This week on Practical Nerds:

(05:19) Reference checks in construction-tech: unique challenges and approaches

(15:43) Blue-collar dynamics: impact on AEC startup due diligence

(24:50)Investor references: potential pitfalls and best practices

(32:08) Founder references: crucial insights for early-stage AEC startups

(42:55) Employee references: rare but valuable perspectives in construction-tech

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"In the construction tech space, we often need to cast a wider net when it comes to references. The industry's complexity means that a startup's solution might impact various parts of the value chain. For example, a marketplace for construction materials would need references from both suppliers and buyers. A project management tool might require input from general contractors, subcontractors, and project owners."

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The 3+1 types of references in your VC fundraising process

When it comes to VC fundraising, reference checks are a crucial part of the due diligence process. We typically see three main types of references, with a bonus fourth type that's less common but can be important in certain situations.

The first type is customer and supplier references. These are essential for understanding how a startup's product or service is perceived in the market. For construction tech startups, this can be more complex than in other industries. The construction value chain often involves multiple stakeholders, so we might need to speak with end-users, contractors, material suppliers, and even logistics providers to get a complete picture.

The second type is investor references. These are particularly relevant for startups that have raised money before. We reach out to existing investors to understand how the founders work with their backers, how they handle challenges, and what their strengths and weaknesses are. However, it's worth noting that these references can sometimes feel like sales pitches, so we often take them with a grain of salt.

The third type, and often the most insightful, is founder references. These can be either "front channel" (provided by the founders) or "back channel" (people we reach out to independently). We're looking for honest assessments of the founders' abilities, work ethic, and character. It's crucial for founders to be truthful about their past experiences and accomplishments, as any discrepancies can seriously damage trust.

The bonus fourth type is employee references. While very un-common, these should be used only in highly specific circumstances to provide valuable insights into how founders operate day-to-day and manage their teams. Keep in mind, this type of reference should always be done with your (the founders') explicit permission.

Construction tech startups require more unique references

In the construction tech space, we often need to cast a wider net when it comes to references. The industry's complexity means that a startup's solution might impact various parts of the value chain. For example, a marketplace for construction materials would need references from both suppliers and buyers. A project management tool might require input from general contractors, subcontractors, and project owners.

This breadth of stakeholders can actually be an advantage for startups. It allows them to demonstrate the wide-ranging impact of their solution and how it addresses pain points across the industry. However, it also means that founders need to be prepared to provide a diverse set of references and ensure that their product is delivering value at multiple points in the construction process.

Blue-collar nature of construction impacts reference process for VCs

One of the unique aspects of doing reference checks in the construction industry is the blue-collar nature of many of the contacts. This presents both challenges and opportunities for VCs conducting due diligence.

First, it's important to recognize that many of the most valuable references might not be sitting behind a desk from 9 to 5. They could be on job sites, in factories, or out making deliveries. This means that scheduling calls can be more challenging and less formal than in other industries. We often find ourselves making quick calls during breaks or after hours.

This informal nature can actually be a blessing in disguise. The feedback we get tends to be more raw and authentic. There's less chance of getting a carefully prepared, PR-approved statement. Instead, we hear directly from the people using the product or service in the field, which can provide invaluable insights.

Language barriers common in AEC customer references

Another unique challenge in the architecture, engineering, and construction (AEC) industry is the prevalence of language barriers. In many regions, the workforce is diverse, and English may not be the primary language for many workers.

This can create obstacles for VCs conducting reference checks. We often need to be flexible and creative in our approach. Sometimes this means having multilingual team members conduct the calls, or even using interpreters. It's crucial to ensure that we're getting accurate information and that nuances aren't lost in translation.

For founders, this underscores the importance of building strong relationships across their entire customer base, regardless of language barriers. It also highlights the value of having a diverse, multilingual team that can effectively communicate with all segments of the market.

Construction field professionals provide authentic, unscripted feedback

One of the most valuable aspects of conducting reference checks in the construction industry is the authenticity of the feedback we receive. Field professionals, whether they're foremen, site managers, or skilled tradespeople, tend to give unvarnished opinions about the products and services they use.

This straight-talking approach can be refreshing and incredibly informative. These professionals are focused on getting their jobs done efficiently and safely, so they're quick to point out both the strengths and weaknesses of any new technology or solution they're using.

For VCs, this means we can get a clear picture of how a startup's offering is performing in real-world conditions. We can learn about practical benefits, unexpected challenges, and potential areas for improvement. This kind of feedback is gold for both investors and founders, as it can guide future product development and market strategy.

Prospective customer references useful for pre-launch AEC startups

For very early-stage startups in the AEC space, particularly those that are pre-launch or in stealth mode, traditional customer references may not be available. In these cases, we often turn to prospective customer references.

This involves reaching out to potential customers in the target market to gauge their interest in the proposed solution. We might ask about current pain points, existing solutions they're using, and their openness to adopting new technologies.

While these references can't provide feedback on an actual product, they can offer valuable insights into market demand and potential adoption challenges. For founders, this process can also help in refining their value proposition and identifying key features that resonate with their target audience.

In the AEC industry, where change can sometimes be slow and resistance to new technologies high, these prospective customer references can be particularly important. They can help validate (or challenge) assumptions about market needs and readiness for innovation.

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Keywords: construction technology, AEC industry, customer references, investor due diligence, blue-collar workforce, stakeholder feedback, grid reconstruction, startup investment

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