Startups are among the riskiest types of business. So it's only fitting that a startup would emerge to specialize in insuring other startups.
For Sam Hodges, the CEO and cofounder of Vouch, the need for startup insurance became apparent during his 15-year tenure as an investor and startup founder. He told Business Insider that in all his previous roles, he had come to realize how an important business tool like insurance had actively held back fast-growing startups.
"Folks don't realize that insurance is a gating item to do what you need to do in business," Hodges told Business Insider. "For Vouch, we needed insurance to get our insurance license and it took 2 months. These sorts of delays can be incredibly painful for a lot of businesses."
On Tuesday, Vouch announced that it had raised $24.5 million in Series A funding, in a round led by Ribbit Capital and SVB Financial Group, the investment arm of Silicon Valley Bank. The investment, which represents Vouch's first outside funding, was done at an undisclosed valuation.
The deal shows Vouch bucked one popular Silicon Valley trend while gladly embracing another. The startup went without early-stage funding before Tuesday's round even though other startups have been raising seed and pre-seed rounds of increasing enormity. At the same time, Vouch is building its business on a precarious foundation by tying its future to the risk of other startups that may not have a sustainable long-term business model.
According to Hodges, business insurance is one of those pesky things startups need even if the company is essentially "two people in a garage." But the insurance industry has yet to catch on, he says, and treats a software startup the same as it would a mom-and-pop auto repair shop, for example.
"Traditional carriers and brokers can't serve [startups] because it's all done offline and there's all this friction. They don't understand technology companies," Hodges said.
Instead of the typical five areas of risk insurance companies use to assess risk factors and charge customers, Hodges says Vouch has dozens, which allows the startup to better serve the range of needs a high-growth company might encounter.
"Unfortunately it's just part of dealing with business," Hodges said. "Almost certainly there are things that happen along the way, whether it's a cyber intrusion or regulatory issue, all those things are risk events that can put a business sideways."
Hodges said that dealing in such a highly regulated environment, and now with such prominent backers, means his team is more experienced than would be expected at a young startup. That experience, which totals almost 100 years between the cofounders and executive team, will come in handy in the event of a market downturn which could disproportionately cut into startups' bottom lines and therefore Vouch's entire revenue model.
"We are investing to make sure our infrastructure and underwriting is sustainable," Hodges said.
We are very comfortable with how we have set up the company."
Vouch currently operates in Utah and Illinois, with plans to expand to California and nine other states before the end of the year. Part of that expansion will come through its new status as a preferred partner with Silicon Valley Bank, one of the most ubiquitous institutions in Silicon Valley. By mid-2020, Hodges said he hopes to be operational in all 50 states.
"To build an insurance company from the ground up you need to make a thoughtful set of investments, and we thought this was a sensible way of going about it," Hodges said.