Everything you need to know about the Waterdrop IPO

What does Waterdrop do?

It's best to understand the five-year-old unicorn Waterdrop as two products fused together: a crowdfunding platform and a medical insurance marketplace.

Most people know Waterdrop as the leading GoFundMe-style platform for medical bills. As of 2020, Waterdrop had helped raise $5.7 billion in donations from 340 million people, according to its prospectus, making it the biggest Chinese crowdfunding platform with a 65.4% market share in terms of total funds raised. It draws in a huge amount of traffic, especially from China's poorest population, a group many apps find hard to reach. Waterdrop is considered one of China's "four kings of the low-income market," along with Pinduoduo, Kuaishou and Qutoutiao. But since Waterdrop has pledged not to charge any processing fees, its crowdfunding platform is generating nearly zero revenue.

Instead, Waterdrop makes money from operating a marketplace of commercial medical insurance alongside its crowdfunding platform. The Chinese market for commercial medical insurance is young, but quickly developing, and that's visible in Waterdrop's growth: The number of insurance buyers using Waterdrop soared from 1.6 million in 2018 to 12.6 million in 2020. And indeed, a lot of that comes from its crowdfunding platform: In 2018, nearly half of its new insurance purchases, or "First Year Premiums," were sourced from there.

Compared to traditional offline insurance brokerage, Waterdrop emphasizes its ability to make data-driven decisions, which should help in a burgeoning insurance market that frequently fails to distinguish between different populations. The prospectus says the company builds user profiles "with 494 basic labels and 2,464 algorithm labels," maintains "a growing data set with more than 30 million structured medical and healthcare data" and then uses this data to craft personalized marketing strategies and detect fraudulent medical claims.

Waterdrop's financials

Waterdrop's annual revenues have been growing quickly, from about $36.6 million in 2018 to $464.1 million in 2020. The vast majority of the revenues — 89.1% in 2020 — come from commissions paid by insurance carriers. Three major insurance carriers, Anxin, China Taiping and Hongkang Life, collectively account for 55.87%.

But the company's net losses are increasing too. Losses grew from $32.1 million in 2018 to $101.7 million in 2020. The biggest reason for high operating costs is marketing spend, which consistently equals about 70% of revenues each year. Operating costs and administrative costs are the next two largest expenditures.

Because it makes less than $1.07 billion in annual revenues, Waterdrop qualifies as an "emerging growth company" according to the JOBS Act and is eligible for reduced public company reporting requirements.

What's next for Waterdrop

This past March, Waterdrop announced the discontinuation of its online mutual aid platform, which Protocol has reported no longer represents a feasible business for many Chinese companies. It appears Waterdrop is slowly walking back its marketing as a charity platform and increasingly emphasizing its business potential as an insurance brokerage. In 2020, referral traffic from Waterdrop's flagship crowdfunding platform only contributed to 13% of total FYP.

In place of its own mutual aid platform, Waterdrop is relying increasingly on third-party social media platforms for referral traffic, which in 2020 contributed 44.9% of FYP. The prospectus explicitly said that Waterdrop's crowdfunding activities "largely relies on Weixin-based link sharing practice," so much so that Waterdrop has listed its future cooperation with Tencent, the parent company of Weixin or WeChat, as a risk factor.

To sell its insurance products, Waterdrop is eyeing the hottest marketing channel in China today: livestream ecommerce. It's maintained an active social media presence on China's short video platforms; last May, Waterdrop founder and CEO Shen Peng reportedly sold over $1 million worth of insurance products during a two hour-long livestream event. In the prospectus, Waterdrop also says it is "planning to apply for [a] Commercial Performance License" so it can work as an agent for livestream influencers.

But Waterdrop's ambitions don't stop here. It launched a medicine marketplace platform in June 2020 to step into the profitable pharmaceuticals market. Eventually, it plans to "build up a health ecosystem."

What could go wrong?

Founded in 2016, Waterdrop has only experienced annual net losses during its short history, and it's unclear whether or when it can eventually make money. It's exploring markets like crowdfunding and "insurtech" — meaning new insurance practices enabled by technological change — where regulations are not yet in place. Just last week, Reuters reported that China's Banking and Insurance Regulatory Commission, its top financial regulator, was questioning Waterdrop's business risks and had suggested the company not go public now. All things considered, Waterdrop's future looks uncertain.

Having positioned itself as a charity platform, Waterdrop has benefited reputationally from raising money for patients in need. That also means the Chinese public holds it to a higher moral standard. This has shown up in the negative public response to Waterdrop closing its mutual aid platform, which has meant terminating contracts with over 12 million (mostly low-income) users. As Waterdrop continues to pivot to its more lucrative insurance business, it could lose existing users' loyalty and trust.

While Waterdrop faces little competition in the crowdfunding space, the online medical insurance business is totally different. Big tech companies Alibaba and Tencent, Chinese insurance giant Ping An, and a host of smaller digital health startups all have their eyes on the same market. Everyone is betting on the growth potential of commercial medical insurance in China. Waterdrop will have to carve out a unique space to keep competition at bay.

Who gets rich?

According to the prospectus, here are the outstanding shareholders before the public offering:

• Shen Peng, the 33-year-old founder of Waterdrop, owns 26.4% of the company shares.
• Tencent owns 22.1% of the shares and has invested in all seven fundraising rounds.
• Institutional investors Boyu Capital, Gaorong Capital and Swiss Re Group own, respectively, 11.9%, 6.5% and 5.7% of the shares.
• IDG Capital and Chinese tech company Meituan also have invested in Waterdrop, although they are not mentioned in the prospectus, according to data analytics firm Qichacha.

What people are saying

• "After users have experienced crowdfunding and mutual aid, they will have more knowledge about and a stronger desire for insurance products… This is fundamental to Waterdrop's ecosystem and a high barrier to entry for other players in the industry." —Chinese tech columnist Lan Xi.
• "For a large country like China, the health condition of people in Beijing is definitely different from those in Guangdong province. But in the traditional insurance pricing model, we treat them the same way. For these platforms with large [volumes of] traffic, they can employ internet finance technologies to divide their clients into clearer categories based on health condition, regions, ages etc … every customer might have hundreds of labels." —Li Yu, deputy general manager of Beijing-based Aixin Life Insurance, in South China Morning Post.
• "If you separate (the charity activities and the business activities at Waterdrop), the originally profitable insurance business will lose its referral traffic and become uncompetitive; a purely philanthropic Waterdrop Crowdfunding platform isn't likely to survive, either." —Zhu Rui, director of the Social Innovation and Business for Good Centre at Cheung Kong Graduate School of Business.