Is Fintech Insurer Lemonade Really Worth $2 billion?

Lemonade recently raised $300 million in a deal led by SoftBank Group at an estimated valuation of more than $2 billion. The Company provides renters and homeowners insurance through a unique model – employing behavioral economics to align the interests of the insurer and the insured.

It uses features such as donating excess premiums (above claim payouts) to the insured’s charity of choice and filing claims through video vs forms to mitigate the likelihood that a customer will engage in fraudulent behavior.

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Beyond the behavioral strategies, Lemonade uses artificial intelligence to make the whole process of underwriting and customer acquisition more efficient and as a result can dramatically reduce the premiums it charges. New and existing customers can be effectively supported through chatbots instead of live insurance agents.

So in just four years since Lemonade was founded in 2015, how can it be worth over $2 billion? There are four primary drivers for this valuation – market size, demonstrated growth, ownership dilution, and FOMO. The insurance market is estimated at $4.6 trillion and is severely underserved by technology. Meanwhile, in a short period of time by year 3, Lemonade had acquired 300,000 customers and generated $57 million in revenues while donating over $162k to charity.

In parallel with executing the round, the existing stakeholders determine how much equity ownership they are willing to give up. In this case, it was determined that $300 million was the right amount to invest and at a $2 billion post-money valuation, the round represented a 17.6% ownership stake. Lastly, investor competition and the Fear Of Missing Out (FOMO) can drive the valuation up, which is likely what happened in the case of Lemonade given the uniqueness of their solution and demonstrated early traction in the market.

Time will tell if Lemonade will live up to its valuation, but for now the Company has officially entered into this year’s class of newly minted Unicorns.