Tuesday, June 23, 2020

NEW INC. MAGAZINE COLUMN BY HOWARD TULLMAN


The Sour Taste of Lemonade's IPO Filing
The insurance business is centuries old and seems ripe for disruption. And it has been. But startups who think that an app and some storytelling will allow them to grab market share could be in for a bitter ending .




General managing partner, G2T3V and Chicago High Tech Investors @tullman



WeWork still owns the current, unchallenged record for the worst written, most navel-gazing, and surprisingly self-immolating S-1 of the last decade. In fact, for a while there, I thought that the WeWork clowns had come pretty close to retiring the world title. I was pretty sure that only the team from Theranos could have really given WeWork a run for the money in the "too much is not enough" department. Elizabeth Holmes could lie with the very best of them and never break a sweat in the process, even with real people's lives hanging in the balance.

But now comes the team from Lemonade, who have mastered the art of turning a "beverage" that they condescendingly call their "cup of tea" and a "cocktail of delightful experience" into an unpalatable S-1 for the public to swallow.  Lemonade is a B-Corp (a public benefit corporation, which means it need not prioritize shareholder value) that sells renters and homeowners insurance to millennials via monthly subscriptions, then reinsures the coverage with grown-up insurance companies. Lemonade says that its ultimate plan and "social mission" is to give back any excess funds to the charities’ customers choose. Who keeps score and decides what gets given back and when are just a couple of the questions that come to mind.

But if there were a buzzword face-off between these Lemonaders and Adam Neumann and his team, I'd have to give the edge to team citrus. It's heartening to see the revised regurgitation of such pithy turns of a phrase as: "the greater good," "doing right," "socially impactful," "self-actualization," and my personal favorites: "making insurance more delightful" and, oxymoronically, creating "the world's most loved insurance company."
This sad offering actually has a chance to succeed in these crazy times. The market is nuts, and about a million bored and home-bound novices have opened new brokerage accounts and become "day traders."  A Lemonade IPO will make the stinky CDOs (collateralized debt obligations) that helped collapse the real estate market look like cotton candy.  Although, just when you think it can't get uglier, the bankrupt Hertz (or "Hurts" perhaps more accurately) comes along with sucker bait-- a huge stock offering right out of the warped imagination of its advisors, which is the absolute height of shamelessness. Honestly, I shouldn't care that much because anyone stupid enough to get in bed with Lemonade, or buy any Hertz stock in the midst of its Chapter 11 filing and invest in these over-the-top fairy tales deserves every bit of what they don't get.
Still, in the interest of some sanity, before we enter another crazy dot-com-ish period of IPOs based on completely insane storytelling, someone has to call BS on this again-rampant idea that every business, every industry and every marketplace is ripe for immediate disruption by a bunch of eager young people without the slightest industry-specific experience. Serious change in industries that have been around for centuries, like insurance, doesn't happen quickly or easily. You can rise above many things and overcome all sorts of obstacles, but the basic laws of inertia and gravity still apply, with a vengeance.
For startup entrepreneurs, ignorance can sometimes be a competitive advantage because they don't know what they can't do and, as a result, they might just get it done. But simply printing all this stuff, making up your own metrics, and mouthing all the right words doesn't get you very far down the road. I said a while ago that not every vertical market was just waiting to be Uber-ized and it's even more true today.

For sure, there are things that can and should be changed in any industry, but change doesn't happen by fiat or by itself. Change takes patience, persistence and a concrete plan that looks beyond the near term where novelty, noise, and novice customers can get you some early numbers and momentum. Bragging about scale without demonstrating any substance or staying power means squat. Eventually even the most outrageous and energetic attitude surrenders to reality.
The ultimate name of the game in insurance is long-term customer retention and lifetime value. Lemonade has mediocre retention numbers at best, which look even worse when you subtract all the customers they have "fired" in the short time they've been around. I'm not adverse to firing customers who don't make sense for the business, but you can't do it blindly. Refusing to look at unpleasant facts doesn't make the facts go away. You can't build a long-term sustainable business if you have a steady stream of customers disappearing, for whatever reason, out the back door.

Equally foolish and misleading is the argument that all it takes is a whiff of technology to reshape and revolutionize any industry. Years ago, this particular line of delusion started with Groupon, which was a technology fa├žade spread over an old fashioned boiler room with hundreds of worker bees spending their days on the phone begging restaurants to buy into a really bad deal for their businesses.  A company that claims to be tech-centric, but which spends only a very modest fraction of its total expenses on development isn't likely to be building anything but a bubble waiting to burst.

It gives the whole disruptive innovation business a bad name when upstarts without a clue start claiming that they're the "next" whatever - just you wait and see - but give me your money in the meantime while I try to figure things out. If the dream is big enough, I guess the facts just don't matter.
Lemonade's tech story seems like another strained attempt to wrap an old business story in some new shiny "digital substrate" strategy based on "exploiting a secular shift." If that last sentence sounds like a load, all I can say is that it's taken from Lemonade's S-1 document and just as confused and non-sensical there. It feels overall like someone suggesting that, if you just accept a couple of my insane assumptions, everything else that follows will seem eminently reasonable.  They're selling you Lemonade. But to me it looks like lemons.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.


PUBLISHED ON: JUN 23, 2020


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