Ever seen these lists or maps of “these are the top 100 startups to watch” ? I know, I know – who hasn’t.
Well – I wanted to backtest how correct and good those VCs or journalists who publish these “best-of” lists or “market maps” are at curating ConTech ventures.
Being a full-time early-stage investor in ConTech as part of the global VC in the sector (Foundamental) – where we speak with several thousands of founders in our sector every year – I’ve had more and more the hunch that “best-of” lists and “market maps” often showed a picture distorted from the sector’s venture reality, and were not very good at highlighting the eventual long-term winners and category creators.
Outside-in PR propaganda ≠ Actual inside-in performance? This analysis was to backtest the “curation quality” and “prediction performance” of all the “best-of” lists and “market maps” created by other people by using objective data. See for yourself…
Methodology
1️⃣
Researched 20+ “best-of” lists and “market maps” for ConTech by VCs and journalists
* Google in incognito mode first; then duplicated the approach with DuckDuckGo
* only lists/maps no later than December 2021 (to allow for backtesting) and
no earlier than 2016 (before 2016, ConTech practically didn’t exist)
* boolean search used:
(”top 50” OR “top 100” OR “top 25” OR “top 30” OR “market map” OR "landscape") AND (”contech” OR “constructiontech” OR “construction-tech” OR “construction tech” OR “construtech” OR “in construction” OR “disrupting construction”) AND (”ventures” OR “startups”)
* searched through ALL search results; text and image results
* excluded PropTech-only firms (of which there were few, eg. Knotel and Juniper Square)
* did not use single-country lists except for USA
2️⃣
Extracted all 530+ mentioned ConTech firms, added objective data-points, and amended the list by the most-funded firms not on anyone’s “best-of” list or “market map”
* cross-referenced each firm with the lists/maps they were mentioned on
* added ConTech firms that have raised $30M+ but were missing on the sampled
lists/maps
* added data-points for each firm:
# of mentions, $ raised total, $ raised before mention, $ raised after mention, $ raised in last 18 months, status
* sources used for funding data: Tracxn first; if Tracxn shows no funding then double-checked with Crunchbase
3️⃣
Ran multiple analyses
* are pundits early or late?
* do they make or miss winners?
* do they promote substance or hype firms?
* if they were a fund: would they earn or burn money?
The sampled ConstructionTech “best-of” lists and “market maps” from 2016-2021
[open-source]
Sampled ConstructionTech “best-of” lists and “market maps” from 2016-2021
The 530+ ConTech ventures mentioned in the sampled "best of” lists and “market maps” from 2016-2021 [open-source]
⛔
Remember: What this is NOT
* first of all: it’s NOT a Foundamental list, also NOT my list!
* It’s NOT an endorsement or curation, and not a measure of quality or long-term success of any firm; remember that this is just a meta-collection of all the sampled “best-of” lists and “market maps” that other VCs and journalists created in the first place (and to demonstrate the advantages and disadvantages of such lists/maps is exactly the point of this exercise – so if you feel this list sucks, that’s my point !)
* It does NOT give an accurate global representation due to a huge bias in the sampled lists/maps; due to the strong bias represented by the pundits’ “best-of” lists and “market maps” towards US (and some European) firms, it contains very few Asian, African and Latin American ConTech start-ups
* It’s NOT complete; in fact we at Foundamental have spoken with over 10’000 ConTech-related founders over the last five years, which gives you an idea just how short “best-of” lists and “market maps” are
* It can NOT show always the correct funding data; we decided to use only funding data available on Tracxn and Crunchbase, even if we know internally that the public data is incorrect; we choose not to disclose non-public info
Sources for funding data: Tracxn, Crunchbase per June 1, 2023; no Foundamental data used
1/ Early or late to the party?: % of total capital raised before
and after mention
🤔
Reading: Looks like they are very late to the parties.
2/ Making or missing winners?: Total capital raised; firms
mentioned 3 times or more vs. firms least-mentioned but raised $20M+
🤔
Reading: They miss a lot more successful firms – too many.
3/ Substance or hype?: % of total capital raised in last 18 months;
firms mentioned 3 times or more vs. firms least-mentioned but raised $20M+
🤔
Reading: This one’s a killer. They seem to promote firms that were much lesser able to withstand the tough funding environment of the last 18 months – by far.
PR > substance for these pundits.
4/ Earning or burning?: “If these lists were a fund that invested
at time of list”: Estimate of hypothetical fund return
💡
Assumptions used:
$1M investment at time of mention per firm. 40% Dilution happened before, 20% dilution after. 48 months holding period. For firms that had 0 mentions, valuation at time of investment assumed as $30M (which is a point in time when people who know the sector should have seen every firm).
🤔
Reading: Not much interpretation needed. The data says it all: “best-of” lists and “market maps” are sub-par at picking ventures.
The reason is simple: The “best-of” lists and “market maps” have missed a large number of large category creators in ConTech consistently. The lists/maps contain a substantial bias towards (i) rather picking any kind of US firm over terrific non-US ConTech firms and (ii) picking many more charismatic, PR-ready founders with high-PR-value investors than they pick less charismatic founders who are excellent operators (because they don’t KNOW that they are excellent operators…)
These lists/maps also clearly seem to be sub-par at picking eventual winners before Series-A’s, which is why you won’t find many firms created since 2020 whom you might think highly of and feel like they are missing here. That’s part of the whole point…
Findings and call-to-action to ConTech founders
ConTech “best-of” lists and “market maps” can waste your time: The data is clear – many pundits are late, bad pickers, and promote hype instead of substance. Reasons are also clear – lack of insight, no proprietary view about operator performance, and hidden incentives.
Adverse selection, anyone?: Alright, get this – out of our top 15 financially-performing companies, only one (1) was ever on a list or market map in its first four years after founding. Let that sink in. Of course correlation is not causation – I am not saying being on a list or map will make your ConTech firm average. But what I clearly see is the correlation between being heads down and under the radar while you build a product and a business with your customers, and your long-term substantial performance in Construction-Tech. Hype does not sell, PR does not sell – only product and substance does, to the no-BS world of construction and architecture clients.
The company you keep: You likely don’t know the past and performance of your peers you get lumped together with on a list or market map. Do they do well? Do they have a good reputation behind the scene? Do they maybe have bodies in their closet? You likely don’t know, and that’s a risk for you. Because your customers and investors might know – they tend to have talked to and looked at many more folks in the space. By accepting to be on a list or market map, you might unknowingly associate yourself with company you don’t want to be mentioned in, and your customers or investors might take notice of such associations. This happens all the time.
I could keep going, but this post already got out of hand.
Let me just close with this call-to-action to you all ConTech founders:
The only stakeholders that matter in your early days are your customers and your talent. If you accept PR for your firm – do it only if it benefits you with your customers or with talent.
Do not accept PR about anything else, especially not investors. It’s an investor’s job to find you. We literally do nothing else the entire day. If this is the reason you accept PR, you are literally wasting your scarce time.
I am a huge fan of staying under the radar. I have seen first hand that ConTech firms can get dinged by old-school construction clients for being perceived as non-serious tech firms, while others who presented themselves as serious firms with no tech PR footprint at all grew quite fast. These are anecdotes, of course – but this general direction is solid advice.
For the last week I was working with a founder team in the construction cash flow space. It triggered me to look deeper into the payables, receivables and cash disbursement workflows in the construction industry in the US and UK markets.
As for material supply invoices, I was unable to find a good source. So I’ll have to run with a total guesstimate here – let’s say each sub-contractor makes 20 distinct materials purchase orders (POs), and each general contractor makes 200 materials POs. Let’s further assume each PO leads to 2 partial incoming invoices from materials suppliers. That gives 22x20x2 + 200×2 = 1’280 incoming materials invoices for an average project. Let’s round it to 1’300.
Now, let’s go to the contracting invoices themselves. We have an educated guess that each sub-contractors works for ca. 3 months. That makes 4.4 sub-contractor equivalents over 15 months project (22 / 15 x 3 = 4.4)
Let’s assume that the subs as well as the general contractor write outgoing invoices (or applications for payment, for that matter) twice per month per project. That gives (4.4 + 1) x 2 x 15 = 162 outgoing invoices upstream. Let’s round it to 200.
So overall, on an average 15 month project, we could be looking at 1’500+ invoices and money transfers.
Now: because each invoice creates a payable and a receivable, and requires them to be closed after cash is received we actually look at 6’000+ book entries per project.
Now let’s extrapolate to the number of construction projects:
The US makes up ca. one seventh of the global construction market.
Which means, there could be 7M residential construction projects worldwide per year.
Now, historically, residential is ca. 33% of all construction spending. The other 67% are performed across commercial, industrial and infrastructure projects. Because those projects carry significantly larger sizes, there should be proportionally less projects in those segments.
Let’s assume non-residential projects carry 10x larger spending per project. That means there could be 7M / 10 x 2 = 1.4M non-residential construction projects per year globally. Again, let’s round down to 1M.
In total, that would give 8M construction projects worldwide p.a.. (Broken down to the US, for example, that would be ca. 1.2M projects per year – sounds directionally right)
The 1’500 invoices and 6’000 book entries mentioned above happen over a 15 months timeline. We need to scale them down to 12 months:
Invoices:
1’500 / 15 x 12 = 1’200 per year per project
x 8M projects worldwide
= 9.6 billion invoices p.a. worldwide in construction (let’s round up to 10 billion)
The truth is likely somewhere in-between these 10B and the 55B.
4’800 book entries per year per project
= ca. 40 billion book entries p.a. globally in construction (and could be as much as 200B)
That’s a lot of cash flows and paper. Here’s a few big issues with this many invoices and book entries:
Massive working capital. Because the various construction stakeholders are traditionally financed from within the same supply chain, one party has to front cash to pay the other party. Incoming and outgoing payments don’t happen on the same day. The difference is the working capital required for construction.
Developers are at constant risk of a general contractor default. The more sequential invoices from sub to GC to developer, the bigger that risk.
Ugly accounting and treasury overhead
Error prone
We know that construction is a $10 trillion global market. Let’s say on average, there’s 30 days of working capital in the construction system. That would amount to $10T / 360 x 30 = $830B of construction working capital.
To cross-check whether this number sounds directionally right: that would be ca.:
$830B x 33% / 7M = $40K working capital per residential project
$830B x 67% / 1M = $550K working capital for a non-residential project
While these numbers won’t be accurate, they are in the right ballparks.
Now imagine you could eliminate one pass-through party in the construction invoice chain, and find a way to pay suppliers more directly. Thus you might be able to reduce the invoices and wires by as much as 50%, which would reduce the working capital by proportionate 50%, or as much as $400B globally, $60B in the US or $20K+ on an average residential project.
To summarize:
10B – 55B construction invoices (and cash transfers) per year
40B – 200B accounting book entries p.a.
$830B working capital
$40K working capital on a resi project and $550K on non-resi
$60B of working capital in US construction could be saved if someone could eliminate one pass-through party in the invoice chain
What I find interesting in this context is: Who bears the burden of these numbers? While the usual answer is the sub-contractor, I actually begin to think the long tail of developers bear the biggest pains. And their pains from these numbers are more painful the…
more different GCs they have to work with on their projects
smaller the GCs they work with
more volume and no. of projects per year they develop
That’s why I have become enamored with solutions fixing invoices and wires in the cash flow chain starting with real estate developers downstream to sub-contractors.
Here, I am continuing my thesis. Writing about the vectors through which incumbents are coming under attack, and their clients can unshackle.
I have noticed how some investors prefer to think their software thesis in terms of features. I don’t find that very helpful. Features are just a result of some larger macro shifts.
That’s why we dont think of our 3D design thesis in terms of features. We think in terms of market structure and mega shifts.
Let me begin my thesis by using a unique metaphor:
Imagine your body needs chronic treatment. Let’s say Diabetes. And folks tell you that you need insulin to treat it and function well.
There’s a dealer (not saying who) who has the reputation for always having insulin. You get it from him. But he sold you insulin at a teaser rate.
And he’s mixing some nasty stuff into your insulin which makes you addicted and dependent. You find it very hard to go to another dealer, because this guy’s insulin is just really hard to switch away from.
In the foreseeable future, his teaser rate will run out.
Now, the dealer comes to you and says “hey, this other drug goes super nicely with the insulin i’m already giving you, it’s great for your body”.
But really, what it does it creates even more chemical dependency of your body so that you can never get out of his insulin.
And you look at your wallet and you think: “hold on, when my teaser rate runs out, all the money in wallet will go to my one dealer. WTF”
“Now he wants to make me even more addicted?”
“No way; i have to get off his $hit, get my life in order and find a less abusive way to get my insulin. And while I’m rethinking it all, I should find an insulin that is not mixed with some of his nasty addictive stuff !”
“Oh, if I am making that huge life change anyway, I should also never again be dependent on a single dealer.”
Now, at this point in your realization, imagine there’s someone who tells you they actually got away from the dealer and since then built their own insulin stack. They tell you they began sourcing the different chemical components from trusted sellers and brewed their own insulin inhouse into the mix that is BEST FOR THEIR body.
That would be perfect, wouldn’t it?
You’d like to do that. You’ll probably need good support from others who are on the same journey as you. But because the vendor has left so many clients unhappy and addicted, you can easily find a huge group of people who have the same issue as you and you can consult each other and team up so you can all brew our own mix and become our own producers.
Within this metaphor, we find five interesting components:
the need for a great product to fulfill life-critical functions (”control my blood sugar”)
the product stack
the vendor’s incentives
the pricing model
the community
Before double-clicking on them: I find it noteworthy that most “pundits” or investors out there think about the feature set, when they think about disrupting the dealer in the above metaphor. And it is a key component – if I can’t offer a decent substitute product, I can’t compete. But: the key to change in this metaphor also lies in working with the system’s incentives, pricing, structure and community.
Let’s bring the metaphor into 3D design and work through the components one by one:
Attack vector 1: Life-critical functions
The drug (insulin) in the metaphor can be equivalent to many tools used in the 3D design stack, but probably the most critical one in the stack of 3D designers and architects is their central CAD/BIM authoring tool. Without which the users couldn’t fulfill their core functions.
The attack vector here is not a more feature rich authoring tool (i.e. an insulin that consists of more chemical components, for that matter). The required feature set is sophisticated, but very clear.
Rather, the attack vector in terms of enhancing the life-critical functions that I see is:
Concurrency: The ability to manipulate and process elements in the same model at the same time.
atomic distributed version control aka git: The ability to store the state of every atomic object of the model at any point in time (and not just time snapshots !) from n-number of users and thus give a complete historical trackability of edits, branches and commits to the 3D model.
n:n multi-player: The ability to have n-number of users collaborate in n-number of distributed software from different vendors, without having to have one central vendor (or server) participate (which would not be n:n).
AI-ready streaming of my proprietary data: The ability to normalize, ringfence and distribute a firm’s or team’s model and model history, so that the team can build their own large language model based on their ringfenced but huge amounts of proprietary data without having to share their data outside their team.
Unfortunately for decades-old legacy authoring tools (the insulin), the above functionalities cannot be easily added on top of an age-old stack. They form a very different core stack around which to build an authoring tool from the ground up, starting with the database and data query architecture. Any legacy authoring tool will have a high development effort to switch to a modern stack that supports the above functions, plus the effort to convince and retrain their users over time.
And that is the attack vector here. Modern software for the 3D design stack built on modern technologies that allow concurrency, git, n:n and AI-ready streaming, offering not a 1:1 substitute but a drastically improved alternative to the drug fix currently on offer.
Which brings me to the entire stack.
Attack vector 2: Product stack
The dealer in the metaphor benefits from the fact that his client cannot home-brew a superior or otherwise better or cheaper insulin himself.
The same thing happened for decades in 3D design. A vendor would offer the most complete authoring software or the most sophisticated specialty tool. A client could never rebuild the same software in house. But worse – a combined stack of tools was not available that – when stacked together – would be a superior solution.
That’s what’s rapidly changing now. Architecture firms and design clients around the world are in the process of re-evaluating their IT spend. What they realize is that that one vendor will soon eat up their entire IT budget. We are talking 2025-2027 here. So soon.
While the largest clients are developing some lighter parts of their stack inhouse (eg. Testfit tools), the most sophisticated parts of the 3D design stack are just not feasible to be built by AE firms or design firms. Inhouse is not an option for the most sophisticated parts of the software stack.
Fortunately for them, these clients begin to actively go into the market, and look for new vendors that fulfil parts of the “dealer’s” software. These clients are willing to stack different softwares together, which do their part of the stack more excellently that the “we-try-to-do-it-all-in-one” software from the untrustworthy vendor.
That’s the attack vector that the dealer does not have an answer to. AE and design firms re-stacking their toolset with software that is individually superior in specific functions, and thus re-building the entire stack of their firm one by one.
Now, the dealer has no reason to participate in this, because: incentives…
Attack vector 3: Vendor’s incentives
In the metaphor, the vendor has the incentive not to heal the patient, but to keep them addicted. Being addicted means coming back for more, eternally. Every time you come back, the vendor needs to sell the patient more per dose, because doses hit resistance. A vicious cycle.
A very similar dynamic plays out when a vendor has maximum market power and market share in a 3D design software product that is ultra core to the user’s company (eg. an architecture firm) and is very complex to learn. The more the designer uses the product, the more the designer stores their data in the vendors software, the higher the addiction.
The vendor then has the incentive to keep adding more and more addictive features, and never let their clients come out from under.
Fortunately for the architecture and 3D clients, though, this is exactly the attack vector here:
Because clients are aware of these incentives (it’s an open secret and visible to the naked eye), the vendor has no credibility of ever meaning well for the clients. Even if the vendor has a change of heart – the hurt is already done. The only reason his clients stay with him is because there is no superior alternative. He abuses them. The moment the vendor faces true superior competition, his reputation is so hurt that whatever he claims he wants to do right by his clients – his clients know that he abused them.
Therefore, any alternative vendor (ventures, for that matter) offering superior substitutes can credibly claim to mean much more well for the vendor’s clients and structure their product and pricing model in a way that demonstrates credibly a good-natured alignment to the client’s benefits (and not to the dealer’s). All you have to do is to structure your product and license in any way that tilts to the benefit of the client, eg. in terms of length of commitment, service, flexibility in using the software, and pricing model. And the existing vendor has no way to defend against this attack vector because he created a systematic issue for himself.
Which brings me to pricing.
Attack vector 4: Pricing
The vendor/dealer in the metaphor is used to a steady and constantly expanding revenue stream from his clients. It will be very hard to change the pricing in a way that tilts in the favour of clients, because (a) “why would I” and (b) the vendor would take home less money where everyone has gotten used to that steady stream and pile of cash. How does the vendor explain that at home?
He doesn’t, or at least not without major discussions and convincing.
That’s the attack vector here. New entrants being able to offer pricing models much more aligned with client outcomes.
Instead of prohibitive seat-based licenses for 3D software, and a hard crackdown on clients who “over-use” according to the vendor – new entrants can offer pricing models that allow them very fast growth and allow architecture and 3D clients much more flexibility and independence. For example:
Pay for volume tiers, don’t pay for unexpected usage spikes
Pay for unlimited use, don’t pay for over-use
Pay for higher-tier features, don’t pay when features not needed
Pay for service level access (especially great in combination with open-source software), don’t pay for custom development and support
Attack vector 5: Community
All clients source their product from the same vendor. That’s why they share the same pain, and they know they share it.
The moment a few of them start building their own product stack, and ask around who can help with sourcing the parts needed, collaborating together to re-engineer a solution – the movement begins. Because the pain is so high and the trust in the vendor is low.
The vendor’s incentives, of course, are to avoid that movement. Control the communication, make sure they don’t speak with each other and make sure that no collaboration happens outside the control of the vendor.
That’s the final attack vector in my list. Activating a nascent yet vibrant community, and unleashing a movement that is brewing under the surface. Arm them to re-stack their toolkit.
3D design has one of the most amazing technical communities out there. Made up from game developers to aerospace engineers to architects – they all build in 3D, and many of them code. They organize online, they exchange ideas and learnings.
And new entrants – especially those that have a credible open-source strategy – are the ones that will be in the position to channel the power of community through this attack vector on the dealer.
My thesis is that through these 5 five attack vectors, 3D design clients can unshackle themselves from the dealer in the metaphor.
So much, for now.
Coming next: In Part 3, I plan to write how I see the attack vectors currently form in the shape of specific company examples – which I deem most exciting to be dealer killers.
Germany has a stock of 20 million residential buildings, plus millions of commercial buildings.
While the initiative has its merits, and is commendable from a carbon reduction perspective – it leaves many building owners in Germany (B2C and B2B) with a lot of uncertainty what it might mean for them.
On top of which, many commercial owners of buildings are already dealing with complexity from the EU’s taxonomy to reduce their buildings carbon footprint.
This uncertainty for building owners is best met with facts about their building’s real substance and thermal footprint.
That’s exactly what building energy audits do, and why they are growing like crazy in Germany (and Europe).
Think of the building energy upgrade cycle in terms of 3 eternally-repeating phases:
Assessing, which consists of capturing the building substance, running complex normed calculations, prioritizing upgrades, and designing them, and also benchmarking the building on a granular level
Installing, from procuring material and labor to carrying out the upgrade project and assuming the risk for the project
Operating, incl. capturing the building’s power and thermal footprint, monitoring variable prices and making operational adjustments
The installation phase will be fixed soon by an abundance of players
Today, the installation phase is severely bottlenecked by a lack of tens of thousands of skilled workforce to carry out the upgrades, such as retrofitting insulation, windows, heat pumps or rooftop solar. The good news in this phase is, though, that a bunch of players have recognized this demand overhang opportunity. Lots of players have raised capital to build asset financing companies for solar (eg. Enpal), for gas boilers and more recently heat pumps (eg. Thermondo), or to bring efficiency to retrofit insulation (eg. Varm – highly recommended to put on your watchlist) or even for generic installation workforce serving the above mentioned players B2B (eg. Installion). Also, OEMs of boilers and heat pumps try to play a big role in this phase.
So, fortunately, the installation bottleneck is getting solved.
However: The problem with players in the installation phase is that they need to put their workforce into work. They need utilisation. And they know their own product, their one solution. Which means: they are not credible in providing the right merit order of upgrades that is specific to an owner’s building.
Should it be solar first? Well, if you ask the solar players, of course !
Should it be heat pump first? According to heat pump players, you bet !
(in reality, in many instances it should be insulation or windows or something else first, so you see the problem)
The operating phase does NOT capture the physical substance
In the operating phase, we have utilities, meter operators, building management systems and price comparison portals who all have a role to play to manage the building’s power consumption. However, it’s limited. For one, their help with heat consumption is not on par. Secondly, the monitoring of power consumption is spotty, at best. Smart meters are still not widely adopted in Germany and larger parts of Europe (I researched and wrote about smart meters almost twenty years ago …). And finally, even if you monitor the level of power consumption, IT DOES NOT TELL YOU ABOUT THE BUILDING SUBSTANCE and why the losses PHYSICALLY occur.
Bringing technology into the assessment phase is the missing link
That’s why there is the assessment phase. It covers the things an owner needs to know about the physical substance and ongoings in her or his building. Unfortunately, the assessment phase is equally (if not more) plagued by skilled workforce shortage. Today, Germany has ca. 7’000 – 8’000 people trained, certified and active to conduct a building energy audit and create the roadmap for upgrade measures, of which many only do this part-time. These highly trained people are called “energy consultants / Energieberater”. They often come from a first life as an architect or engineer, and take on tens of hours of additional training to be certified as energy consultant and be allowed to create the audit documents.
The audit documents are no slouch. They contain 20-40 pages with the building’s specific physical substance, followed by complex normed calculations, followed by an individual upgrade roadmap (what I call the merit-order of upgrades). The merit order tells the building owner what is the most efficient upgrade to do now, to do after, to do later.
And apart from being just really insanely useful – the audit documentation also serves as a purpose to access grants/subsidies and bank financing.
That’s why the building energy audit is really awesome, but complex.
And unfortunately, that’s why a lot of owners want it. If you are a consumer, and you want your single family home audited, it’s quite normal that you wait 6-9 months for your building energy audit.
Now imagine, you are the owner of ten buildings, or hundreds, or thousands. You need a scalable solution – a one-stop shop that uses technology.
Enter: Enter !
Enter has established itself as the leading building energy audit provider in Germany, with more than 3’000 projects completed as I write this. They grew in 600% in the last months. Their secret to achieving such scale recently is that they built a suite of proprietary technologies that allows them to capture building data from owners extremely hands-off, and run the audit calculations and merit-order supported by technology. In the end, it even helps the owners access grants/subsidies by running the process for them. Thx, technology !
What’s equally important to succeed in this market, though, is the positioning and model.
Enter has no workforce to utilize. It is not an installer. As I wrote above, there’s plenty out there that Enter partners with and there’s great synergy. But because Enter doesn’t have to put their own workforce into work, it has no conflict of interest. Enter is in the position to freely recommend any upgrade measure in the order that’s best for the building owner.
Because Enter has a 360° view of the physical substance of the building, its recommendations are based on facts specific to the building. Not beliefs that maybe solar is always best…
And all of this allows Enter to be the preferred partner to owners as well as lenders, since they look to Enter to underwrite the upgrade measures for financing and the actual execution of those measures in the end.
I am convinced that with this round, Enter is scaling not just to a huge financial success – more importantly, Enter is now scaling to decarbonize 20M homes in Germany as fast as possible because owners now finally know what their building’s physical substance is, and what’s the right merit-order of thermal upgrade measures.
a16z published a new post last week about their view on Vertical Operating Systems. In it they argue that:
almost all vertical operating systems start with a best-in-class wedge product that creates a system of record around the foundational customer unit. And then, from that initial foothold, the company launches other products and services that capture more and more of the employee workflow.
Good timing, because I believe we are seeing the Vertical Operating System for SMB contractors in Europe. And it coincides with a major new round announced today.
While a wide range of solutions for the financial stack of SMB contractors has emerged in the US – eg. Adaptive, Briq, Flashtract or Flexbase – the European markets had remained starved for strong venture-backed solutions.
Until Graneet’s new round.
What is Graneet ?
Graneet is the financial operating system for small and medium-sized construction companies. Contractors manage quotes, invoices, project financials and margins, cash flows and payments with Graneet’s software. Key financial workflows are automated, and numbers become transparent across dashboards in real-time.
A useful analogy from other industries is Pennylane – in a super dumbed-down way, you can think of Graneet as the Pennylane for Construction.
Why verticalized ?
If you wonder why a horizontal or multi-vertical financial OS such as Pennylane wouldn’t be better suited to also serve construction, I don’t blame you. Fair question, especially if you have never looked into the specifics of the construction sector.
Construction contractors deal with a bunch of specifics in their financial workflows that no other sector has – not retail, not ecommerce, not logistics, not manufacturing etc.
For starters, financials are arranged around projects, not orders or products or months (I call this the smallest unit of aggregation, SUA). Contractors need to manage their margins on a project level, i.e. their SUA is a project. A project can consist of many milestones and pay-gates, which themselves are made up of orders, applications for payments, partial invoices etc. A financial-OS needs to facilitate these workflow specifics around quotes, (partial) invoices, and margin reporting.
Secondly, projects – and its associated revenues, COGS and cash flows – often run over multiple months, not just one or two. This means that you carry bookings for a long time, while having partial realized revenue in various different months booked against the project, while you carry the remainder of the booking. A horizontal financial-OS which allows an SMB to run their firm around a monthly view only will significantly distort a contractors financials and unit economics. A financial-OS for contractors needs to allow managing your financials not only around projects (see above), but additionally manage across 3+ months of realized revenue, to manage the contractor’s business model.
Thirdly, construction quotes and invoices contain a lot of specific terminology and units. Both quotes and invoices typically have to be broken down to super-specific line items, and line items contain different quantity-units – eg. one being hours, a second being tons, a third being cubic meters, a fourth being distance, and so on. While in retail, ecommerce or services, the units usually are the same and a quote contains anywhere between 1-5 line items, construction contractors routinely offer 50 to 500 line items because it is required by law or by procurement policy from their clients. A financial-OS needs to allow easy quote/invoice creation, editing and summing with multiple different units and hundreds of line items. Also, not unimportant: only a consolidated view of invoices, receivables, project execution milestones (!) and payments will allow instant invoice-financing.
This list of construction-specifics could go on for much longer – just to mention other construction-specific items:
ESG appendices to quotes/invoices and supply chain documentation
applications for payment
insurance certificates, compliance documents, liens
early payments discounts and materials financing solutions
procurement of materials from preferred construction suppliers and inventory-keeping
…
This is the reason why horizontal players prefer going after many many many other verticals first, before they adapt their software to construction. And it’s why a vertical financial-OS wins.
Why not a US venture-backed financial OS for Europe?
US and European SMB markets have fundamentally different mechanics:
Expense cash flows: US market is credit-card (and cash) based, Europe is wire-transfer based.
Labor and payroll: US SMB contractor market has a lot of roaming/freelance and at-will labor with weekly or biweekly payroll, not seldomly on a cash basis and hourly wages. European SMB contractors have a higher share of fixed employees with fixed base salaries paid via wires, and more often than US on a monthly basis.
Compliance documentation: US and European markets can both be heavy on compliance documentation, but what documents are required differs massively. For example, US contractors need to show a lot of insurance documentation, while European SMBs often need to provide documentation from their workers that they were paid minimum wage. Very different set of compliance docs.
Again, this list goes on. Both are mature markets, but organize their financial workflows quite differently. That has implications for the transferability of software from one continent to the other in the early days.
(NB: UK workflows tend to be closer aligned to US markets than mainland Europe, but still different to US)
Cool – so why will Graneet win ?
Amazing product, amazing team, amazing growth. Three out of the biggest criteria for any VC investor.
Graneet’s month-on-month growth has been consistently at 15%+ in 2022.
But such growth can more often than not be bought with expensive and un-scaleable sales motions.
Therefore, let me focus here on a fourth criterion that is quite unique to the firm and prepared Graneet for exceptional scale: its sales efficiency and product stickiness.
When I looked at their 2022 numbers and compared them to best-in-class SMB SaaS benchmarks, this came out:
Sales cycle: Top percentile. To give you an idea: Graneet is measuring its sales cycle in days…
WAU/MAU: this might be the craziest number I have ever seen for an SMB SaaS. Top percentile doesn’t even do it justice. Suffice to say – customers have an insane recurring usage of the software.
Sales burn multiple: Top decile, profitable
In Graneet’s case, what blew my mind is the quite insane customer love coupled with a motion that scales and a very high dollar retention in the SMB segment.
It’s rare to see a vertical SaaS with such excellent metrics poised for capital-efficient growth.
Now that Graneet has loaded up on cash, with a product that is loved by a wide range of contractors, a European market starved for a great venture-backed solution, and possibly one of the greatest vertical SaaS investors of all time (Point Nine), I believe the firm has the ingredients to scale very rapidly.
stating the obvious: this post is my opinion
Over the next weeks, I will be sharing a series of posts explaining our view why the 3D design stack is not just ripe for disruption – but why it is already in the middle of it – and what our thesis is.
To begin, it’s important to pin down the problem.
And no better way to show you the problem than visually.
Incumbents’ 3D and CAD software have a huge problem. They are built on older stacks. When I look at it, I see clunky, swiss-army-knife style software that requires a ton of training time and locks users in by making any switch away as hard as possible.
On top, legacy CAD firms treat users not like kings. Prices seem to get hiked, license structures changed, service seems mediocre.
And users take notice. It seems they took notice for a long time. And they vent. A lot.
Legacy CAD firms don’t seem to care much. It looks like they double down on their strategy. By buying, and buying, and buying more independent software firms, sunsetting software, and closing it all off.
The disconnect seems real. Employees at legacy CAD firms seem to love their life and strategy.
Users not so much.
Meanwhile, the UI/UX design stack has delivered the blueprint for how the exact same situation has played out there.
One of our super exciting young bets of the last year had been Lun, who today announced a new €10M round with Norrsken, Lowercarbon and Partech, which they raised ultra quickly on the back of assembling one of the best management teams in the space in Europe and executing a super unique product (more on that below). We are proud to have led Lun’s pre-seed just 12 months ago.
For a bunch of folks out there the above Venn diagram might not make sense at first. What do design and workflows have to do with heat pumps. It‘s all about buying small shops, training some people, isn’t it?
No, it isn’t.
A lot of companies approach the thermal renovation opportunity across Europe from an Enpal-like angle (basically super-heavy asset-financing model). There’s Thermondo, 1KOMMA5 and many others with slightly different but fundamentally similar takes across Europe etc.
If you really break it down to first principles, these models resemble asset-financing businesses where they take some workforce constraints out. The workforce aspect is secondary though – when you read the P&L and Cash Flow Statements, you see that these models are asset-financing with some bolt-ons left and right.
The not so attractive part with that approach imo is (1) this is a model born out of a low interest environment, and the cash economics of such models are just not what I look for in firms (2) you cannot be a credible arbitrator of a merit order of renovation measures, cause you know, it has to be always eg. solar first (even if the building would benefit from another thermal upgrade first) because that’s where I need to put my OWN workforce into constant work and (3) if you look at reducing our CO2 footprint on the grandest of scales – we are talking 100M+ homes in Europe as fast as possible – these asset-heavy models just cannot move the needle. Only a software play that enables hundreds of thousands of installers can reach that scale and reach it quickly.
Therefore, my thesis is different:
100M+ European homes need thermal upgrades as fast as possible.
Not every building has the same merit order of upgrades. Some have the biggest initial impact from insulation first, some from heat pumps first, some from solar first, some from windows first, and so on.
One of the fastest growing upgrades will be heat pumps (the other will be insulation, by the way, but more on that in another post soon).
Heat pump upgrades suffer from a massive, massive demand-overhang / under-supply.
Material supply will get fixed more quickly than labor supply. Labor supply will remain the largest constraint.
Spec’ing heat pumps is more complex than rooftop solar or fossil boilers. Lots and lots of variables go into spec’ing it right, and the consequences of being wrong are much more economically and thermally significant than for other upgrade measures.
Installing heat pumps is also much more complex, and information is harder to come by than for rooftop solar.
Fortunately, we have a large pool of skilled craftspeople who know how to spec and install heat pumps.
But: they are severely capacity-constrained. 50% of their time is spent on admin tasks that software can help fix: on-site visits, writing quotes, writing invoices, chasing customers to convert and chasing them to pay, and procurement – and collating the various data points required to spec the heat pump, some from open sources and some from the building owner directly.
And: only 25-35% of quotes written by heat pump installers convert into orders. Software can help with this, too.
Bonus: If you build the industry-standard software, a new generation of installers that gets groomed in the coming years can be powered by this software without being locked in to any single employer, and be their own employers. The term “business-in-a-box” applies.
Therefore, my thesis is that a B2B installer-centric design and workflow softwarefor heat pumps which helps with spec’ing and all the tedious overhead work and customer-centric and supplier-centric workflows in itself can free up 50% of installer capacity (i.e. double the current capacity) across Europe. And do this fast and at scale.
In other words: Scaling heat pumps to mega-scale is a design and workflow problem (because it requires skill and is highly varied).
There is precedent and a playbook to get inspired by from the US in rooftop solar – Aurora. And for heat pumps, this formula is even more relevant due to their complexity.
And that’s what Lun does for European heat pumps. No marketplace, no asset-heavy workforce – just amazing design + workflow software to enable installers.
Lun has assembled one of the very best climate-tech and software management teams in Europe. The next year could be fun, now that we stocked up with cash 🙂
P.S. some resources for my readers who love physics and who’d like to become heat pump geeks:
77% of freight transported in the EU is carried by trucks. That leads to about 6.2 million trucks circulating through the EU.
All of this truck freight directly links to gross domestic product. Less drivers, fewer road freight, less goods from the upstream supply chains arriving at their downstream destinations.
And no, increasing rail- and ocean freight do not solve this issue for us. The vast, vast majority of road freight is carried for less than 150 kilometers, which already accounts for the rail and ocean freight which carried goods further upstream.
The truck driver shortage is a big problem
In 2021 we were ±460’000 truck drivers short in Europe + Turkey. These unfilled jobs accounted for ca. 10% of the entire truck driver jobs in these markets.
The breakdown (ca.):
UK: 80’000
Poland: 80’000
Turkey: 80’000
Germany: 70’000
Romania: 70’000
All others: 100’000
And the trend was not our friend: Truck drivers dropped by 10% in UK from 2020 to 2021. 40% of open driver jobs are unfilled.
It’s not like fleet managers do not see this problem (they do !). For example, in UK in 2021, drivers wages increased by +18% (this is before the Fed began acknowledging the spiralling inflation), but they do apparently not increase enough to rebuild the dwindling truck driver supply.
… getting much worse very soon
In 2021, 230’000 drivers had drivers license attestations from non-EU countries, of which many are Ukrainian or Belarusian. According to IRU, on top of the shortage we saw at the end of 2021, an additional 170’000 truck drivers may have left the jobs due to the Ukraine war since beginning of 2022.
If you add it up, just based on this, we are probably short 640’000 truck drivers in Europe + Turkey today.
Now here’s where it gets spicy.
The average age of truck drivers in Europe and Turkey is close to 50 years. 25% of truck drivers are older than 55 years – almost 1 million truck drivers !.
If you add this up to the already existing gap, we are looking at a 1.5M+ truck driver gap in the coming years !
The #1 issue cited by folks who know the road freight industry are: working conditions !
Fixing working conditions for truck drivers can be broken down into four pillars:
Increase time at home (very interested in such solutions !)
Decrease time pressure
Improve loading/unloading conditions
Improve hygienic conditions
If you fix all four, you might be building a very big business.
Specifically, I am looking for founders who use technology to source and train drivers, provide best employment, maximize earnings for drivers and, in doing so, increase time at home (eg. remote solutions instead of autonomy solutions).
(What’s missing on this list is level 4/5 on-highway truck autonomy. Every automotive engineering expert I am speaking to tells me the same thing: not in the next 10+ years. Truck drivers will be here to stay is my bet)
The European Central Bank raised interest rates a few weeks ago again, bringing the main lending rate to 3% and further closing the gap to the Federal Reserve.
I hadn’t had much time to write about it earlier, but I am deeply concerned from a societal perspective. How will thousands of families in Europe (and USA) continue to afford owning homes? Or is there a relief on the horizon?
(I’ll use German numbers below – many mature markets will show directionally similar dynamics)
50% of households have a net income of €2’900 or less. 90% have €6’500 or less net available.
I was interested to analyze how much home households across the spectrum were able to afford in a low-interest rate environment (1% mortgage interest rates were commonly available until 2021 in Germany).
Then I wanted to understand how that affordability of home prices changes as interest rates increase.
For this analysis I used rules of thumb and mortgage assumptions commonly used in Europe:
2% initial annual repayment of principal (norm in Germany)
at least 60% of net income needed for non-mortgage living costbut max. €8’000 per month (banking rule of thumb in Germany)
using a Financing of 100% of home price; transaction cost paid from cash savings (used for simpler calculation; more cash = more home)
Here’s how it looks:
As you can see, the affordability drastically decreases with rising interest rates. Between a 1% mortgage and a 6% mortgage, the home price that a household can pay is reduced by 63%.
If you now overlay the distribution of household incomes, you can make a very reasonable assumption that 90% of homes were purchased for €1M or less, the other 10% were possibly purchased above that.
Here is where it gets (depressingly) interesting:
Flip the perspective, and ask yourself – how many households were able to afford a certain home price in a 1% environment (aka market size for that home category) and home many households in a 6% (adjusted market size for that home category):
For a home that is put on the market for €460k:
50% of households could afford it in a 1% interest environment
3% of households in a 6% environment (you read that right !)
That means you have a 47%-points smaller market size for a home marketed at €460k between 1% and 6% interest rate.
And this is where it becomes a societal issue:
What you see here is that the change in market size happens in the low-mid home categories, by as much as -50%. While in the homes that households with upper-end net incomes can and will afford, you have practically no change in market size (0.5%).
Now, the first conclusion one could draw here is that home in low-mid price brackets could crash in price, while upper-end homes could be more stable in price. That is a reasonable conclusion.
But the story doesn’t end here. Consider the cost of new construction, which is the equivalent of creating new supply in the market:
Unfortunately, construction cost keep escalating. This comes down to skilled labor shortage and availability (and prices) of materials. Regulation doesn’t make construction easier, but more complex. Thus, experts expect construction cost to keep rising.
Which means, we cannot expect new supply to flood the market and create relief in the form of widely available, cheaper homes – at least not immediately.
And this is the very concerning part:
A large part of households signed mortgages at ±1%
When they need to refinance, will their homes be in a price bracket that could come under price pressure, as the market size decreased by as much as 50%?
Even if that doesn’t happen, can they refinance the same debt (from the home price paid in 1% environment) with higher interests?
The silver lining that happened in 2008 in large parts of the US was that home prices came down. The difference is that there was a very steady stream of new home construction in the US available back then which put homes under pressure. I don’t see this happening in Europe this time around.
Therefore, my fear is that we are already in the process of not just keeping new generations from owning homes (that’s already happening), but that former owners will be forced to become renters as institutional buyers are the ones swooping up the low-mid price brackets of homes with available liquidity.
I dug deeper on how recycling and circularity of construction & demolition waste (CD&W) might or might not help fix the raw material shortage we are running into.
To understand this, I had to understand what waste is generated on construction sites, what the CD&W is made of, and where it goes.
(I focused this post on the US market; European and Australian markets will have different specifics but will be directionally same ballpark)
Construction & demolition waste increased by +340% compared to 1990. While – interestingly – municipal solid waste “only” icreased by +40%. We create disproportionately more construction trash than household trash.
The big 6 components that make up construction waste are:
Concrete
Asphalt pavement
Wood
Gypsum (from drywalls)
Bricks and clay
Metals (steel, copper, aluminum and others)
All other materials fall into the “any others” bucket. An example of “others” would be asphalt roof shingles.
Concrete makes up 70% of all construction waste. 22% are asphalt pavements and wood. Bricks, clay, gypsum, metals, and any others together make up 8%.
When it comes to “where does it all go”, brief time for definition:
Re-cycled means something is re-used in (broadly) the same way as before. For example, asphalt pavement re-used to build new asphalt pavement.
Down-cycled means something is not just dumped but used in an energetically lower yield than its prior use. For example, burning wooden doors as fuel.
Un-cycled means something is just dumped in a landfill. Here it’s not even used as fuel or as an aggregate to fill a hole for a new site.
To the numbers:
20% are re-cycled. The majority here is asphalt pavement. Some concrete is recycled. Some minor recycling of wood and metals.
56% are down-cycled. Vast majority is concrete (mostly re-used as aggregate). Some down-cycling of pavement, wood, gypsum, bricks and clay.
24% are un-cycled and just dumped. Again, a good share of this is concrete, but surprisingly much is wood. The majority of bricks, clay, gypsum and any others goes here. Reasons are diverse, but two of the bigger reasons are that separation is too costly or that adverse materials are contained.
What all these numbers tell me is that creating a stream of homogeneous supply of recycled construction materials is really difficult – and really key. The two biggest levers to improve our recycling rate are (1) concrete and (2) wood.
For concrete, someone has to fix the separation to be economically scalable.
For wood framing, I have seen approaches to remove nails – that is generally useful, but holes remain and since wood ages, the structural integrity decreases. That’s why it gets down-cycled.
For wooden door frames, hardwood floors, and similars: they have visual properties that lead to in-homogeneous supply at scale (every door looks a little different)
Who’s fixing construction waste at scale using technology? I.p. looking for robotics and software-led approaches
https://docs.google.com/spreadsheets/d/e/2PACX-1vQUe7iWa59eUAt0KoG0v5uDKsltPsZBjRsVAeFdXvnZs1IuGFdJztsO6TQWSZrz63Whuli50gvTLYFW/pubhtml
http://aecvc.com/
