IPO Preview: Lemonade Files For $100 Million IPO As Public Benefit Corp.

IPOStreet

Lemonade (LMND) aims to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm provides a fully digitized insurance information and coverage purchasing website for renters and homeowners insurance categories.

LMND is a Public Benefit Corporation which may impact how management manages the firm’s financial activities potentially impacting shareholder profits.

When we learn more about the IPO’s pricing and valuation assumptions, I’ll provide a final opinion.

New York, NY-based Lemonade was founded to create an online platform to provide renters and homeowners with insurance information and the ability to bind coverage.

Management is led by co-founder, Chairman and CEO Daniel Schreiber, who was previously president of Powermat Technologies, a wireless charging company.

Below is a brief overview video of an interview of CEO Schreiber:

Source: CNBC

The company’s primary offerings include Renters and Homeowners insurance coverage. Lemonade has plans to expand into additional insurance categories in the future.

The firm’s website uses machine learning-enabled chat bots to more quickly assist prospective clients to learn about and purchase the right coverage for their needs.

The company is registered as a Public Benefit Corporation and seeks to use the profits from premiums for donation to a charity of the client's choice and in doing so reduce excess claims.

Lemonade has received at least $480 million from investors including SoftBank, Sequoia Capital, Aleph, XL Innovate and General Catalyst Partners.

The company devotes a large amount of marketing via online 'search engines, social media platforms, digital application stores, content-based online advertising' to get users to download its app.

The firm purchases search engine advertising and is active in generating earned social visibility as well.

Sales & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, rose to 0.8x in the most recent reporting period.

As a proxy for the growth trajectory of online insurance, according to a 2020 market research report by IBISWorld, the market for online insurance brokerage is expected to reach $31.3 billion in 2020.

The average annual growth in online insurance was approximately 9.0% from 2015 to 2020.

The main drivers for this expected growth are an increased comfort level of usage of online information and coverage sources for insurance as well as improved technology offerings to automate the process for consumers.

Major competitive or other industry participants include:

  • GEICO
  • Progressive Casualty
  • State Farm
  • Allstate Insurance

Management says its use of advanced A.I. technologies help to streamline the entire process of learning about and purchasing insurance, at least for the categories of homeowners and renters insurance.

Lemonade’s recent financial results can be summarized as follows:

  • Growing topline revenue, but at a decelerating rate of growth
  • High and increasing net losses
  • Uneven and high cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

lemonadepl

Source: Company registration statement

As of March 31, 2020, Lemonade had $274.2 million in cash and $124.3 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was negative ($79.9 million).

Lemonade intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO to create a public market for its common stock and for general corporate purposes.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, Allen & Company, Barclays, JMP Securities, Oppenheimer & Co., William Blair and Liontree.

Commentary

Lemonade is seeking public capital investment to fund its high and increasing cash burn as it seeks to grow its online-only business.

The company’s financials show the firm is growing revenue, although at a decelerating rate of growth, while losses are high as is operational cash burn and free cash flow use.

Sales & Marketing expenses have been dropping as revenues scale; its Sales & Marketing efficiency rate is improving.

The market opportunity for selling insurance online, at least to consumers, is large and growing, although I wonder how well the firm will make the transition into other products, since selling to businesses is usually much more involved.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 101.3% since their IPO. This is a top-tier performance for all major underwriters during the period.

The firm is classified as a Public Benefit Corporation, which means ‘Under Delaware law, public benefit corporations are required to identify in their certificate of incorporation the public benefit or benefits they will promote and their directors have a duty to manage the affairs of the corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation's conduct and the specific public benefit or public benefits identified in the public benefit corporation's certificate of incorporation.’

So, will the balancing of those varying ‘interests’ result in less potential value to shareholders interests?

LMND has an interesting company story and growth trajectory but high losses and cash burn, so it will be interesting to see how this IPO gets priced.

I’ll provide a final opinion when we learn more details.

Expected IPO Pricing Date: To be announced.

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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