Three weeks ago, a highly-watched insurance startup called Lemonade opened for business in its first state, New York.
Its goal is to upend the property insurance industry with something it calls peer-to-peer insurance.
Lemonade didn’t expect to sell any policies right away, and was delighted that within the first 48-hours it sold 142 of them, a 15% conversation rate of people who visited the site, CEO Daniel Schreiber tells Business Insider. (If it’s added any more customers since then, Schreiber wouldn’t tell us.)
Lemonade landed in the public eye in December after it raised a whopping $13 million seed round led by Sequoia Capital and a prominent Israeli VC, Aleph.
Schreiber says it was the largest startup seed round of 2015 and “it was the largest seed in the history of Sequoia.”
“Insurance is much more capital intensive than Pokemon Go,” he said. “You do need to have money.”
More impressively, Schreiber and his cofounder, Shai Wininger, raised the cash without a demo app or even so much as a slide deck presentation.
The meeting with Sequoia was “just two guys and an idea. It helps that we are two relatively seasoned entrepreneurs, not 19 years old. We had a credible thesis. We were thoughtful about the [business] model. It was talking it through,” he said. “For Sequoia, the opportunity was pretty compelling.”
Last summer, the company also landed another round of investment of an undisclosed amount from the venture fund of insurance company XL Group, a Lloyd’s of London syndicate, who is now both a reinsurance partner and investor.
A ‘social good’
There are a few reasons the VCs were so excited.
They liked the experience of the cofounders. Schreiber, who describes himself as a recovering lawyer, had been a general manager at SanDisk, then a president at wireless charging company PowerMat, the wireless charger for Samsung devices.
Wininger was a cofounder at Fiverr, a big Israeli startup success story.
And they liked that they were going after the trillion-dollar property insurance industry.
“Insurance has been unspoiled by innovation in 100 years,” Schreiber said, adding that the average age of the largest incumbents is 95 years old.
On top of that, insurance is “very broken. It’s one of the least trusted sectors of the economy. It ranks very low in all customer satisfaction.”
He added, “Most Americans don’t believe they get paid what they deserve. Most consider insurance a necessary evil rather than a social good, even though its very much a social good. It’s a community coming together to protect the less fortunate.”
Turning insurance into charity
Lemonade sells rental insurance policies for as little as $5 a month and home insurance for as low as $35/month (your policy rates may vary). Its business is conducted entirely online via an app. There are no human insurance brokers. And Schreiber has no plans to use them – ever, he says.
Instead, a bot called Maya calculates your policy rates for you.
The VCs also liked that one of the previous online insurance companies, Esurance, sold to Allstate for $1 billion back in 2011.
But where most insurance companies pocket the money you pay as profits, less any claims paid, Lemonade takes a straight 20% cut of the policy rate as its share. And if you pay in more than your group uses as claims for the year, Lemonade donates the money to a charity of your choice (from your kid’s school to an established charity).
“We don’t make money denying claims. If money is left over, we don’t want to be tempted and we don’t want you do be tempted either. Consumers do embellish claims,” Schreiber said.
So when they do pay a claim, they remind the policy holder that the leftover money is going to a charity the person cares about.
Since Lemonade is organized around charities, the “peer-to-peer” group, the people who are collectively paying into the pool from which your claims are drawn are others that are donating to that same charity.
If there’s not enough money in the kitty to pay for your claim, the company has some top-notch reinsurance partners, including Lloyd’s of London, to cover it. This has gained Lemonade a top financial rating, even though it only publicly lays claim to less than 200 total customers so far.
“We’ve taken on the full-stack of insurance, becoming an insurance company, which is kind of nuts,” Schreiber says. “And we’re doing it in New York, the toughest state. New York is the most highly regarded, exacting and regulated state for insurance. If you can pass muster with New York, hopefully we can move quickly in the remaining states.”