After going public, once-hot startups are riding a valuation roller coaster

Published April 23, 2021

To close out the week, a short meditation on value, or, more precisely, how assets are valued in today’s markets.

Do you recall the pre-direct-listing hype Coinbase enjoyed? After reporting its estimated first-quarter financial performance, interest in the domestic cryptocurrency trading giant ran red-hot.

When Coinbase set a $250 per-share direct listing reference price, it was broadly viewed as modest, if not downright low. Of course, a reference price is just that — a reference — so it wasn’t too big a deal. But it also wasn’t surprising that Coinbase shares traded as high as $429.54 on their first day, according to Yahoo Finance data.

Coinbase equity hasn’t topped $400 in any following day and is now under the $300 mark, with more declines set to arrive as trading commences. Its reference price looms, and suddenly a price that felt intensely conservative before Coinbase began to trade is starting to look nearly reasonable.

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There have been other notable declines in value among some recently public, more technologically differentiated companies. The Exchange has watched with something akin to polite confusion as the value of Root, a neoinsurance company, fell to a third of its public-market highs after going public, even though it beat growth expectations in its most recent quarterly report.

We could toss UiPath into our trend of wildly meandering value. The company’s initial IPO price range targeted a price as low as $43 per share. Today it’s worth $76.75 per share in pre-market trading.

No one knows what anything is worth, again. This is the feeling I get while watching the markets work to determine how to value assets as diverse as startups crossing the private-public divide to the value of Bitcoin, which was supposed to keep going up. Until it suddenly reversed gear.

Frankly, we’re still dealing with new-enough models — or big-enough guesses about the future baked into business models — that it’s hard to really value the most uncertain (and therefore most exciting) companies, let alone cryptocurrencies. Let’s discuss.

Value?

3 lessons from Root’s IPO pricing

Published October 28, 2020

Last night neo-insurance provider and former startup Root priced its IPO at $27 per share, $2 per share ahead of its $22 to $25 target price range.

According to Root, it sold 26,830,845 shares in its IPO, including 24,249,330 from the company itself. Its underwriting banks have the option to buy another 4,024,626 at the IPO price, less “underwriting discounts and commissions.” The remaining shares are being sold by existing shareholders.

At $27 per share, Root raised $654,731,910, but that figure will rise to $763,396,812 if its underwriters exercise their option in full, using the full $27 price for our calculation. Per its S-1 filings, both Dragoneer and Silver Lake will purchase $250 million of Root stock at the IPO price once the IPO has closed.

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Today, in a first, we have two editions of The Exchange for you. Get hype.

Root will therefore raise north of $1 billion in its IPO, once all shares sold are counted. Doing some loose math, Root is worth around $6.8 billion at its IPO price, though Renaissance Capital, an IPO specialist, puts the figure at $7.1 billion on a fully diluted basis.

For the Midwest, Ohio-based Root’s IPO is a win. The company shows that it is possible to build high-growth technology companies worth billions of dollars far from coastal hubs. For the broader insurtech space, Root’s IPO is a win. The company follows Lemonade to the public markets, setting a strong valuation mark again for the neo-insurance startup market.

For similar companies like Clearcover, MetroMile and all startups that related to Root and Lemonade, it’s a good day. Let’s get into what we can learn from Root’s pricing.

Three lessons

Insurance multiples are hot. Key from Root’s IPO is the fact that we can now see insurance revenue being treated similarly to software revenue. How so? In multiples terms. Let me explain.

Root generated $245.4 million in revenue during the first and second quarters of 2020. That’s a run rate of around $491 million. At $7 billion, that’s a 14x revenue multiple. For an insurance provider with scant gross margins! Wild. Given Root’s weak-looking Q3 2020 revenues, that number isn’t going to fall anytime soon.

For companies that are not pure-play software outfits and want to go public, Root’s strong, above-range pricing makes it plain that there is investor demand for more than one type of revenue growth.

Investors are betting that Root’s history of growth will continue. In the first half of 2019, the company’s revenues were a mere 42% of what it pulled off during the same period in 2020. If the company can more than double again next year, then, hey, maybe all the numbers work. But to see public shareholders take such a growth-and-valuation flyer on an insurtech player is notable.

Kyle Nakatsuji, co-founder and CEO of Clearcover, another neo-insurance provider, explained to TechCrunch via email what he thinks is going on: “It’s clear that the market is aware of the massive opportunity for technology-enabled disruption in the category and it is rewarding those companies that focus on customer-oriented, digital innovation. The rapid growth of key players in the space is now proving this will play out and the winners will be consumers seeing lower prices and investors seeing better returns. ”

Are insurtech startups undervalued?

Published July 24, 2020

On the heels of Hippo’s funding round and our exploration of how the private markets appear to be more conservative than public investors at the moment, we’re asking a new question: are a bunch of insurtech startups undervalued?

Hippo — an insurtech startup focused on home insurance — put together a $150 million round at a $1.5 billion post-money valuation after growing its gross written premium to $270 million “in the past 12 months.” At that valuation, and at pre-adjustment premium scale, Hippo is super-cheap compared to Lemonade, another venture-backed insurtech startup that just went public.

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There’s no need to relitigate Hippo’s valuation and how the private markets have valued the firm. But our work yesterday does give us the chance to do some fun math on other players in the neo-insurance space, namely, Root and MetroMile. Using data accrued from financial filings and valuation data from Pitchbook and Crunchbase, we can grok how much the two firms are worth using Hippo’s and Lemonade’s current premium multiples.

If you aren’t familiar, the cohort of startups we’re looking at have raised well over $1 billion as a group; VCs really believe in them. How they are priced then, and how they exit, will help determine the results of many a venture fund.

So, are other players in the startup insurance market cheap at their last private price when compared to Lemonade and Hippo? Did their venture backers overpay? Let’s find out.

Cheap? Expensive?

Lemonade targets down-round pricing in impending IPO

Published June 25, 2020

Earlier today, insurtech unicorn Lemonade filed an S-1/A, providing context into how the former startup may price its IPO and what the company may be worth when it begins to trade.

According to its new filing, Lemonade expects its IPO to price at $23 to $26 per share. As the company intends to sell 11 million shares in its debut, the rental and home insurance-focused unicorn would raise between $253 million and $286 million at those prices.

Counting an additional 1.65 million shares that it will make available to its underwriting banks, the company’s fundraise grows to $291 million to $328.9 million. Including shares offered to underwriters, Lemonade’s implied valuation given its IPO price range runs from $1.30 billion to $1.47 billion.

3 questions for Lemonade’s IPO

That’s the news. Now, is that expected valuation interval strong, and, if not, what might it portend for other insurtech startups? Let’s talk about it.

Not great, not terrible

TechCrunch is speaking with the CEOs of Hippo (homeowner’s insurance) and Root (car insurance) later today, so we’ll get their notes in quick order regarding how Lemonade’s IPO is shaping up, and if they are surprised by its pricing targets.

But even without external commentary, the pricing range that Lemonade is at least initially targeting is not terribly impressive. That said, it’s stronger than I anticipated.