My Rant on Lean Startups

*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed or registered financial expert. Please see a financial advisor before making investment decisions.

Here's the podcast episode for this post

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The tech boom in Silicon Valley can be attributed to cheap capital, the growth in popularity of ESG investing, and technological advancements. What was once a normal place with a business hub in San Francisco is now a vibrant area with high housing prices and the headquarters of various companies that are creating technologies that are becoming more integrated into our daily life. 

What's also interesting about Silicon Valley is that unicorns that were born there, like Uber and Airbnb, are startups that many would consider being lean, or not having a lot of plant assets. Basically, they're a platform and they make money from their users using the platform. Facebook was a lean startup in the beginning as they only managed their online platform and made money by the advertising and data collecting. Today, these companies are worth billions of dollars even if some of them don't make profits.

The successes of these startups have inspired many other entrepreneurs to venture into other industries and make it as lean as possible. 

Photo by J. Kelly Brito on Unsplash

One company that has caught my attention was Lemonade, an insurance startup that primarily sells renters and homeowners' insurance to consumers. 

What makes Lemonade different from other insurance companies is that they're very lean. While their S-1 likes to talk about their great technology, if you translate them, it pretty much shows that they're a company that integrates a lot more technology in insurance dealing compared to other insurance companies. By using a lot of technology, they can hire fewer people for labor and automate most of the work done in insurance. 

This startup sounds like a lean startup to me. Lemonade said that their "insurtech" is proprietary and it's what allows them to create enticing product offerings to consumers. Also, they mentioned how their Customer Cortex is another example of technology that makes them an innovative technology company. When you read more about their "Customer Cortex," it's basically using AI-chatbots instead of humans to handle customer service. 

When speaking to experts in technology, many say that chatbots that use Natural Language Technology are widely available. To make them, you can use open-source platforms like Google BERT. Their Customer Cortex isn't as special as many would like to believe. 

And for advertising, that's mostly done on social media instead of direct sales. As for most insurance companies rely on reps to gather leads and facilitate deals while Lemonade has most of those deals facilitated through automation. 

It's interesting that Lemonade is experiencing something many other startups are also experiencing, unfortunately.

In their S-1, Lemonade reported a net loss of $108.5 million in 2019, more than double its 2018 losses. Meanwhile, revenue increased three-fold in the same span from $21.2 million to $63.8 million. 

While revenue has increased by 300%, their losses increased by more than 200%. Sometimes I wonder if they are experiencing diseconomies of scale since they lose more money when they experience an increase in business. 

So pretty much, Lemonade has been buying its customers and hasn't reaped any benefit from it. 

I'll admit, the founders of Lemonade have found a smart way of making insurance leaner and more scalable. Using chatbots and other technologies to automate most of the insurance business, it helps reduce costs by a big amount and reduces the need to hire reps and staff when running an insurance business. 

But, because their financials are showing that the idea isn't making profits in the meantime, many (including me) will be wary and avoidant when it comes to investing in its IPO. 

Lemonade is one of the many examples of lean startups that can't seem to reduce their costs and make profits even if their operating costs should be lower because they aren't buying and managing many plant assets. While I do believe that the concept of the lean startup is great, at the end of the day, making money is more important. 

Some founders will say that losses today will pave the way for profits in the future. Until they prove that the business is truly profitable, huge losses for investors is unjustifiable.