This week we are back with another conversation with my friend Ryan Reeves, this time on Lemonade ($LMND — we wrote a previous article about the company here). We talk about the bull and bear cases for the company, the financial model, the importance of using imagination when thinking about the future, and what I think is the most interesting part of the conversation, competitive advantages or moats.
Ryan Reeves:
Okay, in today's episode of The Investing City Podcast, super happy to have Marcelo Lima on for a second time. So thanks for being here, Marcelo.
Marcelo P. Lima:
My pleasure, Ryan, nice to see you.
Ryan Reeves:
You too. So yeah, let's talk about Lemonade, and I'll link to the show notes of our first conversation. But in this conversation, I would love to talk about Lemonade and just kind of breaking down the company and just how you heard about it. So first, just love for you to tell us about how you even came across Lemonade.
Marcelo P. Lima:
Boy, how did I come across Lemonade? Probably just monitoring the companies that are coming to the public markets. And initially, I was very skeptical. We have this reflexive knowledge from listening to Buffett and all the value guys over a decade plus, that if you find a financial company that's growing very fast, it's usually a bad idea. It's usually very risky, it's going to blow up at some point. And so I was very intrigued, but I was very skeptical. And I thought this is different.
Marcelo P. Lima:
So the first thing I did is I guess I watched the IPO video which anybody can go watch on their website. And I realized that this seemed at least to be a very different kind of animal. They are built on, as Dan Schreiber, the co-founder says they're built on this technology substrate, whereas incumbents are built on pen and paper and human knowledge. It's a little bit of a sabermetrics idea where now a company that's built on software can use completely different tools.
Now, obviously, if you look at GEICO’s hiring website, for example, they're hiring tons of data scientists. They're hiring software engineers, people with skills in Snowflake and all these different tools. And that's granted. But it's also interesting to note that companies like JP Morgan Chase, which claim to be technology... Jamie Dimon says, "We're a technology company, we have so many developers." They still don't get it, if you know what I mean, they really can't hold a candle to digital-native companies, like Square, for example.
It's very hard to change that DNA and to change the culture of a company. So given everything we know about organizational behavior, I approached this with a very open mind. I said, "Well, I'm skeptical, but I really want to hear the story. And understand whether this is a different animal or not." That was the first intro to the company.
Check out this thread
There's actually a very interesting little book that got published, telling the story of the company by a gentleman called Ty Sagalow. So the story goes that Dan Schreiber and Shai Wininger the co-founder were introduced to each other via a venture capitalist from this Israeli venture capital firm. I think they're called Aleph. They met and they decided to go down the list of big industries that they could attack.
And when they came upon insurance, they said, "Okay, well, there's something here. This is a trillion dollar industry, everybody hates their insurance company, the experience is pretty bad. Can we do something differentiated here?" So they white-boarded all of these different ideas, without knowing anything about insurance. Now, that is a huge red flag in my book. If you listen to a lot of venture capitalists who fund these companies, a lot of them will say things like, "Well, we only like to talk to founders who have gone down the rabbit hole and hit their head against the wall for 10 years. And they really figured out how to build this new type of company."
This was sort of the opposite. These guys didn't know anything about insurance, were completely new to the industry. How can they possibly come up with something that works given their lack of expertise? But what they did is they came up with very interesting ideas as far as just approaching this with an open mind, and what a delightful customer experience looks like. Then the story goes that they Googled “insurance innovation.” And this guy Ty Sagalow shows up on Google; this is several years ago when the company was founded.
So, Ty is in his office in Manhattan and his phone rings. And it's these two Israeli guys from across the Atlantic, and they're like, "Hey, we're starting this company, and we Googled ‘innovation insurance’ and you're the only guy who showed up. Can you come to Tel Aviv and help us." And so he ended up joining them as another founder and really helping them understand the insurance part, now that they had this idea.
And so that's when I started becoming more interested in this from an investment perspective, because I started understanding the depth of talent that they then were able to hire into the company. Insurance experts, people from the industry, who had obviously an open mind and were willing to look at things with a fresh set of eyes.
That was my introduction to the company. And by the way, Ryan, I don't know if you... Have you looked at this book, or have you watched the IPO video yet?
Ryan Reeves:
So I haven't read the book. But I've done a decent amount of legwork on Lemonade. I actually found out about Lemonade because I've held Fiverr for a while, and I was reading into Shai Wininger, and realized he left Fiverr and started Lemonade. And I was like, that's really interesting, because I think Fiverr has huge potential. But this guy's leaving and starting a new company, and kind of went down the rabbit hole on Shai. He's amazing. I'm just kind of leave it off there.
Marcelo P. Lima:
Yeah, I totally agree. And it's interesting. Recently, I went back and I used 99Designs, and Upwork and Fiverr. And the experience on Fiverr, at least for what I was trying to do, was so vastly superior that it was just incredible. And you can sort of feel that design ethos that Shai brings to Lemonade now. And you can see his tweets. He's always iterating on the product.
The next thing I did then was I just listened to all the interviews I could find with the founders. I really want to try to get inside their heads and understand where they're coming from, their perspectives, how they think. And I was very impressed. And I'm very impressed with Michael Eisenberg, the guy from Aleph, who introduced the founders. That's got to be one of the best introductions in the history of business. Just two guys who didn't know each other, and they just became great co-founders.
Ryan Reeves:
Yeah, I think it's really interesting. So, you've got a fast-growing financial company, it's already a red flag. And then you have two guys, no industry experience. And they're kind of going down the list trying to find a big TAM to disrupt. Another like, oh, maybe they're sort of mercenaries, rather than missionaries sort of thing. So you listen to the interviews and then what are some of the things that you do to kind of gain conviction and kind of push through those red flags?
Marcelo P. Lima:
Yeah it's fascinating that you say that, because it's exactly what I thought. The mercenary versus missionary dichotomy. There's one thing though, that I've realized, which is pattern recognition, you have to be flexible as to how you apply it, because the stuff that's going to work in the future, it's not going to look identical to what worked in the past. So you really have to be very open-minded about these different animals that you encounter.
I like to use this biological, Darwinian analogy that you're in... You go to Galapagos, and you're investigating all these different organisms, and you're going to come across some pretty crazy things. In business, new business models, new configurations, of founders, ideas, et cetera, that you haven't seen before. And you just can't have this very rigid model of how things should be.
So, I just listened to the founders, I obviously read the S-1 [IPO prospectus], I spoke to the company. And everything started making sense to me. What they were saying made a lot of sense to me; the way the company had evolved over time, growing even though their loss ratio was coming down. I did the math on their customer acquisition cost, it was improving over time. The premise made a lot of sense to me: an existing insurance company operates in a very traditional way and collects a certain amount of data, whereas Lemonade, through their digital onboarding, is able to generate a lot more richness of data on each customer.
The most interesting thing to me was how they acquire those customers because they started out with renter's insurance, which is very low premium. Many other insurance companies don't offer renter’s insurance because it costs a lot of money to pay a commission to the agent, or to a broker. There's not enough commission to motivate that line of business. Yet Lemonade started with renter's insurance, and they can do it because they acquire customers through an app. It's automated.
Then, those customers belong to Lemonade. They graduate over time. Lemonade acquires customers that the competitors don't see, because that customer is way too early in their life journey. And over time, that customer graduates, and buys a condo or buys a house, their premiums go up 4x, 5x, et cetera, at the same original CAC (customer acquisition cost). They don't need additional customer acquisition cost to get that incremental premium. And then of course, they can layer on other products: they introduced pet insurance, life insurance, they're close to introducing auto insurance.
It's that whole premise of land and expand, which is something that enterprise software companies do very well. A customer on Salesforce might land on the CRM product (customer relationship management). After a while, you think, "Well, I also need MuleSoft, or I also need, perhaps, data analysis. So I'm going to subscribe to Tableau." They have a whole host of different products that they can then cross sell you. And that's very typical in enterprise software.
So, I just applied those ideas, and I realized the whole story made sense to me. And the numbers corroborated the story. Now, with something like Lemonade, it's borderline venture investing, because it's still very early in the company's life. So you really have to have this imagination and look at the company, and ask, “What is it going to look like five or 10 years from now?” And not really penalize them too much, because they don't have today the metrics that they will have five or 10 years from now.
Ryan Reeves:
Yeah, I think that's really interesting. The idea of imagination. Kind of growing up in value investing, you’re always thinking about margin of safety. Whereas this idea of imagination, like how big can it actually get is something that I think is still a little bit underrated in the public markets. So, I think it's really interesting that you brought that up. One other thing I wanted to touch on was, I actually use Lemonade.
That's after I started researching it. I was like, wow, this is a really interesting product. I used it for homeowners insurance. It was unbelievably easily. I mean, just the customer experience it's sort of like... It kind of reminds me of people who like to hate on Tesla stock. The kind of meme is like, "Well, have you ever driven one?" It seems similar with Lemonade, have you actually used the product? Because I mean, I got a quote in like, a minute. Didn't have to talk to anybody. I would love for you to walk through that imagination process, specifically, and what steps you took to understand how big could Lemonade get?
Marcelo P. Lima:
The imagination thing is interesting. I was very much the way you described in terms of the value investor that only bets on what he can see. The dichotomy there is that the value investor is looking at things as they are, and is willing to pay for what he can see today. So, I can open up the balance sheet and income statement, there's a big margin of safety on the current numbers. That's all I'm willing to look at, because I am a conservative, value investor. I'm not saying that making fun of it or anything because I did that for many, many years. The difference, what I started realizing over time, is that mental model, I'm not saying it's wrong for everyone, but at least for me, it just became very limiting.
I would end up not investing in a lot of things that were extremely profitable over many, many years, for lack of this ability to underwrite growth. Even the godfather of value investing, Ben Graham, invested in GEICO in 1948. He put 20% of his fund in GEICO. And it was a 145-bagger. I think it was 25% compounded over the next 25 years. In the appendix to The Intelligent Investor, he admits that one investment in GEICO produced more profits to his fund than everything else he did put together.
That really intrigued me. The father of value investing ended up making more money from imagination. I’m saying that he had the imagination, he was actually approaching it from a value investor's perspective. When he invested, he said, "Well, if this thing got liquidated, I still have a margin of safety. So I'm going to invest in it," because he got a very low price. But over time, it was that imagination part that really made him the money, if he had had this foresight.
I thought, well, why not apply that to everything? A few years later, ran into Chuck Akre at the Berkshire meeting. And I told him, "I've been coming to the Berkshire meeting for 10, 15 years. And there are things that Buffett says, that I've been hearing over and over again, but only now is it really sinking in." Chuck reaches into his pocket, and pulls out a coin. I don't know if you've seen this coin, and it says, "Slow learners club, charter member."
Chuck Akre holding the coin he showed me on May 5, 2018 at the Berkshire Hathaway Meeting in Omaha.
I thought that was so funny, because I'm like, “That's me.” Chuck had said in an interview, quoting Albert Einstein, that imagination is more important than knowledge. I thought, "That's super fascinating that an investor is bringing this up." This is what venture capitalists do very well. Venture capitalists, especially the guys at the seed stage, they're able to meet a founder, who has a big idea, in a big industry, and they're like, "I'm going to bet on this guy."
A lot of times, the founder is going to pivot many times because the original idea doesn’t work out, but the venture capitalist is betting on the person. In fact, Art Rock, when he retired, he said, “If I could go back in time, I would have just torn up all the business plans, and I would have just looked at the resumes, and just bet on the people, because that's really what matters."
If you apply this to public markets, it's completely unknowable what these companies are going to do a quarter from now, two quarters, a year, et cetera. What you can know, the part that is knowable, is the quality of the people today. Great entrepreneurs, great businessmen, they will figure it out. Essentially, that's what you're betting on, is that these guys will be able to navigate, they'll be able to out innovate, out execute, out think. Now, of course, nothing's guaranteed, but that's the bet.
If I can find founders like that... I use DCFs, even though I know that they're hugely problematic, but I use them as guardrails. I like to figure out this Michael Mauboussin “expectations investing” idea of what is implied in the current market price. In other words, the current company's valuation is X billion dollars. Okay, great. What has to happen for that to make sense? And so you put on a spreadsheet and you realize, wow, revenues have to be this much in 10 years, margins have to be this much, the multiple has to be this much. And then you do an IRR, and you get 20%. And you're like, okay, do those assumptions make any sense whatsoever? Does that revenue number make sense? So that's a way to back into the current valuation that I think is very useful.
So that in a nutshell, is this idea of using imagination. Like you said, I think it's very underutilized, because it's harder to imagine than it is to look at the numbers today.
Ryan Reeves:
Yeah, it's really interesting. So I'd love to talk a little bit about the insurance business. How would you even think About Lemonade versus competition and kind of what the economics will look like 5, 10 years down the line?
Marcelo P. Lima:
The company talks about this in their IPO video, and I've talked to the company a few times. The CFO has also given some very good interviews, on YouTube and at financial conferences. You also want to test consistency. You want to make sure that everything that the company is telling you make sense, that they're consistent in how they're thinking. And I think the answer is absolutely, yes. Of course, this is an extremely competitive market. I think the differentiation for Lemonade is the way that they acquire customers, the way that they apply technology, both ingesting data, using machine learning to improve their underwriting, using machine learning to improve the claims experience. Thirty percent of all claims are automated and they can increase that over time. That dramatically lowers their cost.
It's important to remember that software is highest leverage activity that we know of as humans. One developer sitting at a computer can log onto Amazon Web Services, type some code, and boom, she can interact with billions of customers around the world and build something extremely powerful. A company that can harness that and do it better than competitors can become a very powerful machine over time.
Lemonade has talked about having 13% to 17% operating margins over time. They don't give any guidance as far as how many policyholders or policies in force they can have. But right now, Lemonade has about a million customers, you can look at historical numbers and see how much they've grown over time. The way I think about it is I apply a growth function every year. What numbers are reasonable as far as year over year growth, and usually these numbers decline over time. So a company that's growing 60% today might be growing 50% next year, and then 40%, after that, and by year 10 they might be growing in the teens, it really depends on the company.
Of course, there are inflection points where sometimes growth accelerates, or acquisitions, or exogenous shocks like COVID which was an accelerant for a lot of companies that nobody could have forecast. I know that these models are wrong, but they are guardrails. So then you can look at premium per customer.
Hopefully, that goes up over time as customers attach to different types of policies, whether that's life insurance, pet insurance, or future product introductions like auto insurance, which they've already teased. You get to a number in 10 years or so, as far as revenues, and then you have to look at the industry. What do the other insurance companies do? Is this reasonable? And I think the estimates that I have are reasonable.
I've put them out on Twitter to test them against the bears. I'm super happy to engage with bears because I think one knife sharpens the other. If you have sharp people to talk to, it improves your underwriting. I say either your underwriting improves or it crumbles. So bring it on. And so far, I've seen a lot of pessimism from the bears. I think all their points are valid, but I think time will tell. I think the company will actually perform and they think the company will not, so that's really what I think what it boils down to.
Ryan Reeves:
What is the one like bear point that you come up again and again, and what's wrong about that bear point?
Marcelo P. Lima:
Insurance companies have two big buckets of expense. One is called expense ratio, the other is loss ratio. You give me $100, I'm the insurance company. Let's say I spend $25 to cover my overhead. At the end of the year, you have a loss, I have to cover you. I'm going to spend $60 or $70 to cover your loss, let's say. So that's the loss ratio and the $25 of my overhead that's the expense ratio. The hypothesis is that at maturity, at scale, Lemonade, because it's able to process claims using software, that they will have lower expenses than incumbent insurance companies.
Now, one way to test this is, how many customers does the insurance company have, and compare that to how many employees it has. And Lemonade is much more efficient than incumbents even today. And I don't remember the exact numbers, but I think it's three or four, maybe five times more efficient. In other words, they serve five times more customers, per employee than an incumbent insurance company. Now that tells you something.
They're able to light up new geographies, operations in Germany, in France, Texas, without a single employee in those geographies. That's very interesting. The whole idea behind this company, the software substrate and their machine learning algorithm that improves over time, you can imagine that their assumptions about expense ratio at maturity will be true.
The bears say, "There's no way." The bears say, "Progressive is doing everything that Lemonade is doing. GEICO is doing everything that Lemonade is doing." I think the retort to that is everything that we know from organizations, and disruption, if you read Clay Christensen, he tells us that it's very hard, if not impossible, for an incumbent that has been doing business processes a certain way, for 50 years, 100 years, in some cases, it’s very hard for them to change those business processes overnight, to respond to a new entrant that has a fundamentally different approach.
Imagine that you are the manager of one of these legacy insurance companies. And you have to completely upend, you have to fire a lot of people who don't have the right skills, who don't have the software development background, you have to probably ditch a lot of technology that you have. Perhaps you're running mainframes with FORTRAN or COBOL, or something else. You have to convince a lot of your managers that this new approach is better. It challenges so many internal structures in these companies and so many fiefdoms that it's very hard to do.
We see that over and over again. Why is it so difficult for banks to respond to fintechs? These neobanks, digital-first banks, and these apps that are now turning into banks like Cash App, is one of my favorite examples. I think that just waving your hands and saying “GEICO does everything that Lemonade does and Progressive does everything Lemonade does,” I think is kind of naïve from that perspective. I think that is the strongest argument that I've heard against Lemonade ever reaching, not even improving on the expense ratio, but even reaching parity. They just say, “There's no way these guys are ever going be as efficient as Progressive or GEICO.”
Ryan Reeves:
Yeah, I mean, it really is the classic example of bottoms up disruption coming in at the super low end with renter's insurance. Where, like you said, no commissioned agent is going to want to service that. So it's really interesting. Going back to the management team, Dan and Shai: what are some qualities that you saw in them that really piqued your interest and made you believe in them?
Marcelo P. Lima:
I think Dan Schreiber said something that I think is so true. He said that storytelling is one of the most important skills for an entrepreneur. And that sounds like something that a promoter would say. It sounds like something that a grifter would say. If you're a short seller you're like “I gotcha, man. You're just telling stories.”
I disagree. I think Dan’s absolutely right. The reason is, if you look at great entrepreneurs, even going back to Thomas Edison, they need to inspire really smart people to join them. In order to do that, they need to tell a big story, and sell this big vision and a mission. That's how you get incredible people to join you. And the greatest founders and entrepreneurs, they don't just say it. They believe it, they live it, and it's in their veins.
And I genuinely think that Dan and Shai fit the mold, I really think that they are true believers, that they want to build a generational insurance company that does things very differently, that can achieve a very different result over time. So it's really going back to studying these guys, understanding their DNA, how they think, and how they've responded to challenges over time. That's given me the confidence that they can pull it off.
Now, nothing is certain in business, the proof will be in the execution over time. So far, I think they're doing a fantastic job. All the KPIs (key performance indicators) are moving in the right direction. There aren’t that many companies to compare them to. If you look at Root Insurance, for example, they have a lot more in terms of in force premium, because they do auto insurance, which is a bigger dollar amount. They're much smaller when it comes to number of policies.
They have a founder, who is an actuary, so he's an actual industry expert. But it's hard for me to get super excited about the company. It’s hard to describe. Whereas with Lemonade, you get this very interesting feeling from the company that the company cares. You're using a different part of your brain, you're not using your analytical mind, you're not doing arithmetic, et cetera. You're not using your CFA to understand this.
That part I think is frankly the edge for an investor in understanding this, having this emotional intelligence. It’s obvious in hindsight, but you can apply this idea to a lot of other companies. Companies like Apple, and Facebook, and others, where you have this maniacal founder, that you look at the guy's history and his actions over time. It paints a picture of somebody who is just not doing it for the money, but doing it for something much bigger.
Ryan Reeves:
Yeah, I think it's really interesting how you brought up storytelling, and it kind of plays off of the incumbents’ difficulty and you might have to fire people that don't have the skills. But for them to actually hire people who want to work for GEICO that have machine learning backgrounds, are they going to go to GEICO or go to Lemonade? It just seems like I guess you could throw more money at them, but then there's... They're going to be paid enough anyway. They're going to get paid in stock. So is that really a differentiator? It's really that mission. I think that hits on a lot of different things. So one thing that I'm interested in is, what would disconfirm your thesis? What would cause you to change your mind on Lemonade?
Marcelo P. Lima:
For the investment to work, you have to see an adoption curve. The insurance industry already exists. Perhaps there's a bit of new market creation here at the low end, because they're enabling renter's insurance for people who wouldn't have had renter's insurance previously, because it's something they didn't think it was important, maybe it was hard to get, because there aren’t that many carriers.
A good analogy for this is Square. Square had the dongle that you attached to your phone, and it let you swipe a credit card. That is new market creation: those are people who never would have gotten a merchant account or a real point of sale device back in the day.
That enabled a new market. Kids selling cookies or slime at school could take credit cards.
Over time, Square moved up market and developed this beautiful cash register. If you look at their financials, the larger customers are actually growing faster now than the smaller customers. So that is also an example of low end disruption creating a new market and then moving up market.
Payments is a very big, very competitive industry. It's hard to tell how much new, de novo customers they're getting, that didn't exist before and are enabled because of their technology. Similarly, for Lemonade, it's going to be hard to tell. I think it's actually going to be that they are displacing incumbents more than anything else. Right now they're competing with nonconsumption, but over time, they're going to be competing with consumption.
What breaks the thesis for me is if that growth algorithm is broken over time, in the sense that you wake up one day, you get quarterly results, and they haven't grown as fast as you thought. And it keeps happening. Perhaps it was a one off. But then you see where they just hit a wall. That to me would really break the thesis, because I think that if that were to happen, that happens before they reach scale, and can prove their economics. Because, by definition, in order to prove their economics, they have to be at scale, and to be at scale, they have to keep growing customer count.
Ryan Reeves:
That makes a lot of sense. Is there anything, any other points that you want to touch on with Lemonade? Any specific things that I didn't ask about?
Marcelo P. Lima:
I think you made a very good point about hiring. Because if you are a smart computer science person, and you're going to look for people like you to work alongside, you're more likely to find those people in a company that's digital native, like Lemonade, than you are at an existing company like GEICO or Progressive. Not saying GEICO and Progressive don't have a lot of really smart people. Of course they do.
But, again, it's that feeling thing. If I'm a young, CS grad, or computer science person, and I'm looking for somewhere that can stimulate me and where I can get interesting mentorship, where I admire the management team, Dan Schreiber is a lot more visible than Todd Combs, the CEO of GEICO. Maybe if Todd were on Twitter, and giving interviews on YouTube channels and things like that, he would be able to hire more people.
But that's, I think, also part of the genius of the storytelling advantage. A lot of these tech CEOs are very, very good at marketing themselves. That's a skill and that's a competitive advantage. Because if I'm a potential employee, I'm going to see that and I'm going to be like, "Yeah, I want to work with that guy!" Whereas the CEOs of Progressive or GEICO, I don't know anything about them.
Ryan Reeves:
Yeah. As investors, we think of moats as these very static things. You have network effects, I check the box. Switching costs, check the box. Instead, I feel reality is much more dynamic; perhaps a CEO has amazing storytelling skills. Maybe they just marginally hire that person who they really wanted to get. And that person goes on to create a 10% improvement in the AI algorithm for Lemonade, which lowers loss ratios, which allows them to invest more and more.
That one little thing contributed to a leap forward versus a competitor. You can't know everything about these companies, they thousands of employees; it's impossible to know everything that goes on under the covers. But it's really interesting to try to figure out those things that are the difference makers versus viewing moats as the static things.
Marcelo P. Lima:
Yeah, you can see this in companies where you've had a lot of storytelling from reporting. So for example, Amazon, there's The Everything Store. And now there's Amazon Unbound, both books by Brad Stone. You see the in the history of Amazon a lot of key employees over time that made a huge difference. We know the same thing is true about Facebook. And those are just two examples.
People really, obviously, matter. Being able to attract people who are like-minded, who have that missionary zeal to change the world is super important. I strongly feel that potential person is going to be a lot more attracted to a company that's very visible, very digital native, and that espouses similar values. What is it, if not a part of the moat?
Ryan Reeves:
The other thing that kind of comes to mind is Buffett always talks about how between the business and the management, the business will always win out. You have to focus on the business, because management can only do so much.
You have this idea, at the same time, that hiring the best people is of utmost importance, and that will really differentiate. Do you have any thoughts on?
Marcelo P. Lima:
Yeah, that's why I only look at good industries. Because that is something that remains true. If you have a management team that tackles an industry with a reputation for poor economics, it's the reputation of the industry that will remain intact. Roughly what Buffett said. And I think that's true.
That's why I focus on great industries. In insurance, you can build a very good business. One exercise I did before this podcast with you is I went on Bloomberg and I pulled up a bunch of insurance companies. And I plotted their operating margins and combined ratios. Roughly speaking, an operating margin of 15% implies a fully loaded, if you will, combined ratio of 85%, including loss adjustment expenses and all that.
The bears were saying, "Oh, that's impossible. Those companies don't exist." Well, it turns out they do exist. Not that many of them. Most insurance companies, as we know, do not have fantastic economics. They tend to break even on their underwriting and they make money on their investment float, although that's increasingly hard today because of very low interest rates. The really good ones are the ones that are able to do both. For Lemonade, I give no credit at all for investment gains. I don't think that's part of the thesis at all today. No company today is able to invest the way Buffett does, in equities and things like that. If they do well, it'll really be from the combined ratio.
It's very important to focus on great companies, on great industries, and then find the best founders. That way, you have the best of both worlds. Great industries and fantastic founders. I don't believe in lousy industries; even if they have a fantastic manager it's a tough proposition. Do you have any counter examples of that?
Ryan Reeves:
Not really off the top my head. I appreciate you brought up insurance, because I don't think of insurance as this amazing industry. Progressive and GEICO have been amazing performers. So there definitely are examples, but obviously insurance isn't enterprise software. No industry really is. But with really, really giant industries it also widens the playing field. Insurance is pretty consumer facing, which widens the TAM a ton. So there are tradeoffs. There are a lot of very successful industrial conglomerates, which I wouldn't think of as necessarily amazing industries that have very specific process power. But insurance, like you said, there are examples where there are really good companies in there.
Marcelo P. Lima:
Yes, and Buffett over time has identified some really good executives in insurance. Those people exist. Imagine if you could give them superpowers with software. I don't think you need an Ajit Jain to run Lemonade. They're not doing exotic insurance like Ajit is doing. By the way, it's interesting that in that little book, there's a picture of Ty Sagalow and Ajit Jain. So Ajit had the opportunity to invest in Lemonade, but he chose not to.
Click to see Ajit in the photo
Ryan Reeves:
Oh, that's really interesting.. So who was Ty Sagalow? Like what did he do before helping out Lemonade?
Marcelo P. Lima:
He's not involved with the company anymore. He was a co-founder, and I don't think he is on the board of directors. But he was a veteran of the insurance industry. And for some reason, interested in innovation in insurance. I don't really know what that meant, before Lemonade. I don't know what his activities were. But he was, I think, very helpful. At least that's what you gather, obviously, he wrote the book. It's a thin book. It's not substantial or anything like that. But the company is only a few years old anyway.
Ryan Reeves:
Well, hey, I mean, I've kept you almost an hour already. But I really appreciate you breaking down Lemonade. I mean, a company that is very interesting, has a lot optionality moving into auto insurance. One quick thing is life insurance. I didn't realize how giant an industry life insurance is. And they kind of just like snuck Term Life in there. So yeah, like you said that land and expand notion is really interesting. Only a million customers. I mean, it's quite plausible, they have a global market. Who knows what's kind of the upper limit of that. So I think it's a very interesting company. And so I appreciate you coming on and breaking it down for us.
Marcelo P. Lima:
Hey, Ryan, it's always a pleasure. Thank you so much for having me.