Apr 11, 2023

Financial Operating Systems for SMB contractors in Europe

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.

News broke today that we doubled down on Graneet, the ERP and financial-OS for small construction contractors in Europe, in a new €8M round led by Point Nine. Foundamental had co-led Graneet’s seed in 2021. We bought a lot more equity in this round again.

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:

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:

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…

Sales CAC payback: Top percentile

LTV/CAC (fully loaded!): Top percentile

NRR: take this benchmark – Graneet sits in the GREAT category

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.