Lemonade’s proposed initial public offering, disclosed earlier in June, has the dubious distinction of being unveiled during the ongoing COVID-19 pandemic, a phenomenon that has roiled the public markets and created economic uncertainty around the world.

If successful, the IPO would help make the case that today’s crop of InsurTechs have what it takes to appeal to investors even during tough times. It would also potentially give a healthy exit for the company’s A-list investors: Japan’s SoftBank Group, Allianz, Google’s venture capital arm, General Catalyst, OurCrowd and Thrive Capital.

While some observers are optimistic about Lemonade’s chances in the public markets, others are skeptical about the road ahead. One reason why: The insurer, which sells digital home and rental insurance in the U.S. and has begun a European expansion, remains unprofitable despite having raised nearly $500 million since its 2016 launch.

“We’re skeptical of Lemonade’s IPO because the company has no material product or value proposition advantage—it’s another AI-backed, loss-making fintech with a popgun marketing budget that targets millennials. Additionally, the cost to scale is tremendous, and the road is only going to get harder,” said Hugh Tallents, senior partner at New York-based management consulting firm cg42.

Lemonade declined to comment, citing the “quiet period” companies are required to follow after filing IPO plans.

Plenty of Competition

Tallents said many of Lemonade’s competitors are already moving toward AI-friendly millennials as the InsurTech has or have incorporated AI into their business. That’s a dynamic that makes it hard for Lemonade to succeed, he said.

“It’s much easier for major players to copy Lemonade’s technology than it is for Lemonade to build a strong distribution network and generate brand awareness. This is where Lemonade is going to struggle. It takes a lot of continued investment in marketing to reach new customers and be the loudest voice in a crowded field,” Tallents said. “To put it in perspective, Lemonade spent $19 million last year on marketing and was racking up losses. GEICO spent more than three-times the amount that Lemonade has raised in total so far just on marketing in the U.S. last year. Lemonade’s level of marketing spend is minuscule in comparison to what the competition in the property/casualty industry are forking out year over year.”

While its gross written premiums have grown steadily, Lemonade’s bottom-line net losses have expanded too, from just under $53 million in 2018 to $108.5 million in 2019, according to the company’s IPO prospectus filed with the SEC. The company said it booked $36.5 million in losses during the 2020 first quarter compared to a $21.6 million loss in the 2019 first quarter. (Editor’s Note: Incurred loss and LAE recorded on the income statement was $45.8 million for full-year 2019 and $18.2 million for first-quarter 2020. Also contributing to bottom-line net losses in these periods were sales and marketing expenses of $89.1 million for full-year 2019 and $19.2 million for first-quarter 2020)

A Good Shot?

Nate Pacer, co-founder and chief research officer of the analyst firm Venture Scanner, said he sees Lemonade’s IPO as generally positive, despite the uncertainties.

“Is the IPO a good thing? Yes. Insiders get liquidity and funds to operate the business, and new investors get exposure to a business model they believe in,” Pacer said.

He said Lemonade’s prospects are on par with other technology companies that have decided to pursue the public markets.

“Lemonade has a future similar to other tech companies that have gone public recently,” Pacer said. “Their prospectus makes it clear they are not currently making money, but that they believe they have a pathway to profitability. Some companies have succeeded at this and others have failed. It will be up to Lemonade to execute.”

Lemonade’s preliminary prospectus states the IPO could be as high as $100 million, but the final number will be decided in the coming weeks. [Editor’s note: Lemonade subsequently priced its IPO at up to $286 million.] Because of that, Pacer said it is too early to assess Lemonade’s IPO in and of itself. Still, he said the lack of negative publicity is an encouraging thing.

“I haven’t seen the type of negative reactions like we did for [shared office space startup] WeWork’s early filings. [The IPO was pulled in 2019], so there does seem to be investor appetite,” Pacer said. “The COVID pandemic will also affect markets in ways that have nothing to do with Lemonade itself.”

Trevor Burgess, the former head of Morgan Stanley’s IPO Execution Group, is now CEO of Neptune Flood, an InsurTech and flood insurer that relies on AI. He said that Lemonade’s decision to file an IPO prospectus reflects optimism about its future. Whether investors share that remains an open question.

“Filing a prospectus means that Lemonade is optimistic about the market reaction to their IPO and kicks off a 15-day period of marketing,” Burgess said. “Later this month we’ll learn more about how investors are valuing their company and its prospects.”

Determining a Successful IPO Value

Sarah Kocianski, head of analysis and research manager at 11:FS, a UK-based FinTech consultancy, said that Lemonade’s initial IPO prospectus is likely on the low side.

“Lemonade’s statement that it’s looking to raise ‘around $100 million’ feels cautious, and it seems likely the final figure will be higher than that given it is very much still in its growth stage. It also has a lot of cash in the bank after its last raise from SoftBank of $300 million suggesting it doesn’t need to IPO at this stage,” Kocianski said. “Those two factors combined suggest that anything in the $100 million-$300 million range would be a not disappointing exit …”

She said that other IPOs from InsurTechs of similar scale will likely follow, with possible candidates including Root, Metromile and Next Insurance.

“The apparent recovery of the markets may inspire them to move IPO plans forward. However, we should be wary of being overly optimistic,” Kocianski said. “Despite investors’ appetite for new stock, the U.S. recession has yet to bite, and we are far from a full economic recovery elsewhere that could lead to wobbles in the market in the near future.”

Tallents also noted the COVID-19 pandemic and volatile market, though he said Lemonade is pursuing its IPO because one of its main investors, SoftBank, “needs a win following the WeWork [IPO] debacle last year.”

He predicted a Lemonade IPO would tick up initially, and then ultimately disappoint.

“We’ll likely see an initial rise in price, reflecting the considerable buzz around the company, but once investors start digging a little deeper into the economic model, there will be a pullback with the realization that this is not a long-term play,” he said. “It might get a rash of Robinhood investors initially because of the mission story, but those folks are short-term profit takers. The surge will be followed by an equally gigantic thunk—likely two to three weeks after the IPO.”