SoftBank-backed insurance startup Lemonade has postponed IPO plans after plotting an offering for this year. It shows how the pipeline for high-growth tech is getting clogged after WeWork.

Lemonade

Lemonade cofounders Shai Wininger (left) and Daniel Schreiber (right)

• Insurance start-up Lemonade has pushed back its public market debut, which according to media reports had been planned for some time this year.
• The insurer had chosen Goldman Sachs and JPMorgan to lead the offering, according to people with knowledge of the agreement.
• Lemonade is another fast-growing tech firm backed by SoftBank or its Vision Fund that's had challenges entering the public markets.
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Lemonade, the insurance startup that counts SoftBank as one of its largest investors, is yet another fast-growing, money-losing tech company that's finding it hard going to market.

The insurer had earlier this year been targeting an IPO as soon as August or September, according to some reports, but the timing on any public debut has been pushed back, according to people with knowledge of the company's process. One of those people cited concerns about how fast-growing tech firms are being viewed by the market.

The startup tapped Goldman Sachs for the coveted lead left role on the share sale, according to one of the people. JPMorgan was also expected to help lead the offering, a second person said.

The delay shows that another company in SoftBank's web of funding and influence is in limbo between massive private fundings and the public market. The biggest example so far has been WeWork - which counted SoftBank's Vision Fund as a big investor and had to be bailed out by SoftBank after its failed IPO.

Lemonade has never publicly shared its plans for an IPO. In 2017, the company hired a new finance chief, Tim Bixby, who touts his skill on his LinkedIn profile at "driving hyper growth at tech companies through IPOs." He was the CFO at Shutterstock when that company first sold shares to the public.

In June this year, an Israeli website reported Lemonade was planning to raise as much as $500 million in an IPO before the end of the year that according to the report would value the company at more than $2 billion. The next month, on July 10, Eric Munson, the chief investment officer at Lemonade investor ADIT Ventures, told a roomful of people at a conference to expect an IPO filing in the next month or so, according to a person who attended the talk. Munson didn't return a call seeking comment.

"Lemonade Insurance, one of our positions in the Adit Growth Equity portfolio, recently hired Goldman Sachs and JP Morgan Chase to take them public," Munson wrote in a performance review dated the same day. "More details to follow, once they are formally announced."

Four months later, and nothing has been announced.

That comes after SoftBank-backed WeWork unveiled its S-1 filing in mid-August, setting off a storm of criticism about its finances and the financial entanglements of founder and then-CEO Adam Neumann. Now, that offering has been derailed, Neumann is out as CEO and chairman, and SoftBank had to step in to rescue the coworking company with a massive bailout.

SoftBank Vision Fund-backed car rental service Fair has slashed staff and lost its CEO after SoftBank had to step in last month with an extra $25 million to keep it afloat.

Public market investors are increasingly wary of buying into money-losing tech startups, and other IPOs have been delayed as well. Endeavor Group, the entertainment and talent agency, pulled its IPO in September after weak demand. And Postmates, the food delivery startup, last month told its bankers it would delay its public offering, Recode reported.

SoftBank Group last week reported a $6.4 billion operating loss for the third quarter thanks to massive writedowns on WeWork, Uber, and other investments by SoftBank and the Vision Fund.

Spokespeople for Lemonade, SoftBank, Goldman Sachs, and JPMorgan declined to comment.

High loss ratios

Lemonade was founded by Shai Wininger and Daniel Schreiber, two Israeli entrepreneurs intent on disrupting the insurance industry. Employing what they call artificial intelligence, the company uses a chatbot to lead consumers through a series of questions that ends with homeowners or renters insurance. A second chatbot handles claims. The company, which takes a 20% cut of the premium up front, offers policies in more than 25 states.

Wininger also founded Fiverr, the freelancing app taken public by JPMorgan earlier this year.

Lemonade has made a name for itself with its streamlined app, straight talk about the complexities of insurance, and catchy marketing campaigns.

Recently the company gained attention on social media for its tussle with Deutsche Telekom over the use of a particular shade of magenta. The German telecom, which owns T-Mobile in the US, sent the insurance startup a cease and desist letter over its use of the color. Lemonade has vowed to fight, and launched a #freethepink social media campaign.

Lemonade, which is registered as a B Corp, unveiled a program in 2016 called GiveBack where it donates a portion of the premium it collects to charity as long as there's enough reserves set aside to pay future claims. It gave $162,000 to charity last year on behalf of customers.

But the company hasn't been bringing in enough revenue to cover claims, what's known in the insurance world as having a loss ratio higher than 100%. For an insurance startup, a loss rate higher than 100% can be worrisome since it means the company is paying out more in claims than what it brings in from premiums.

The company readily admits the loss ratio is too high, and says it's making progress. By its own count, the ratio has been above the 100% threshold - in some cases above 200% - for much of its history. For example, it lost 132% of the premiums it collected through the first half of 2018, according to a company blog post written by the chief underwriting officer.

By the first quarter of this year, the ratio had fallen to 87%. That's still above the 75% threshold that Schreiber has cited as a goal, and above the 67% industry average observed between 2012 and 2017, according to a Harvard Business School case study that examined the startup's first few years.

Lemonade's insurance carrier - one of three subsidiaries housed within the larger company - wrote more than $44 million in policies through the first six months of 2019, according to filings it submits to insurance regulators. During that time, it lost $5.8 million. The figures don't include the results of the insurance brokerage or a third unit that handles tech research and development from Israel.

Lemonade in turn works with reinsurers, but does not specific which ones on its website.

Lemonade has still to get approval from the insurance industry's most-trusted ratings companies. The company turned to Demotech to get an A Exceptional rating. Ratings heavyweights A.M. Best, Moody's Investors Service, Standard & Poor's and Fitch haven't yet weighed in.

In a 2016 examination, New York authorities cited its custodial agreement with Citigroup and said it didn't include terms and protection required by insurance regulators. The regulator recommended fixing the deficiencies, which were corrected, according to a person with knowledge of what went wrong.

Schreiber has served as the public face of the company, maintaining an active Twitter presence, appearing at industry conferences and speaking to a multitude of media outlets including Bloomberg TV, Harvard Business Review, and Inc.'s Founder Project podcast. He often uses analogies and comparisons to more high-minded ideas to sell his insurance offering.

At one conference, Schreiber said Lemonade has used a number of game theories to guide its approach, including something called a Ulysses contract, or a decision made today to lock in your future self. It's a nod to Ulysses, or Odysseus, the protagonist in the Greek play, the Iliad, who straps himself to a ship's mast to avoid the temptation of the Sirens trying to lure his boat onto the rocks. Like Ulysses, Lemonade has tried to tie its hands from taking unclaimed premiums at the end of the year as profit, like other carriers, he said.

SoftBank invested in two rounds, leading a $120 million series C fundraising in December 2017 and then a $300 million series D round in April this year that valued the company at $2.1 billion, according to Pitchbook. The stakes are not owned by the high-profile $100 billion investment vehicle known as the Vision Fund but by the tech conglomerate itself.

In October 2018, Lemonade partnered with WeWork to provide renters insurance to people living in the coworking space's apartment buildings.

Lemonade board member Michael Eisenberg, the cofounder of Tel Aviv, Israel-based Aleph and former partner at famed Silicon Valley venture firm Benchmark Capital, is close to WeWork founder Adam Neumann. He also introduced the founders of Israel-based web company Wix to JPMorgan tech banker Noah Wintroub, who took the firm public some years ago. Shu Nyatta of SoftBank is also on the board.

Dan Ariely, the behavioral economist, was a founding employee and holds a small stake.