Fintech IPO’s? In This Economy?
Hi all, Julie here. Apparently private companies are assuming that if Robinhood traders are willing to buy new shares of stock from Hertz even though it’s going bankrupt, they’ll want to buy shares in their company as well? (Please read my old colleague Matt Levine on this if you haven’t yet).
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Over the past few days, we’ve seen some new IPO candidates come out of left field with Lemonade filing an S-1 and CNBC breaking the news that Quicken Loans has filed confidentially. During a pandemic and civil unrest, it feels like a weird time to be trying to enter the public market, but to be fair, other companies listing recently have done well in the near term, so there are other reasons to think shares will be well received.
Now, it’s hard to gather too much on Quicken since it’s a confidential filing, but there are some numbers from recent interviews plus trends we can assess in the mortgage market. Take this from CNBC:
“Quicken Loans CEO Jay Farner said on CNBC in mid-April that March was the “biggest closing month in our company’s history – nearly $21 billion in mortgages closed.” He said on CNBC that the company was estimating nearly $75 billion in mortgage applications in the second quarter, compared with almost $53 billion in the first quarter.
Given how low mortgage rates are, it makes sense that there are a lot of people looking to refinance, as well as another segment of people looking to make new purchases all together (like my 27-year-old sister in Michigan). Reports are expecting the company to price in the tens of billions of dollars, which would make it one of the largest IPOs of the year and one of the largest the fintech space has ever seen. I can see the reasoning behind them wanting to go public. They probably have a lot of numbers pointing to quarters of growth ahead with mortgage rates likely to stay low for some time and there are a slew of people around my age (29) that will be looking to buy homes in the next 5-10 years. The fact that it’s already one of the largest mortgage issuers in the country can be both a pro and a con. Pro is that it shows they have staying power and the model works. Con is that there is less room for growth.
Lemonade, on the other hand, is far more perplexing than Quicken. Thankfully for us, the filing wasn’t confidential so we can get a look at some numbers. It’s hard to find some that might make anyone other than a gambling trader want to buy them, so it’s hard to imagine they’ll price well.
Perhaps the most concerning to me is the churn (buried in the filing). Retention rate is 75% in year one and 76% in year two. Net retention is about 90% year over year which also isn’t amazing given that it takes two years or more for customer payback. I doubt these customers are all buying homes and deciding to get homeowners insurance elsewhere (though this is also a very bad sign), so why are they leaving? I’ve used Lemonade for years and have always had a great experience, and I generally hear the same from others. My guess is that the churn is a mix of people foregoing renters insurance all together, as well as some of these customers buying homes and using someone else.
That brings me to a concern I’ve always had with Lemonade. Renters insurance is a tough business, and they have to do well cross-selling into other verticals in order to make it work. So far, home insurance has been a struggle, with far fewer people opting to use Lemonade for this offering. When it comes to auto, CEO Daniel Schreiber has told me he doesn’t have much interest in going into this vertical since he thinks that the market is changing dramatically. The prospectus says they plan to have other offerings in the future, but I haven’t heard rumors of any launching in the near term.
So, why the hell are they deciding to go public if the numbers are so bad? There are a few theories. One is that Softbank is pressuring them to do so. Another is that they couldn’t raise more funding at terms they could agree upon. Perhaps the most interesting theory, however, is that they filed in order to drum up a potential acquisition. It’s not such a crazy idea given that Prudential paid upwards of $2B (close to Lemonade’s most recent valuation) for a no name startup late last year.
But I wonder what an incumbent would get out of buying Lemonade? One possibility is that they just want Lemonade’s customers, which skew young (about 70% of its customer base is under the age of 35 and 90% said they weren’t switching from another carrier). But merging the tech between the companies would be challenging, expensive and time consuming. Perhaps they’d want to just try to gobble up a competitor for the customer set, and then hope to learn from some of the tech to improve their own systems and be more successful in convincing customers to use other product offerings than what Lemonade has been?
Many insurance companies offer you better rates if you use multiple products from them, so if they could integrate Lemonade and then get that same customer to use them for auto, home or life, that could be a reason for a deal. One thing Lemonade should keep in mind is that as its target audience gets older, they are going to need other types of insurance, and their competitors offer those bundled deals (as I learned buying a car recently). If Lemonade only has a couple of products, I’d expect churn to remain high, and it’s hard to run a profitable renters insurance business with high multiples if that’s the case. If they do end up going public, they’ll want to launch another product soon, and hope that they can ramp it up faster than they’ve been able to with home owners.