Now that Lemonade has raised nearly $500 million in financing to date and is pursuing an international expansion, speculation has begun as to what the exit strategy will ultimately be for investors of the InsurTech startup.

After repeated attempts to contact Lemonade, a spokesperson responded to Carrier Management via email stating “we’re not interested in commenting on this matter.” But industry insiders have identified two likely courses of action: Within the next few years, Lemonade will either be sold to a large carrier or pursue an initial public offering. Either option would potentially help investors gain a healthy return on their investment.

“Lemonade is one of the hottest players in the new wave of InsurTech startups, and their funding has been pretty unprecedented in that space,” Nate Pacer, co-founder and chief research officer of the analyst firm Venture Scanner, told Carrier Management via email. “Investors are seeing that the InsurTech sector is starting to mature, with later-stage events growing from 20 percent of deals to over 50 percent within the past five years, so harvesting [an investor exit of some kind] is a very real option.”

Pacer said both an acquisition of Lemonade or an IPO “are viable exit options,” though he noted that “large insurance incumbents are investing directly into Lemonade, indicating they may be willing to acquire.” An IPO is feasible, he said, because recent tech-related IPOs “show that the public markets are ready to play as well.”

“Smart founders and investors know this and so design the [capitalization] table to align with incentives around exiting,” Pacer said.

Lemonade, launched in 2016, has raised $480 million in four rounds of financing, including a $300 million round disclosed in April 2019. Investors include insurance giant Allianz, XL Innovate (the investment arm now owned by AXA), SoftBank, Aleph, General Catalyst, GV (Google Ventures), Sequoia Capital, Sound Ventures, Thrive Capital and Tusk Ventures.

Pacer noted that voting shareholders—those with larger stakes, typically—ultimately decide when a startup exits. Allianz, General Catalyst and Softbank are among Lemonade’s largest shareholders, he added.

An Allianz spokesperson replied “no comment” when asked if the company is interested in acquiring Lemonade.

International Expansion Will Be Key

Lemonade’s $300 million financing is designed to help the digital insurer expand in the United States but also launch in Europe, as well as grow its product offerings beyond home and rental insurance. Currently the company sells insurance in at least 23 U.S. states, according to its website. More than 163 people work for Lemonade, which has sold over 500,000 policies thus far, Lemonade CEO Daniel Schreiber said in a recent Reuters interview. Lemonade bills its offerings as quick and easy, touting the ability to provide policies or pay claims within minutes. The startup donates any money left over to charities its customers choose.

Lemonade’s push to expand its concept internationally will be key to investors’ exit strategy, according to Matteo Carbone, an InsurTech expert and founder/director of the IoT Insurance Observatory. In the meanwhile, the startup will have time “to experiment and fix what has not worked well as of today” as it fine-tunes its concept. That includes finding ways to bring its current gross loss ratio down to the market average, Carbone said.

Carbone, a contributor to Carrier Management, noted in a December 2018 Carrier Management article cowritten with Adrian Jones that Lemonade (as of Q3 2018) has made progress on the road to financial stability. At the time, the insurer had grown premium by 57 percent over the previous quarter to $15.5 million and also booked a 96 gross loss and loss adjustment expense ratio—its best to date. At the same time, its reserves reached unfavorable development at $254,000 versus $245,000 in the previous quarter. Also, Lemonade had written $33 million in premium through the nine months of 2018, behind some expectations, Carbone and Jones wrote.

Carbone said that Lemonade’s “storytelling” has been terrific in attracting insurance executive interest, more than “people on the street who would have to subscribe to an IPO.”

With that in mind, Carbone said he could see Lemonade being acquired in the near future.

“I can’t exclude [that] a large international insurer or bank will decide to write a big check in order to give a message to the financial analysts,” he said. He added that it is “plausible” that this could happen within the next 18 months as the company seeks to successfully transplant its concept overseas.

But Lemonade and its investors will likely be seeking a specific price if the company is to be sold. If that doesn’t happen, then what?

“If no one will buy them at the price they will look for, in a few years they will have to try the IPO,” Carbone said.