Shepherd Raises $6.2M Seed Round - Construction Insurance Innovation

Shepherd Secures $6.15 Million Seed Funding to Disrupt Construction Insurance

Shepherd, a burgeoning insurtech company specializing in the construction sector, has successfully finalized a $6.15 million seed funding round. This investment was spearheaded by Spark Capital. The financing follows a prior pre-seed round completed in February, which was also supported by participation from Susa Ventures, who reinvested in this latest funding event.

A Shift Towards B2B Insurance Models

More broadly, Shepherd exemplifies a growing trend of neoinsurance companies prioritizing business clients over individual consumers. Insurtech ventures targeting consumers previously benefited from substantial venture capital investment, but their initial public offerings have often been met with initial enthusiasm followed by declines in stock value.

However, companies such as Shepherd – and Blueprint Title, which recently raised capital – are exploring alternative avenues for profitability within the insurance landscape. Shepherd is specifically focusing on the construction market, initially targeting excess liability coverage as its entry point.

Addressing Construction Industry Insurance Needs

According to co-founder and CEO, Justin Levine, construction contractors face numerous insurance obligations, including general liability and commercial auto insurance. Frequently, these projects also necessitate additional liability protection, typically obtained through excess or umbrella policies.

Shepherd aims to serve the middle market within the construction industry – businesses handling projects valued between $25 million and $250 million annually. The company intends to leverage technology to enhance its customer underwriting processes.

A Two-Pronged Technological Approach

Levine explained that the company’s offering will consist of two key components. The first is a fully digital customer experience, which he acknowledges is becoming standard within the insurtech sector. However, Shepherd differentiates itself through its strategic partnerships with construction technology providers to improve underwriting accuracy.

For instance, the startup has established a partnership with Procore, who has also invested in Shepherd’s business.

Leveraging Third-Party Data for Enhanced Underwriting

Utilizing data from third-party software companies to inform underwriting decisions is a logical approach. Companies that actively embrace new technologies and methodologies are likely to present a different risk profile compared to those that do not. Increased data availability generally leads to more informed underwriting, and integrating with software used by construction firms aligns with this principle.

The CEO of Procore corroborated this view, noting that a customer described their product as “a risk management solution disguised as construction management software.” Effective risk management could potentially lower Shepherd’s loss ratios, enabling it to offer more competitive pricing.

Capitalizing on Market Inefficiencies

Levine believes the construction insurance market is currently experiencing challenges. Increasing settlement costs have resulted in substantial losses for some established insurance providers, prompting price increases. Shepherd anticipates that its lack of a legacy book of business will allow it to provide more favorable rates.

The company intends to utilize excess liability coverage as its initial offering to penetrate the construction insurance market, with plans to introduce additional products in the future. This specific coverage area was selected due to its perceived position as the most problematic aspect of the broader construction insurance landscape.

The Appeal of the B2B Neoinsurance Market

The B2B neoinsurance startup market is particularly compelling. Selling policies to consumers involves distinct cost structures – varying based on coverage type – and often significant marketing expenses. Moreover, customer acquisition costs can be substantial when competing with large, well-funded national brands. The business insurance market may prove to be a more viable path to profitability for emerging tech companies, a hypothesis that venture capitalists are actively testing.

Spark Capital’s Investment Rationale

Natalie Sandman, who led the deal for Spark Capital, shared that Shepherd initially pursued a different project before shifting its focus. This change in direction resonated with her firm. Sandman emphasized the potential of integrating new data into the construction insurance underwriting process to facilitate more intelligent decision-making. Improved underwriting translates to more profitable coverage, increased cash flow, and ultimately, greater value creation.

Shepherd’s strategy centers around utilizing data-driven insights to offer competitive rates and streamline the insurance process for construction companies.