Lossmaking Lemonade defies the skeptics

Shai Wininger and Daniel Schreiber  / Photo: Shlomi Yosef , Globes

Some argued that the digital insurance company was not worth $2 billion. They were right but got it completely wrong.

Digital insurance company Lemonade (NYSE: LMND) has confounded expectations. 

Ahead of the company's Wall Street IPO at the start of the month, many investors were wondering whether Lemonade was really worth the $2 billion valuation, on which the company's last $300 million financing round was based in April 2019. Those investors who insisted that Lemonade was not worth $2 billion were right, but not in the way that they thought. The company is currently worth $4.5 billion.

The fact that the financing round last year was led by Softbank, which soon after came unstuck with its over-valuation of WeWork, only added to the skepticism about Lemonade. Many commentators began comparing Lemonade to WeWork, arguing that it was basically an insurance company seeking to spuriously boost its valuation by pretending to be a tech company.

Lemonade's proponents argued that the comparison with WeWork was unfair. Whereas WeWork is a real estate company, which has simply dressed up its bricks and mortar buildings to appeal to young tech companies but with no tech per se itself as part of its operations, Lemonade genuinely has a tech component in the form of unique algorithms based on big data and artificial intelligence. Lemonade claims it can gather 100 times more data than traditional insurance companies, which makes it cheaper and more precise in its pricing.

The biggest argument against Lemonade's $2 billion valuation was that it was that it only had revenue of $67.3 million in 2019 and losses of $108 million. Others pointed out that if Lemonade's algorithm was so game-changing, why did it pass on 75% of the insurance policies it did sell in 2019 to reinsurers. And as "Globes" asked last month, can Lemonade's potential make it nearly as valuable as Israel's two largest traditional insurance companies combined - Harel and Phoenix together have a market cap of $2.35 billion.

The initial answer seemed to be that Lemonade was not worth $2 billion. The company announced last month that it was pricing its IPO at a valuation of $1.35 billion. But a week later it held the IPO at a higher valuation of $1.6 billion and then the stock market mechanism took over. The share price soared $140% on its first day's trading and a further 30% the following session, giving a remarkable market cap of $5 billion. The share price has since slipped somewhat and is currently trading at $81.64, giving a market cap of $4.5 billion - more than double that dubious $2 billion valuation. It seems that everybody was wrong, the skeptics who thought the company was not worth $2 billion and the proponents who insisted it was.

But $4.5 billion how can that be? Investors are either betting on the huge potential for future insurance sales by Lemonade or that there will eventually be a bidding war by the global insurance giants to buy the company and its algorithms.

This is all good news for Softbank, which has a 21% stake in Lemonade, albeit that its shares are locked down for the first six months trading on the NYSE, by which time the price might have fallen (or risen). Beleaguered until recently after the WeWork debacle, Lemonade and the general boost to the tech sector by the Covid-19 pandemic, have seen the Japanese multinational holding company's share price reach a 20-year high.

Passion puts the win into Wininger

But Softbank is not the only big winner from Lemonade's IPO. The company was founded in Israel in 2015 by CEO Daniel Schreiber and president Shai Wininger. Lemonade has been operating in the US since 2016 and Europe since last year, offering home insurance online, which is purchased mainly by people aged under 40.

Passion is not the first word that comes to mind when thinking of insurance, even if it is digital insurance and the unique algorithms developed by insurtech company Lemonade. But Wininger has revealed that passion is the secret ingredient behind the digital insurer's success.

Last month in a special project, "Globes" asked 100 Israelis to choose the word in Hebrew that they are fondest of. Wininger chose "Tshuka" best translated as passion.

Explaining his choice, the tech entrepreneur said, "When I started out, many people advised me that business and emotions don't mix. Business is numbers and procedures, processes and money, and no small measure of toughness. Today, after several failures and several successes, I believe that the opposite is true. The entrepreneurs behind the most successful companies in the modern era motivated themselves and all those around them by a dream for change, not the desire to get rich, to promote themselves or stay in power.

Wininger added, "Today I am well aware of my personal passion - using technology and creativity to implement revolutions in old-fashioned industries. I have learned to look for this passion in choosing partners and employees and I have kept my distance from those mainly focused on personal promotion and material gain. There are many areas that require fundamental change - banks, airlines, government ministries and of course the political system."

Wininger is not a man who speaks much to the media and little is known about him beyond his two most high profile successes - Lemonade and freelance services platform Fiverr (NYSE: FVRR), which he founded with CEO Micha Kaufman, and several other undistinguished startups that he founded before that.

Fiverr held its IPO in June 2019, at a valuation of $650 million, and its share price rose 90% in its first trading session, only to quickly fall back below its IPO value. But the fall was only temporary and today Fiverr has quadrupled its value with a market cap of $2.56 billion.

Wininger left Fiverr to found Lemonade but still holds a 5.7% stake in the freelance services platform, which together with his 9% in Lemonade (locked down until December 30), makes him worth $536 million. Passion it seems has put a big win into Wininger.

Published by Globes, Israel business news - en.globes.co.il - on July 14, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Shai Wininger and Daniel Schreiber  / Photo: Shlomi Yosef , Globes
Shai Wininger and Daniel Schreiber / Photo: Shlomi Yosef , Globes
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