Shepherd’s CEO Justin Levine answers Five Questions on how his $6.2m fundraise came about & why it didn’t include me (yet)

I love working with great people and as a venture capitalist, am fortunate the number of founders I’m impressed by far exceeds our investment capacity. Here’s an example of a founder that I’ve known for a while who recently raised a seed round with different firms than ours. In industry terms, I’d call this a “miss/loss,” which VCs tend to not write about for obvious reasons (I’ve got a whole other rant on the fake performative anti-portfolio lists — Bessemer’s aside). But Satya and I post-mortem our miss/losses so I figured, why not do a version of it in public? My friend Alex at TechCrunch covered Shepherd’s seed round last September and here’s some more detail on how it all came about via my Five Questions with their cofounder/CEO Justin Levine.

Hunter Walk: Justin, thanks for agreeing to do this. I really enjoy our conversations and am especially glad you’re up for some candor, because it’ll help provide some insight into the state of the startup and funding market. Ok, first, let’s provide some backstory. You want to tell people how we originally met?

Justin Levine: Sure! Homebrew was on the board of a construction tech startup called BuildingConnected, having led their seed financing. BuildingConnected’s first and only acquisition was a company I founded called TradeTapp. Our team joined BC in 2018, and less than 6 months after that BC was acquired by Autodesk, where I continued on for about a year. As I started to explore new ideas, Dustin (DeVan, CEO of BuildingConnected) made sure Hunter was one of the first investors we spoke with.

HW: So then you ‘did your time’ at Autodesk post-BuildingConnected acquisition. What did you learn from the two acquisition experiences, and the whiplash of going from small startup -> bigger startup -> big public company that quickly?

JL: In short, a lot. I was pretty naive going into my first startup, having worked in more “traditional” roles within the construction industry prior to founding TradeTapp. I certainly didn’t know a ton about venture capital or the tech industry at large. I think BuildingConnected was eye opening because of how truly BIG the idea was — much bigger than what we had been chasing at TradeTapp. At BC, our products were SaaS tools, but they were just a wedge into something bigger. What we were really building was the first professional network for all of the $10T construction industry. If done right, the opportunity was enormous. Pretty cool! BC taught me to dream bigger, and to experience startup at scale.

Post-BuildingConnected things definitely changed. This will sound like a shot at Autodesk (it’s not meant to be), but what I learned from my time there is that acquisitions are incredibly hard and come with many unavoidable challenges. It takes a tremendous amount of effort to remain customer focused — something we often struggled with. This article from Noam Bardin (fmr CEO of Waze, acquired by Google) articulates some of the impossible choices large corporations have to make when integrating acquired startups, and a lot of his perspective certainly resonates with my experience.

HW: You and I had lightly stayed in touch, but reconnected when you started work on a NewCo. The original idea was novel but not one that we had great conviction around, so we held off investing but wished you luck, Then you returned to a problem space you knew well and started Shepherd (commercial insurance for construction). In March 2021 I reach back out based on a LinkedIn bio change you made (my CRM is mostly in my head) to learn more. We chat in April, find out that you’ve already raised a pre-seed round and are building towards a seed. Where did I f*** up? aka how come you didn’t come back to us for the pre-seed knowing that (a) we all got along and (b) we have some relevant fintech/insurtech experience ourselves?

JL: Ha! I wish I had a better answer for this one. The truth is that we were preempted by Susa about a month after starting YC W21. YC specifically tells you not to engage with VCs mid-batch, but given the long(er) road of setting up a neo-insurance carrier, we felt like we had extenuating circumstances and ultimately they were supportive. Susa has a strong track record in fintech / insurance (Newfront, Robinhood, etc.) and we also had a great relationship with the partner. Courtney pitched us as much as we pitched her. In retrospect, I think we were a bit fatigued from the unsuccessful fundraise attempt with the previous idea (it wasn’t just Homebrew that said no) and perhaps we lacked the appetite to shop the deal around even though we may have had the opportunity to do so. Susa was pretty aggressive in getting a deal done quickly, and the whole thing was over in a few days. I can’t say we have major regrets here though — Susa has been a great partner.

HW: Ok, we’re really going inside baseball now. The seed round gets done with a surplus of demand — I mean you’re a second time founder working in an area of expertise that is a huge market. We’re talking with you about the round but it’s growing beyond Homebrew’s comfort zone given our own fund size and strategy. Share how you thought about this round — doesn’t have to be specific to me/Homebrew — which ultimately shaped the decision you made about composition? Is it driven by size of round you want to raise? The needs of the lead investor for ownership? A round that is most accommodating for the existing investors while allowing you to get new people involved? You’re trying to balance a bunch of trade-offs and needs of different parties.

JL: There are definitely a number of considerations for us when taking on any outside capital, and some of them are round specific while others are just our philosophical approach to fundraising. Of course, the current state of the financing market dictates a lot of behavior as well. As you said, we’ve been operating in a pretty founder-friendly environment if you meet a few criteria such as operating in an area of expertise, and having a successful exit under your belt.

At seed, we cared deeply about the partner leading the deal: what’s their background, what’s their standing within the fund, how are their references coming back, and finally: are they on the ascent in their career (i.e. how much will Shepherd’s success mean to them beyond financial outcome). Next would be the fund itself: reputation, expertise (early stage vs. multi), and market experience (fintech/insurtech). This framework helped narrow the field for us a lot, and from there deal terms were probably the next most important thing.

We were pretty open minded regarding round structure, but the dynamics of raising at a higher valuation, which we pushed for, meant that the lead was going to need a pretty large percentage of the round in order to maintain their ownership target. With that in mind, we wanted to make sure we had room for at least one strategic partner that we felt would create an advantage for the business (in our case it ended up being two: Procore & Greenlight Re) with the remainder allocated to angels. Everyone got squeezed down, and there were definitely more than a few tough phone calls. All of this added up to a bit of a larger seed than we expected ($5M), but we were still really happy with the outcome. Natalie at Spark Capital, who led the round, has been everything we were looking for and more.

Despite all this, it’s really tough to turn away the potential to work with amazing people like you and Satya. I think these things tend to work out in time, though. My takeaway on financing is that you have to make the best decision based on what’s best for the company and team long term — and sticking to a concise plan around timing and evaluation framework was extremely helpful in ensuring it came together successfully.

HW: A nice peek behind the curtain for folks on what these rounds can be like when it becomes a “consensus” deal. Returning back to what really matters — actually building a company — what are one or two things you’ve done differently the second time around when it comes to the first 12–18 months of Shepherd?

JL: Applying my first learning from BuildingConnected, Shepherd is a much more ambitious idea than anything I’ve ever done. Our mission is to make construction, one of the most hazardous industries in the world, safer and more financially sustainable — that’s why we come to work everyday. The “how” is by creating innovative insurance products which incentivize contractors to adopt new technologies. We’re positioning Shepherd to have potential for enormous long-term impact across commercial insurance, and I think the BIG dream this time around is attracting some of the best talent across underwriting, product, and engineering to join us. It helps to have two extremely accomplished two co-founders that people immediately gravitate towards as well, and I absolutely love the team we’re building around the 3 of us.

On a more personal level, I’ve matured a lot as a leader since the first days of TradeTapp. I try not to ride the emotional wave of startup life like I sometimes did before and rather be a consistent source of calm for our team, co-founders, and investors. I view a huge component of my job as making sure every employee is in the best position to succeed in their roles. I pay a lot more attention to what everyone is optimizing for individually, and aligning their personal goals with the company goals. From TradeTapp, I learned it’s easy to take these things for granted only to realize later that not everyone is pulling in the same direction.

Finally, there’s been a pretty significant change at home…I’m also a recent Dad! My son was born just about 2 months after we founded the company. The days of the company being the one singular focus in my life are over. But there’s a silver lining to that: I think having a baby at home forces a different level of focus and decisiveness around the way I operate. Being a second time founder, you’re able to peak around a few more corners and avoid some of the dumb mistakes you made the first time. It’s not always perfect but I can say confidently that the lessons from building something a first time are invaluable to the next.

Well there you go, the story behind the story on how rounds get done for companies which have heat on them. I’ve found that seed these days really is two different worlds: founders who have no trouble getting multiple termsheets within days of fundraising at valuations we used to assign to A rounds, and of course more commonly, those who find that it’s a constant struggle to get investors to believe in their vision and take a risk on them. What’s interesting here to me is our involvement in Building Connected was the latter (cold email from two founders), and one of their alumnus turned into the former! Thanks Justin for sharing a bit with me here and best of luck.