Lemonade (LMND 9.70%) has achieved tremendous success with its disruptive approach to insurance. But there's a natural question shareholders often ask: "What is to stop one of the massive insurance giants from copying Lemonade's business model?"
In this interview, recorded on Nov. 29, Fool.com contributor Matt Frankel asks Lemonade co-founder and co-CEO Daniel Schreiber that exact question.
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Matt Frankel: You just mentioned State Farm, so on that note, what would prevent a State Farm from replicating your business model?
Daniel Schreiber: I chuckle. Where to begin? We've learned a lot of respect for incumbents like State Farm. I laugh not because they're not tremendous companies with great heritage led by fabulous people, they are all of those things, but because the challenges that they face in the 21st century are incredibly tough, may even be insurmountable in the long term.
If you own State Farm or Allstate, any of these companies with "state" and "farm" in their name, you have tens of thousands of brokers. You took the job as the CEO thinking that that was a tremendous asset and a defensible barrier to competition, and now you're wondering whether that asset isn't really a liability in the era of direct to consumer digital distribution, and then you've got channel conflict and you can't really go digital and it's holding you back rather that propelling you forward. You were told all these wonderful stories about the technology that you built up since the 1980s, and now you come in and you realize that this is just an albatross around your neck.
What you want is a black box, what you've got is a black hole and you keep pouring money into it and nothing really good comes out of it. You spend decades grooming your team for legacy preservation because you're a 200-year-old company and you thought that the going was good and it would continue that way, and suddenly you're faced with digital disruption and the need for business transformation and you just don't have the culture, you don't have the people.
Frankly talking to investors, you don't have the investor base. I've spoken to some CEOs with the largest companies who see the writing on the wall. They say to me these amazing sentences like, "Daniel, I fancy your chances more than fancy my own," which is a stunning thing to hear from some of the largest in terms of the world. When you spend time with them, you understand that even though they know what needs to be done, it would be a huge disruption to their existing business and they won't get support from their shareholders because they have shareholders who don't read The Motley Fool.
They've got shareholders who are these large institutions that just want their stable 5% dividend year in year out and will not support strategies that involve transformation. They are hemmed in from their culture, from their technology, from their shareholders. It's the classic innovator's dilemma.