Shepherd raises $6.2M seed round to tackle the construction insurance market

Shepherd, an insurtech startup focused on the construction market, has closed a $6.15 million seed round led by Spark Capital. The funding event comes after the startup raised a pre-seed round in February led by Susa Ventures, which also participated in Shepherd’s latest fundraising event.

Thinking broadly, Shepherd fits into a theme of neoinsurance providers selling more to other companies than to consumers. Insurtech startups serving consumers enjoyed years of venture capital backing only to find their public debuts met with early optimism followed quickly by eroding share prices.

But companies like Shepherd — and Blueprint Title earlier this week — are wagering on there being margin elsewhere in the insurance world to attack. For Shepherd, the construction market is its target, an industry that it intends to carve into starting with excess liability coverage.

The company’s co-founder and CEO, Justin Levine, told TechCrunch that contractors in the construction space have a number of insurance requirements, including general liability, commercial auto and so forth. But construction projects often also require more liability coverage, which is sold as excess or umbrella policies.

Targeting the middle-market of the construction space — companies doing $25 million to $250 million in projects per year, in its view — Shepherd wants to lean on technology as a way to help underwrite customers.

Levine said that his company’s offering will have two core parts. The first is what you expected, namely a complete digital experience for customers. The CEO likened its digital offering to table stakes for the insurtech world. We agree. But the company gets more interesting when we consider its second half, namely its work to partner with construction tech providers to help it make underwriting decisions.

The startup has partnered with Procore, for example, a company that invested in its business.

The concept of leaning on third-party software companies to help make underwriting decisions makes some sense — companies that are more technology-forward in terms of adopting new techniques and methods won’t have the same underwriting profile as companies that don’t. Generally, more data makes for better underwriting decisions; linking to the software that helps construction companies function makes good sense from that perspective.

The CEO of Procore agrees, telling TechCrunch that an early customer of his business said that its product is “a risk management solution disguised as construction management software.” The more risk that is managed, the lower Shepherd’s loss ratios may prove over time, allowing it to better compete on price.

On the subject of price, Levine thinks that the construction insurance market is suffering at the moment. Rising settlement costs have led to some legacy insurance books in the space with larger-than-anticipated losses, pushing some providers to raise prices. Levine’s view is that that Shepherd’s ability to enter its market without a legacy book of business will help it offer competitive rates.

Excess liability coverage is the “wedge” that Shepherd intends to use to get into the construction insurance market, it said, with intention of launching other products in time. The startup is attacking excess liability coverage first, its CEO said, because it’s the place of maximum pain in the larger construction insurance market.

Frankly, TechCrunch finds the B2B neoinsurance startup market fascinating. Selling policies to consumers has a particular set of cost of goods sold (COGS) — varying based on the type of coverage, of course — and often stark go-to-market costs. Furthermore, customer acquisition costs (CACs) can prove irksome when going up against national brands with huge budgets. Perhaps the business insurance market will prove more lucrative for upstart tech companies. Venture investors are certainly willing to place that particular wager.

Natalie Sandman led the deal for Spark, telling TechCrunch that when she first encountered Shepherd it was working on a different project, but that when it shifted its focus, it struck a chord with her firm. The investor said that the idea of bringing new data to the construction insurance underwriting process may help the company make smarter decisions. In the insurance world, better underwriting choices mean more profitable coverage. Which means greater future cash flows. And we all know that that means for value creation.