Foundamental | Build Supply ⎟ Vertical Integration Is Back In The Techno-Industrial Era

Build Supply ⎟ Vertical Integration Is Back In The Techno-Industrial Era

September 7, 2024

We explore the shift from demand-driven aggregators to supply-focused vertical integration in real-world industries, and its impact on construction materials and the role emerging markets play in it.

Patric Hellermann

Build Supply ⎟ Vertical Integration Is Back In The Techno-Industrial Era

tl;dr

Planera raises $13.5M for collaborative visual planning tools in construction

Startups failing at 7x higher rate than in 2019, but it's not all bad news

Venture capital creating "leaky buckets" in pursuit of unicorns

AI funding boom repeating past VC mistakes

Vertical integration and supply ownership becoming crucial in techno-industrial era

Emerging markets driving innovation in B2B marketplaces and supply chain integration

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Planera raises $13.5M for collaborative visual planning tools in construction

We kicked off our discussion with the news of Planera's recent $13.5 million Series A funding round. This construction tech startup is tackling the complex world of project scheduling and planning. Their approach? A more visual, collaborative, and intuitive platform that aims to disrupt the dominance of traditional tools like Oracle's Primavera P6.

Planera's strategy isn't about specialization - it's quite the opposite. They're going for generalization, making scheduling tools more accessible and user-friendly. This is a big deal in an industry where scheduling experts often wield significant power due to their mastery of complex, established tools.

The construction industry has long relied on specialists who've spent years mastering tools like P6. These experts often become indispensable, creating a barrier to adopting new technologies. Planera is trying to break this cycle by offering a more intuitive, browser-based solution that could potentially democratize the scheduling process.

However, this approach isn't without challenges. The entrenched nature of existing tools and the power dynamics around scheduling expertise make it a tough market to crack. Despite loving the product and being impressed by the founder, our own team at Foundamental didn't end up investing, primarily due to the financial terms of the deal.

The key for Planera will likely be finding niches where the incumbent solutions are either outsourced, infrequently updated, or relatively basic. By proving their value in these areas, they could gradually build the credibility needed to challenge the status quo in larger market segments.

US startups failing at 7x higher rate than in 2019, but it's not all bad news

We then dove into a provocative tweet by Linas Beliūnas about the surge in startup failures. The rate at which US startups are going bust is now seven times higher than in 2019. But here's the kicker - this might not be as negative as it sounds.

There's been an explosion in the number of startups over the past decade. More startups mean more potential for failure. It's a natural part of the entrepreneurial ecosystem. The abundance of capital deployed into startups in 2020, 2021, and 2022 created a boom, and now we're seeing the inevitable correction.

The rise of AI and other tech tools is likely to accelerate this trend. These technologies are making it easier than ever to create a startup, leading to more attempts but also more failures. It's a double-edged sword - lower barriers to entry mean more innovation, but also more competition and potential for failure.

Venture capital creating "leaky buckets" in pursuit of unicorns

We used a metaphor of "leaky buckets" to describe what's been happening in the venture capital world. Imagine startups as buckets, and capital as water. During the zero interest rate policy environment since 2012-2013, there was so much capital (water) available that the venture community started creating buckets (startups) just to hold it.

Many of these buckets were leaky from the start. As more capital became available, especially in 2019-2021, investors looked for more buckets to put it in, often overlooking the holes. Now, as new capital inflows slow down, we're noticing just how leaky some of these buckets really are.

This approach has been particularly prevalent in the US market, where early-stage investing often involves backing multiple "horses" in the hope that one will emerge as a winner by Series B. It's a strategy that can work, but it also leads to higher failure rates and potentially less efficient capital allocation.

AI funding boom repeating past VC mistakes ?

Interestingly, we're seeing the same pattern repeat itself in the AI boom. There's been a flood of funding into AI startups over the past 18 months, often with little scrutiny. We're seeing numerous startups that are essentially wrappers around existing AI models getting substantial funding.

This reminds us of the 2013-2020 cycle, but compressed into a shorter timeframe. While this approach might lead to some spectacular successes, it's also likely to result in many failures and burned investor cash.

Vertical integration and supply ownership becoming crucial in techno-industrial era

We wrapped up by discussing a tweet from Not Boring's Packy McCormick about the shift from demand aggregation to supply ownership in the "techno-industrial era". This resonated strongly with our experiences at Foundamental.

In the consumer internet era, mastering distribution to billions of users was key. Companies like Facebook and Uber built empires by owning demand. But in the B2B and industrial spaces, we're seeing a different model emerge - one focused on owning and integrating supply.

This shift is particularly evident in emerging markets, where rapid economic growth is straining existing supply chains. Companies like InfraMarket and Zetwork are succeeding by integrating and upgrading underutilized manufacturing capacity, then marketing it to a network of customers with guaranteed outcomes.

In Western markets, the playbook looks a bit different. It might involve building cross-border models to tap into US or European demand, or investing in domestic supply with a focus on robotic efficiencies and reduced labor costs.

Emerging markets driving innovation in B2B marketplaces and supply chain integration

We've noticed that some of the most innovative B2B marketplace models are emerging from countries like India. These markets are growing so rapidly that traditional supply chains are struggling to keep up, creating opportunities for new, more integrated approaches.

The playbook often involves identifying underutilized manufacturing capacity, integrating it with software for quality control, and then marketing this capacity to a network of customers with guaranteed outcomes. As demand grows, these companies can scale up their supply integration, creating a virtuous cycle of growth and improved efficiency.

This model is particularly powerful in markets where existing supply chains may be unreliable or inefficient. By vertically integrating and providing guaranteed outcomes, these companies can build trust and capture market share rapidly.

In the West, we're seeing adaptations of this model, often focusing on cross-border opportunities or on building domestic supply with a focus on automation and efficiency. The key in both cases is owning and optimizing the supply side, rather than just aggregating demand.