology stack to power them."
Much of Lemonade's case for being considered a tech company is focused on its use of artificial intelligence. AI powers its two chatbots. The technology also underlies a system it calls CX.AI, which Lemonade uses to automatically answer certain customer inquiries and requests, such as when they need to change their policies because they've moved, according to the company's IPO documents. It also relies on artificial intelligence and related technologies including big data and machine learning to detect fraud, handle repetitive tasks, and automate formerly manual tasks, such as processing paper checks. Lemonade's various chatbots and AI systems are linked to something it calls its Customer Cortex, where it collects and analyzes information about its customers. Those insights are then used by its chatbots and other systems when interacting with its clients. The established insurance industry also depends on technology Viewed in isolation and without context, Lemonade's technology seems very impressive and might persuade some that it was really a tech company. But it's almost certainly not as cutting edge and innovative as it would appear. To an outsider, insurance might seem to be a technological backwater. But it's really not. Insurance companies for years have relied on sophisticated algorithms to determine their risks, for example. "It's not like insurance companies are dumb," said Rob Siegel, a lecturer in management at Stanford Graduate School of Business. "They know how to crunch data." The insurance giants have spent huge sums over the years upgrading their own technologies, some of which are visible to consumers. All the major insurers have smartphone apps. State Farm customers who want to file a claim can get help from the insurance giant's own chatbot. And consumers who visit Progressive's website can use the automated system to sign up there for car insurance without interacting with a live representative. Lemonade's chatbots and use of artificial intelligence may be slightly ahead of the big insurance companies, but it's a difference of degree, not of kind, analysts told Business Insider. Its use of such technology is "a piece of the trend we've been seeing in the industry over last 20 years," said Brett Horn, an equity analyst at Morningstar who focuses on the insurance business. "I don't see anything in the Lemonade materials that suggests they have some secret sauce AI, Skynet that's going to be able to do things that other apps aren't doing," said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business. "And I don't see how they'll get more data than the existing insurance companies that will allow them to do that." Lemonade's business is built around selling insurance Lemonade's financial details offer even better proof that its core business is insurance, not technology. Nearly all of the company's revenue came from insurance. Last year, for example, Lemonade posted $67.3 million in sales. Of that amount, $63.8 million came from the premiums its customers paid for home and renters' insurance. Another $100,000 came from the commissions it made on offering insurance sold by other companies. The remaining $3.4 million came from investment income. In other words, Lemonade makes its money by selling insurance, not software. But its financials offer more proof beyond the revenue line. Last year, Lemonade had $175 million in operating and insurance-loss related expenses. Of that amount, it spent just $9.8 million, or less than 6% of the total, on technology development. That was less than half what the company spent on general and administrative costs. Its biggest expenses by far were sales and marketing — $89.1 million — and insurance losses and adjustments — $45.8 million. Just by contrast, Zoom, the maker of the now-ubiquitous video conferencing software, spent $67.1 million, or about 13.5% of its total expenses, on research and development last year. That despite the fact that it too had a heavy marketing budget that ate up more than two-thirds of its total expenses. Lemonade holds no patents But perhaps the most glaring reason why Lemonade isn't a tech company is that it hasn't actually created any unique technologies — at least not any that were worthy of patenting. Patents are a time-tested way that of showing that companies are creating technological innovations. True tech companies file for numerous patents to protect their intellectual property, sometimes hundreds or more each year. As of the end of March, though, Lemonade didn't hold any US or foreign patents, according to its IPO paperwork. Not only that, but it didn't even have any patent applications pending in the US or elsewhere. Again, just as a point of contrast, when Zoom filed for its own IPO last year, it had been issued two patents and had seven more applications pending. Lemonade may want investors to put it in the same category as Zoom and other tech companies, but "they look more to me like an insurance company," said C. Gregory Peters, a financial analyst who focuses on the insurance industry for Raymond James. Got a tip about Lemonade or tech investing? Contact Troy Wolverton via email at email@example.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
Read more about Lemonade and tech investing: Lemonade's IPO plan will destroy one quarter of its $2 billion valuation. But analysts think the latest SoftBank startup could avoid WeWork's fate. 2 of the most important players in Lemonade's IPO are bots. Here's how the $2 billion startup is pitching investors. Here's why tech IPOs are starting to see a surprising, and sudden, snapback The $2 billion SoftBank-backed insurance startup Lemonade has filed to go public SEE ALSO: SoftBank-backed startups are bleeding, as investors tighten up scrutiny over loss-making business models. Here's a running list of all the Japanese giant's major investments in tech. Join the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship
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Softbank-backed Lemonade wants to raise up to $286 million in an IPO — valuing the 'insurtech' firm at about 25% less than its latest funding round (LMND)
Lemonade, which filed to go public earlier in June, announced on Thursday a price range of...Lemonade, which filed to go public earlier in June, announced on Thursday a price range of $23 to $26 for its public offering. The updated regulatory filing could mean a significant valuation hit for the insurtech firm. Japan's SoftBank holds a significant stake in the money-losing company, and is hoping to rebound from stumbles by Uber and other portfolio companies. Visit Business Insider's homepage for more stories. Lemonade, the buzzy insurance startup backed by Softbank, updated its initial public offering documents on Thursday with a price range for its new shares of $23 to $26. The 11 million new shares for sale, coupled with existing stock, priced at the middle of that range would give the company a market cap of around $1.3 billion. In its most recent private funding rounds, the buzzy "insurtech" firm was valued as high as $2 billion, according to Pitchbook data. Softbank, which has had a rocky track record with IPOs of money-losing companies like Uber in recent years, holds a roughly 27% stake in the company. Lemonade — which uses AI chat bots to sell insurance plans to renters, car owners, and more — reported a net loss of $108.5 million in 2019, more than double its 2018 losses. Revenue, meanwhile, increased three-fold in the same span from $21.2 million to $63.8 million. "We have a history of losses and we may not achieve or maintain profitability in the future," Lemonade's prospectus warns. "We expect that our net loss will increase in the near term as we continue to make such investments to grow our business." Read more: Masa Son is facing one of his biggest challenges yet as the SoftBank Vision Fund racks up billions in losses. 12 insiders reveal where it all went wrong. However, the company's founders say there's a $5 trillion annual market opportunity in dragging insurance out of the dark ages. "As transformative as the prior revolutions were for insurance, there is reason to believe that today's will be even more so," Israeli founders Daniel Schreiber and Shai Wininger wrote in the filing. "No part of the value chain is immune this time: distribution models, business models, statistical tools, systems of management, cost structures, corporate structures, corporate culture, technology stacks, user experience, marketing channels, data sources, data uses, value propositions, human capital — all these and more are being upended."Join the conversation about this story » NOW WATCH: Why electric planes haven't taken off yet
The devastated IPO market is coming back to life, but not all tech startups will make it through this opening
The market for initial public offerings has rebounded over the last few weeks. But the tech...The market for initial public offerings has rebounded over the last few weeks. But the tech IPO market has yet to bounce back and likely won't be in full swing until September, said Rick Kline, an attorney with Goodwin who helps companies prepare for the public offerings. Right now, the market seems most interest in companies that haven't been hit by or may have even benefitted from the coronavirus crisis, he said. The election, a potential resurgence in the pandemic, or a violent turn to the ongoing protests could all potential derail the IPO market rebound, Kline said. Visit Business Insider's homepage for more stories. Like much of the rest of the US economy, the initial public offering market has reopened for business in the wake of the coronavirus crisis. But don't expect a rush of venture-backed tech IPOs just yet. A few such startups, like insurance technology company Lemonade, which released its offering paperwork on Monday, may go public in coming months, Rick Kline, a partner at Goodwin who co-chairs the law firm's capital markets practice and helps tech companies prepare for IPOs, told Business Insider. But many more are likely to wait at least until Labor Day, when the public offering typical picks up after the usual summer lull. "It does seem like the IPO market is starting to open some. I still think it will be [in] fits and starts this summer," Kline said. "If I had to pick a month ahead of the election," he continued, "I would probably say September will be the month where we'll see the most tech IPOs." There were 12 public offerings in the US in January and 20 in February, according to Nasdaq, before the COVID pandemic and the subsequent lockdown orders shut down much of the economy and throttled the IPO market. There were just five offerings in March and nine in April But the market started bouncing back last month, when 18 companies went public. There have already been 10 IPOs this month. There have been few tech IPOs lately Few of the offerings during the rebound thus far have been from tech companies. Instead, many have been from pharmaceutical or life sciences companies or from so-called blank-check firms, which raise money with the express purpose of using the money to buy another company. That may be starting to change, though. ZoomInfo, which offers a proprietary online directory of companies and corporate managers, went public last week, as did Shift4 Payments, which offers digital payment systems and services to restaurants and other companies. Online used-car marketplace Vroom is expected to public later this week, while SoftBank-backed online insurance company Lemonade is now waiting in the wings. The initial signs that markets were unfreezing happened about two months ago when some of the companies hit hardest by the coronavirus, including Carnival and Southwest Airlines, went out on the public markets and successfully raised money through convertible debt offerings. About the same time — in April and May — there was a wave of secondary offerings, where already public companies sell new tranches of shares to public investors. The success of those debt and secondary offerings showed that the financial markets were still open for business and there was still plenty of liquidity in them, Kline said. That seems to have given startups and their backers the confidence to move forward with their IPOs. "It's been a little bit of a rolling wave," he said. The rebound could still lose its bounce The resurgence in the stock markets has also helped, Kline said. After hitting their nadir in third and fourth week of March, the markets have bounced back, with the Nasdaq and the S&P 500 back in record territory. "I think the markets have held up really well, bounced back better and quicker than at least I expected, maybe than most expected," he said. The companies that are likely to go out in the next few months are those that have done well during the pandemic or even benefitted from it, he said. Companies that were hit hard by the crisis are likely going to have to wait, perhaps into next year. Lemonade, which says it was largely unaffected by the coronavirus crisis but is bleeding cash and saw its losses swell in recent months, could be a test case to see whether the market has regained its appetite for fast-growing but money-losing tech startups. "I think what the market's saying is they're interested in growth," Kline said. "It probably is responsible growth with a path to profitability." While he's expecting the tech IPO market to really get into gear in September, companies may have a limited window of opportunity to go out. The presidential election could well close the market again, as attention turns to it. The markets don't like uncertainty, and if the election starts to look like it's too close to call, investors, worried about how things will turn out, could shy away from investing in new offerings, he said. And other things could halt the rebound, such as a sharp resurgence in the pandemic or a sharp increase in violence associated with the ongoing protests over police killings and brutality toward Black people, Kline said. "I think if you don't see something going on in the world right now that could derail the IPO markets, you're not watching," he said. Got a tip about the tech industry or tech investing? Contact Troy Wolverton via email at firstname.lastname@example.org, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop. Read more about tech investing: BI Prime Edit in Viking With the Nasdaq back in record territory, here are the top 10 best-performing tech-focused funds to consider investing in Enterprise software companies aren't immune to COVID, and experts warn investors are underestimating how many customers might demand price cuts or peel away We'll never see another $100 billion technology Vision Fund — from SoftBank or anyone else Airbnb was supposed to ignite a boom of tech startup direct listings, but then the coronavirus killed the IPO market SEE ALSO: A Silicon Valley lawyer who works on tech offerings thinks the IPO window could reopen later this year. But he says only a very small group of companies will be able to go public. 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These bots don't need social distance: $2 billion Lemonade's IPO filing shows how companies are pitching investors in the pandemic
Lemonade, the online insurance company, says its chatbots helped insulate it from the coronavirus crisis. The...Lemonade, the online insurance company, says its chatbots helped insulate it from the coronavirus crisis. The company has two bots — AI Maya and AI Jim — that interact with customers; the former signs up new clients, while the latter helps them file claims. The chatbots allowed the company to continue offering its services during the pandemic "without triggering concerns about social distancing," it said. Lemonade released its initial public offering paperwork on Monday; the documents showed that it's still losing money, despite its bots. Click here for more BI Prime stories. Doing business amid a pandemic is not easy, what with all the rules around masks, lockdowns and maintaining distance. Fortunately for Lemonade, the insurance tech startup that filed to go public on Monday, two key members of its staff are immune to the virus — that's because they are bots. In its S-1 IPO prospectus, the SoftBank-backed startup explained to potential investors why "AI Jim" and "AI Maya," the names of the two bots who sign up new customers and handle claims, have allowed it to maintain business as usual: "Our customers' experience with Lemonade is likewise largely unaffected by the turmoil as AI Maya and AI Jim chat with customers, wherever they may be, without triggering concerns about social distancing." Since the coronavirus began to spread earlier this year, we've seen COVID-19 warnings pop up in the quarterly reports and risk factors of numerous public companies and IPO candidates. But Lemonade's filing brings a refreshing new twist to coronavirus comments that companies provide investors. AI Jim and Maya may even be helping Lemonade's business to thrive during this challenging time. The amount of current annualized insurance premiums the company had on record in April was 130% higher than in the same month a year earlier, Lemonade said in the filing. The premiums grew 53% more that month than in April 2019. According to the filing, Lemonade benefitted not just from its bots but from other modern technologies. Because its service is cloud based, its employees were able to work from home during the pandemic without a hitch, it said. Customer phone calls were routed to workers' laptop and its teams communicated online using Zoom and Slack, Lemonade said. "The upshot is that while we all enjoy each other's company, our teams are able to access systems, support customers and collaborate with each other from anywhere, much as they did before the pandemic," the company said in its filing. To be sure, its ability to operate seamlessly through the crisis doesn't mean that SoftBank-backed Lemonade is a huge money maker. Quite the opposite, in fact. The company's loss swelled in the first quarter this year to $36.5 million from $21.6 million a year ago, despite its sales more than doubling to $26.2 million. That's after the company's loss more than doubled last year to $108.4 million on $67.3 million in revenue. Lemonade's operations and capital expenditures burned through $20.1 million in the first quarter after consuming $80.8 million last year. Got a tip about the tech industry or tech investing? Contact Troy Wolverton via email at email@example.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop. Read more about tech investing: The devastated IPO market is coming back to life, but not all tech startups will make it through this opening With the Nasdaq back in record territory, here are the top 10 best-performing tech-focused funds to consider investing in Enterprise software companies aren't immune to COVID, and experts warn investors are underestimating how many customers might demand price cuts or peel away We'll never see another $100 billion technology Vision Fund — from SoftBank or anyone else SEE ALSO: Airbnb was supposed to ignite a boom of tech startup direct listings, but then the coronavirus killed the IPO market Join the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship