Lemonade went overnight from being a unicorn that has never made a profit into a massive success. But there are some investors wondering whether the underwriters forced the company to leave money on the table
Lemonade co-founders Daniel Schreiber and Shai Wininger. Photo: Ben Kelmer
The surge of the Lemonade shares by 139% in the first day of trading on the New York Stock Exchange last Thursday made it the most successful IPO of an American company this year. While in Israel we are fond of claiming the insurtech company as one of our own, this is an American company for all intents and purposes, even though it happened to be founded by two Israeli entrepreneurs and has an R&D center in Israel. The price of the shares originally set by leading underwriters (26$-28$ per share) Goldman Sachs and Morgan Stanley, two of the most powerful banks on Wall Street, was lower than the $2 billion valuation Lemonade got on its last private funding round. But Lemonade's surge on the opening day of trading - or what is known in New York as a “pop” - increased its valuation to $3.8 billion, already ensuring that everyone is in the green. But did really everyone make a profit? Lemonade went overnight from being a unicorn that has never made a profit into a massive success. With the value of the company doubling in a single day, there are some investors, especially those coming from Silicon Valley, far from the East Coast Wall Street junta, that are wondering whether the underwriters, in order to ensure their success, forced the company to leave money on the table. There are those who are saying that had the price of the shares been set closer to the value which it reached in the opening day of trading, the company could have made double the $319 million it raised. After all, that is the goal of an IPO - to raise funds to support the company's growth. Instead, it was the underwriters and the investors that bought the shares in the IPO that saw returns of over 100% on their investment. From a quick examination of the first and only day of trading in the shares to date (NYSE was closed on Friday due to the Fourth of July), it is easy to see that many of the shares likely changed hands more than once. This means that those who bought shares in the IPO, which are usually financial institutions connected to the underwriters, could have made an immediate profit. On the other hand, the company was left with a lower sum than it could have maybe raised and the general public received access to the shares at a far higher price than the more "distinguished" investors. The plot only thickens when you take into account the current reality of the Covid-19 pandemic, which has made stock markets more volatile than ever, while also bringing into the game new players that are aiming to benefit from the volatility. According to a report in the U.S., Lemonade became a very popular share on online trading platforms like Robinhood. The Millennials, who make up a large portion of the traders on the platform, are also the average Lemonade client that connects with the company's vision of simple and cheap digital insurance without almost no human touch. While the experienced investors made their gains on the opening day - similarly to what happened a few weeks ago with used car sales platform Vroom Inc, which also has a connection to Israel and saw its shares surge 117% - the younger and less experienced jumped on board later and inflated the price beyond any logic. As is often the case, the truth lies somewhere in the middle. The underwriters, including SoftBank, which owns the biggest stake of shares in Lemonade, learned their lesson from the failed WeWork IPO and wanted to come to market with a lower profile. None of the parties could have afforded a failure. After all, Lemonade may be growing quickly, but profitability isn't on the horizon, while plenty of competition is. Lemonade will be feeling it, even more, when it tries to enter the property insurance business which is considered to be more straightforward for the underwriter. The original valuation of $1.5 billion, which the underwriters were targeting, gave the company a generous price multiple of 20, so a valuation of almost $4 billion which the company has reached due to the jump in price seems disconnected from its performance. In the meantime, someone who is certainly enjoying the IPO is SoftBank, the Japanese multinational conglomerate holding company led by Masayoshi Son. Less than a year ago it suffered a massive blow with the failure of the WeWork IPO, a company that in its essence is somewhat similar to Lemonade. Both companies changed what was a physical service to a completely digital reality, but weren't successful in profiting from it while using mantras from the SoftBank dictionary like being "the world's favorite technology" and "providing awe-inspiring service." These terms hadn't appeared in prospectuses previously, and neither did valuations of billions of dollars for companies who don't know how to turn a profit. The Lemonade IPO led to a 3% climb in SoftBank shares last Thursday, taking it to its highest level since July 2019 and somewhat sweetening the tumultuous year the company has experienced.