What a start into 2022. Today news broke that our portfolio company Tül had completed its most recent growth round: $181M on an $800M post, with an exclusive club of investors in 8VC, Avenir, Coatue, Tiger Global, Lightrock and others.
We’ve all become so used to mega-rounds in the past year. So what’s special about this one?
A whole lot actually. Consider this:
We’re fortunate to be early investors not only in one, but in both of the category-defining ConTech marketplaces globally. Besides Tül, the other category-leader we backed early is Infra.Market.
So with our inside view as investor in both firms, we want to answer:
Where did Tül and Infra.Market start?
What is it that makes both companies so successful?
And where might both firms go from here?
Let’s start at the start 😊
We have had quite some success in our first fund with our early investment in Infra.Market (more on that here). Our partnership with Souvik and Aaditya had spoiled us to expect quite a lot of the next category-leading marketplace, since they had built Infra.Market to grow to $400M annualized GMV just a year ago.
Earlier in 2021, at about the same time Infra.Market was at its $400M run rate, we were fortunate that Enrique and the Tül team decided to partner with us. In that past year, we’ve been quite impressed with 20-30%+ month-on-month growth on quite a large scale already (Tül plans to be at $450M annualized GMV at the end of 2022, the same run-rate Infra.Market was early in 2021). All this while constantly increasing its already healthy margins.
So, on the surface, Tül’s stellar execution is so similar to Infra.Market’s it’s almost scary. But likening Tül to Infra.Market is also selling short Tül’s execution – and its own category-defining playbook.
💰 LatAm is a $120B+ construction materials market – roughly the same ballpark as India’s construction materials market
🏪 LatAm has a distribution structure hugely reliant on local hardware stores. 50% of the total sales are distributed by 600’000 hardware stores.
👪 The majority of those hardware stores are not owned by chains – they are in the hands of Moms and Pops. They are SMBs.
↔️ Space-constraint is a real issue for these small hardware stores. They purchase materials on inventory, store the cement bags and equipment anywhere they can find space – including their roofs ! – and sell it off. When they run out of storage space, they cannot purchase and sell more until they have made more room. Demand is often bigger than storage space.
💳 The other bottleneck for hardware stores has been the access to working capital financing. Even when storage space is sufficient, small Mom-and-Pop stores have to purchase inventory and finance the purchase out of their own pockets. Traditional financiers in LatAm have found it challenging to extend credit to small SMBs in the construction space.
🚛 Logistics cost routinely account for ca. 20% of the purchasing cost of construction materials in LatAm. This is less driven by unreliable logistics (some of it is), but more so by a low-concentration of purchasing power und low bundling of volumes.
Hardware stores are the most efficient last-mile delivery channel across LatAm. Stores were bottlenecked by low purchasing power, no credit access, and running out of storage space. Materials suppliers were unable to serve the 600’000 hardware stores efficiently. A tech-enabled mega-distributor can plug the hole between supply and retail.
And we quite loved that thesis, because we are convinced that construction SMBs are sleeping superpowers.
That’s why when we learnt that Tül started as the digital-first mega-distributor and enabler for LatAm’s hardware stores, we fell in love within minutes of our first meeting with Enrique.
🪨 Infra.Market’s original playbook for much of its first 4 years was to be THE service-rich one-stop shop for big general contractors to purchase their bulk materials, such as cement, aggregates (the little rocks that nothing works without), flyash and concrete. Not more. At the roots, that was that.
😇 But while Infra.Market was laser-focused in their customer segments and categories, it excelled with execution. Customers have always received a worry-free package – order with Infra.Market, get it delivered when you need it, where you need it, on time, on budget and on quality. No hassle, no errors.
🏬 India has a healthy supply of smaller and medium-sized suppliers of materials. Lots of them serve their local communities, or selected customers. They tend to go undiscovered by large parts of the rest of the country, let alone big general contractors who don’t have the time to search the country for unbranded suppliers. Infra.Market gave those smaller suppliers a seat at the table, allowing them to be discovered by Infra.Market and thus serve (indirectly) into big clients.
Within the context of any emerging market, that is a powerful proposition. It turned out to be what the Indian market was starved for, too.
India’s construction market was fueled by big projects from infrastructure and housing. A handful of large general contractors construct those projects, and we know how to sell to them efficiently. But those contractors are crunched for time and margins. Undiscovered suppliers produce same or better quality as branded manufacturers, but due to lower fixed cost, can offer their goods at more competitive prices. A digital-first one-stop shop can be the platform to connect contractors and suppliers, if it is willing to guarantee delivery and quality.
Hmm. Does that seem like the same playbook to you? Let’s see…
Stating the obvious: Infra.Market and Tül are both construction material fulfilment platforms. However, they initially went after slightly different playbooks.
Beachhead customers: Infra.Market was initially focussing on large infrastructure clients, Tül tailored their service offering to the needs of small hardware shops.
Product categories: Given the focus on different customer groups, the number of SKUs was widely different: Infra.Market’s initial offering comprised fewer than 10 SKUs compared to the 1000s of SKUs Tül had in their first catalogue.
Service offering: The similarities are strikingly obvious. Instead of focusing on a simple, service-light marketplace, both companies elected to pursue a service-rich model, in which they take supply-chains (eg. warehousing, logistics) under their control. Thereby driving the availability and quality of material fulfilment to unprecedented levels.
So in essence, while the no-worry no-hassle experience for customers was similar from the get-go, Tül and Infra.Market started in very different places of their markets, and with different models.
But that was just the start.
As you can see, the early theses of both firms were dominated by their local market contexts. India and LatAm shared some similarities, but also offered different starting points to a degree. Both Tül and Infra.Market were excellent in picking playbooks that allowed them to get adopted and loved by customers fast.
Now, does that mean they will stick to their initial playbooks? Very unlikely. We see a convergence of playbooks. As a matter of fact, Infra.Market has already implemented a direct-to-retailer strategy in addition to their core offering.
But that does not mean they will not evolve their playbooks. In our view, the stories are just starting.
Our thesis is that the early playbooks will converge into a holistic model that looks much more alike.
In our observations, both Infra.Market and Tül (and soon a few others) will evolve to share the following characteristics:
In our view, the stories are just starting. We see a convergence of playbooks. Ultimately playbooks of the leading construction marketplaces will converge to share the above traits.
Now, keep in mind: These playbook elements are not what a construction marketplaces looks like when it starts. That’s the whole point of our learning from the past 2 years being partners to Infra.Market and Tül. These elements are what we believe the category-defining construction marketplaces can evolve into.
And we believe that no matter where you started out – in a B2R model like Tül or originally in a B2B model like Infra.Market – ultimately playbooks of the leading construction marketplaces will converge to share the above traits.
Should be a fun journey for everyone involved 🚀
We have learnt that so much about defining a category in ConstructionTech lies in the execution. So ultimately, time (and execution) will tell.
That said, we are closely following a few firms in other markets that we are quite excited about, and that started with their own playbooks:
In the meantime, all we have left to say is an immense thank you to Enrique, Juan Carlos, Nicolas and the Tül team, as well as Aaditya, Souvik and the Infra.Market team for trusting us to be a great partner early in their journeys. We learnt a lot, and are proud to call ourselves your partners. Thank you !
If you are building the next category-defining construction marketplace – or a HORIZONTAL marketplace that happens to also serve construction – we’d love to talk 💌 Join the global ConTech marketplace club, and let’s build your category-leader in this elite group of founders together ! Write us.
Asia-Pacific and Africa: Shub
Europe and LatAm: Patric
North America and LatAm: Adam
BNPL: These 4 letters have dominated tech news the past few months. Headline after headline, funding round after funding round.
The “buy now pay later” phenomenon and craze has taken the tech industry by storm giving consumers the flexibility to break purchases into equal installments and buy products interest free. We have spent the last couple of months evaluating whether this ecommerce phenomena would be applicable to the construction world, but before doing so, we needed to understand the foundations of what has made BNPL so successful.
The rush of optimism and interest in companies such as Klarna, Afterpay, and Affirm that offer “buy now, pay later” has accelerated during the pandemic. These players are able to feed off the data acquired so that they can better assess who is able to pay back a loan and get business from customers that were previously excluded from using credit cards, but perhaps were no less credit-worthy.
A market hack, we’d say.
BNPL isn’t entirely risk-free since it’s still a line of credit that can influence credit scores and trigger debt collectors in some cases. Nevertheless, BNPL accounted for 2.1% of global e-commerce in 2021.
With e-commerce continuing to grow, consumer expectations have radically changed, and ´Buy Now Pay Later´ has been one of the pivotal solutions to respond to that change, by seamlessly integrating as a checkout option, and offering consumers no interest, and sometimes, no late fees. Adoption is booming, particularly among Gen Z and Millenials, and merchants love it, as a means to boost sales, improve conversion at checkout and even save on interchange fees.
In the years BNPL has become a Trojan horse for taking on payments as a whole. While the beginnings of Klarna were coined by the unbundling of services, today the Sweden-based quadricorn runs the full checkout facility for their partners, not just as a credit plugin, proving that BNPL players are key contenders in joining the billion dollar ranks in the fintech ecosystem.
At least VCs seem to think so: funding in BNPL has grown from just $110M in 2016 to $4b+ in 2021 YTD. There are now 170+ startups competing in the BNPL space, with new players being born every month.
And the craze does not seem to have an ending:
But the journey doesn’t stop there…
So we’ll get to the construction angle. But, before that, we need to dive into B2B and why this model sets the stage for any type of “buy now pay later” in construction.
Where do B2B models fall into the grand scheme of BNPL and holistic repayment options for merchants and their customers? Well…
Business buyers want the same digital experience they get as consumers and business merchants are looking for every opportunity to make their customer relationships stickier, increase average order size, and capture a larger share of wallet. The market is grossly underserved, with startups like Berlin-based Billie, recently raising an €86M Series C round, tapping into this huge opportunity.
Arguably more important is that small business buyers need access to affordable credit and financing options. Financing has always been a challenge for small and medium-sized businesses (SMBs), and COVID has only exacerbated the problem (interestingly, this makes up over 80% of the construction industry)!
Until COVID, a surprising percentage of B2B commerce still took place partially or entirely via traditional channels such as in-person sales, assisted selling, distributors, and phone. In fact, approximately 80% of B2B payments continue to be made via check. And 40% of businesses report that online purchases are more complicated to make than traditional purchases.
The problem wouldn’t be as exciting if there weren’t challenges to overcome. B2B BNPL will likely take some time before it catches up to the widespread popularity B2C BNPL has achieved, namely because:
Now, let’s get to the nitty gritty…. 😉
Even less talked about is how can the construction industry take advantage of BNPL or similar or similar business models to solve major pain points plaguing the industry.
Hello Let’s set the stage for why construction would benefit (and is patiently waiting) for a BNPL-type solution.
What is even going on here?
Wow! It’s surprising that this still happens in 2021.
The construction industry is dominated by progress payments, which are payments paid out based on the percentage of work that is complete. Contractors and subcontractors will typically request progress payment via a payment application in order to request payment from the hiring party and are submitted according to the contract timeline.
The benefits here are that owners and general contractors can review the work of subcontractors before it’s complete and resolve disputes in a timely fashion. The subcontractors, who in many cases are cash flow-constrained, can receive payments before the project is completed, making cash flow easier to predict and control and they can avoid taking on unnecessary debt.
The downside is the time needed to put together the application at multiple points during the project. There can also be disputes between the general contractor and subcontractors around how much of the project has actually been completed, which could cause unnecessary delays or filing of liens. BNPL can further facilitate the movement of payments between construction parties.
What has been done with regards to BNPL in construction?
But the industry is not completely unfamiliar with BNPL. In Europe, for instance, BNPL is informally adopted by construction SMBs mostly twice per year – right before summer vacations start and right before Christmas starts. Convenient, you may think… But: the reason was not that the SMB went on holiday, rather that their clients did so and the contractors found out that over that period they would tend to wait 30-45 days longer for their invoice payments AND had 2-3x higher rate of missing the invoice payment altogether.
Moreover, with vertically specialised BNPL moving in other markets, we have seen the emerging of solutions penetrating our world from the consumer-side. Wisestack, who has raised $45 million, has brought buy now pay later to in-person home services (think HVAC repairs and plumbing). The company even goes head on with the fragmented nature of the industry by accessing the professional customer base of vertical SaaS providers, such as Jobber.
What should be done?
So where do we go from here? We see the value of productizing BNPL in construction payment flows so as to increase its continuous vs. cyclical use, and facilitate its entry into complex B2B workflows. As validators rather than predictors, we want to pool our insights from what we are currently observing in the market:
BNPL may not be the silver bullet that solves all the payments delays and cash flow constraints that plague the industry, but it can be suitable in many cases allowing subcontractors and suppliers to be paid in a timely fashion and for work to proceed as anticipated, further enabling an on time and on budget project delivery.
Time will tell to what extent the industry will adopt this solution. It may be targeted at specific business models (i.e. home improvement or equipment marketplaces) or see further penetration into more traditional payment workflows. We strongly hope that the B2B BNPL wave doesn’t miss out on the multi-trillion dollar opportunity in construction. If anything, it should be one of the first adopters.
We were asked many times since we started Foundamental 2.5 years ago:
What is the difference between ConstructionTech and PropTech?
What sounds like a straightforward question has brought even veteran industry insiders to the verge of despair and hair-loss. Interestingly, by far the largest group of folks asking us are asset owners and investors. By my – totally
scientific un-scientific – estimate, 90%+ of folks asking us are large institutional investors and real estate investors. It points to an increasing interest into ConstructionTech we have been observing lately.
On the other hand, we spoke to thousands of founders in 2020, and most of them quite clearly expressed the distinctive differences. Many of these founders don’t even come from a real estate or construction background – and yet seem to have a clear view of the differences.
However, founders told us they get the same question from their investors, who can be generalist venture capital firms looking at many different sectors.
So, we thought, let’s share the distinctive features how we see them – and put this question to bed once and for all.
Let’s kick it off with textbook definitions. According to the Cambridge Dictionary:
“Property Management is the management of land and buildings as a business, including keeping buildings in good condition and renting property”
“Construction is the work of building or making [or renovating] something, especially buildings, bridges, etc.”
In other words, construction is about creating and selling assets from scratch, while property management is about utilizing and re-selling existing assets.
Makes abstract sense, so far. Still, doesn’t help much when you’re an investor or a founder. Let’s try another way.
Both sectors have in common that they transact big immobile assets. That means, both require mastery of the financial side, especially topics such as creating liquidity through loans, escrows, working capital management and insuring risks.
The differences lie elsewhere.
To master ConTech, you have to master supply chains. To master PropTech, you have to master utilization.
ConTech deals with multiple uncontrolled and dynamic environments, while PropTech almost always deals with one controlled and static environment. That’s because PropTech addresses assets that already exist, and as such, knows the parameters of the asset and its surroundings. Property management supply chains are often simpler and linear.
On the other hand, construction supply chains have to account for a wide range of factors not in control of the owner, eg. weather, traffic and workforce, as well as inter-dependencies (if my plumbing materials don’t arrive on time I must reschedule my tile works).
Without claiming to be exhaustive: In PropTech, technology helps to increase asset utilization, decrease building operations cost and re-sell an asset at better financial terms.
We see most PropTech address the same four levers:
In ConTech, the value of technology plays out differently. Tech serves to create control over supply chains and fulfillment. This begins how we engineer and design the asset and which materials we use, as these decisions can have major impact at how supply and logistics can be optimized. That’s why ConTech attacks a wide range of levers to create value:
To master ConTech, you have to master supply chains. To master PropTech, you have to master utilization.
Let’s also talk about the addressable market.
Almost all PropTech addresses two asset classes: residential and commercial buildings.
ConTech is applicable to a larger scope of asset classes. While a large share of companies we see (and like) attack the residential class, and many go after the commercial class, we also see various ConTech firms applicable to infrastructure assets, and some to industrial assets.
Some technologies in construction are vertical and asset-specific. An example of this is auto-generative design, where firms such as PillarPlus auto-optimize MEP for residential assets, other firms such as Continuum Industries auto-optimize waylaying and routing for infrastructure assets such as railways.
And there are examples of construction technologies that can be deployed horizontally across all asset classes, eg. reality capturing such as HoloBuilder.
That being said, most technologies we see (and like) are asset-specific and have a clear vertical focus.
So what’s the point of having more asset classes to serve, if most ventures are vertical and asset-class specific? The point is that the larger market that construction addresses is an advantage for investors.
First, because many of the learnings are transferrable from venture to venture across asset classes.
For example, we learnt from ventures in the high-rise segment that licenses and subscriptions are not well liked by many construction customers, due to project budgeting. This learning actually transfers into the infrastructure and residential segments as well. For us, being an investor in ConTech, seeing what happens in all construction asset classes is a huge advantage to identify patterns across asset classes.
This asset class diversification provides resilience to our portfolio, through optionality and adaptability. A great example we learnt from one of our Asian portfolio firms: Before COVID, the luxury condo build-to-sell space in several Asian economies was booming. The way it worked until COVID was that developers would build high-income condos “on inventory” as there was enough demand pipeline to sell them off at any time during the development. A decent share of our portfolio firm’s revenues came from these high-price development projects.
Since COVID, the infrastructure segment as well as lower-income housing segment are still booming – while the luxury condo segment in that market has yet to rebound. This has stretched the balance sheet – and more so, cash flows – of high-income condo developers, as they sit on inventory against a disrupted market demand in these Asian economies. The average Days Sales Outstanding (DSO) in this asset class increased from 50 days pre-COVID to 120+ days since COVID.
As a reaction, our portfolio firm stopped serving high-income developers since then, and focuses on the other asset classes – infrastructure and lower-income residential. Result: Our firm is at 700% revenue compared to February 2020 with an average DSO of 50 days and less.
We obviously use this learning to use our options in construction tech, picking firms that serve high growth asset classes.
The point: Construction with its various asset classes allows ventures – and venture investors – for optionality and adaptability. As a result, ConTech portfolios are more resilient and less dependent on market disruptions (such as commercial office buildings or commercial retail assets coming under pressure since COVID).
For us, being an investor in ConTech, seeing what happens in all construction asset classes is a huge advantage to identify patterns across asset classes.
Secondly, PropTech is often seen as a very large addressable market – for good reasons. The global market size of professionally-invested global real estate eclipsed $9 trillion in 2019. Mind you, this is the value of the assets though – not the value of servicing the assets. Except for brokerage solution, almost all PropTech is about servicing the asset. Therefore, in reality, the addressable market size for most PropTech is smaller. Let’s assume 20% of the value of a real estate asset goes into yearly maintenance – that gives a real estate servicing market size of $2 trillion. Still a huge market, of course. (We‘ll admit, this does not account for those assets that had not been transacted in 2019 🤓😊)
Let’s compare: The global construction market size is somewhere between $10 and 12 trillion, and 10% of global GDP. And because almost all of construction value is done as-a-service for the investor of the asset, the total construction market size is practically equal to what can be serviced (i.e. $10-12 trillion annually).
So, the $10 trillion construction market that ConTech companies is even larger than the market that most PropTech’s play in (except for brokerage).
If you are excited about PropTech (rightly so!), you should be even more excited about ConTech (hell yeah!).
For commercial asset investors/owners: Many face a disruptive market shakeup since COVID. By focusing on PropTech, commercial asset owners can optimize top-line and operating cost of a disrupted asset class, be it commercial retail, offices or tourism assets. You have to wonder if this is equal to riding a dead horse – only time will tell, no one can know for sure. But that’s the point, isn’t it? Because owners of commercial assets cannot know if they are riding a dead horse, seeking diversification and new avenues to future growth makes sense. When focusing on ConTech, they gain access to entirely new business.
For residential asset investors/owners: COVID has demonstrated how resilient the residential asset class is in major economies around the globe. The lower-to-mid income residential asset class is thriving. According to the US Census Bureau the number of building permits in April 2021 has increased by 60.9% compared to April 2019. We speak regularly with the CEOs of major asset owners and construction firms – almost uniformly they believe that the lower to mid market residential construction will be a growth driver of economies for the 2020s decade, alongside infrastructure. In the last months, many of them have taken bold strategic decisions to focus more and more on the low-to-mid income residential asset class.
There is a paradox for large residential developers though: While the residential asset class is booming, existing residential portfolios are not on par with economic and climate expectations. Existing portfolios have fallen behind. Large developers that are public or go public might come under shareholder pressure to differentiate more clearly. We observe multiple publicly-listed developers on the verge of upgrading to the highest stock indexes in their countries – which comes with more shareholder scrutiny and questions such as “how do you differentiate from your competitors” and “show me your carbon footprint”. Shareholders are asking for differentiation and new efficiency potentials.
While the servicing of homes has been addressed and optimized for years (PropTech), the design, construction and renovation of residential assets is where we still find massive opportunities to drive throughput and growth (ConTech). Residential asset owners can gain access to a wide range of ConTech opportunities, and thus drive the next level of productivity gains and strategic differentiation.
For infrastructure and industrial asset investors/owners: Existing infrastructure assets can see major ROI from overhauls and life-extension maintenance. That lever is not addressed by PropTechs, but by ConTechs. And then, 1% of GDP goes into building new infrastructure such as highways, tunnels and bridges every year (going all the way up to 5% in China). But almost all of them suffer cost overruns, on average 70% in mature economies. If you are an infrastructure investor with a portfolio of projects, gaining access to ConTech and becoming able to evaluate which technologies are winners, allows you to consider a rollout of the winning technologies across your infrastructure portfolio to reduce cost volatility and increase project transparency and coordination. More cash, less risk across your portfolio.
For building components/materials producers and distributors: In our conversations with the top execs of many of these firms – from New Zealand over Indonesia, Germany, UK to North America – we were impressed how several of them use ConTech as a new customer group. One good example is a global building components manufacturer using venture capital as a sales channel to identify the highest-growth prefab firms across the globe, and get the fast-lane access for sales and partnerships of their products into this high-growth customer segment.
Sales channel for core business: Asset investors/owners use ConTech to gain access to high-growth customers and partners to distribute your core products, i.p. building components and building materials. Examples: bathroom supplies, tiles, windows, insulation, cement/concrete/aggregates, steel and many more.
Productivity gains: You can roll-out ConTech massively over your portfolio of construction projects. Works best if you are the investor/owner and can mandate the application of new technologies, eg. via your tender/RFQ. Examples: reality capturing/digital twin technology, workflow management software, computer vision on site, enhanced wireless networks for sensor integration.
Investor relations: You become able to communicate to shareholders your efforts to strategically differentiate vs. competitors and to reduce your carbon footprint by investing in ConTech and partnering with the very best ConTech firms in your markets. Use the access you gain to stimulate your internal innovation efforts with the impulses you gain from external ConTech.
New business opportunities: This is the longest term game you can play, but also offering the highest rewards. Use your ConTech access to track which of the emerging markets and business segments will be here to stay – what are the growth rates, what are the margins, what playbooks and technologies are winning. This requires deep access “behind the scenes” and is the most difficult to pull off for incumbents on their own. When you succeed, you gain the ability to drive M&A and inorganic growth highly effectively.
We saved the best for last. Our research and own calculations show that the carbon emissions reduction potential from construction is 10x higher on a per-year per-building basis than when we optimize the existing building stock. Here’s why.
(Before we explain – let’s be crystal-clear: Both new construction and existing buildings will have to massively reduce their carbon footprint to reach the world’s carbon emissions targets. It’s not an OR, it’s an AND.)
Both existing buildings and new construction are big contributors to the world’s carbon emissions (UN, EIA and Rocky Mountain Institute numbers from 2017 and 2018):
What this tells us is that both construction AND existing buildings offer us massive levers to decarbonate the world. And that’s true. But not quite the whole picture.
Consider these numbers for the life time of a prototypical multi-family home:
Now, you might say: “see, the carbon reduction we gain from optimizing building operations are much higher than from construction.”
Over decades, yes. But context helps. Don’t rush to your conclusion just yet. Consider this:
The main difference between construction and existing properties is that construction unfolds over a short time period (say, on average, 2 years construction time) while existing buildings run over long time period (eg. 50 years). Also, existing buildings require major overhauls and renovations (eg. every 25 years).
Now, if you break down the above numbers on a per-year basis, the picture changes:
That is a 10x difference between the emissions from construction vs. the emissions from building operation for the same building.
Also, the construction emissions can be reduced immediately, over the first 1-2 years, while the emissions from building operations unfold over many years.
The point: Construction is the 10x bigger lever to reduce carbon emissions than building operations. ConTech addresses the big instant CO2 lever while PropTech is a lever that unfolds gradually and more slowly.
Finally, consider this. If you master ConTech, you don’t just optimize the construction phase, but the later operations phase as well. By engineering our buildings differently, we also influence the operations during the asset’s whole life cycle. Better insulation during construction means lower operating cost and lower emissions. ConTech has a positive double-effect on both the construction phase and the property management phase.
This doesn’t work the other way round: If you master PropTech, you only optimize the next years of operations, but you won’t optimize construction of your next buildings.
For all of the above reasons, we observe that ConTech is beginning to inflect.
While PropTech has become a massive industry over the past years – and rightly so – we believe ConTech offers exciting growth rates, business opportunities and return potential for asset owners, investors and founders.
We believe that ConTech – alongside HealthTech, FoodTech and a few other sectors – will be THE high-growth sector for the 2020s decade.
Check out my colleague Marie’s article on the data why we think ConTech will inflect 5x-6x in the next 3 years.
And that’s why we feel: ConTech > PropTech in 2021.
Keep in mind: we’re unashamedly biased. We’re just really 🐂 -ish on ConTech.
If you feel like us: We would love to hear from you. 💌
Today we all learnt that a major ConstructionTech firm is allegedly about to close shop. It started with much fanfare and a high-profile management team in 2015. $1.6 billion in funding later, we all ask ourselves where we stand in ConstructionTech.
If you’re like me, an eternal optimist – every ambitious founding team that trailblazes an industry allows others in the industry to learn. Like, big time.
Make yourself comfy, get a refreshing beverage. Here’s why an epic ending initiates the boost sequence for the ConTech rocket.
Let’s go way back. As far back as ancient (and mythological) Greece 🇬🇷. Anybody remember the story of Icarus? Here’s the gist:
Daedalus fashioned two pairs of wings out of wax and feathers for himself and his son. Daedalus tried his wings first, but before trying to escape the island, he warned his son not to fly too close to the sun, nor too close to the sea, but to follow his path of flight. Overcome by the giddiness that flying lent him, Icarus soared into the sky, but in the process, he came too close to the sun, which due to the heat melted the wax. Icarus kept flapping his wings but soon realized that he had no feathers left and that he was only flapping his featherless arms, and so Icarus fell into the sea and drowned.Bibliotheca of Pseudo-Apollodorus, first century BC
In a nutshell: Someone who has more experience in the field gives you solid advice. You think you know better (complacency) and are infallible (hubris). What was supposed to be a nice weekend trip over the Greek coastline, turned out to be your fall to death. Whoopsies, I guess.
Here we’ll leave ancient Greece for a moment (we’ll come back to it later). Let’s fast-forward to the year 2020 and look at the conditions in ConTech.
Were they maybe caught in a bad situation? Bad timing?
Here are the facts. 2020 brought major milestones for the real estate technology sector:
2020 had also shed some light that ConTech is breaking out. There is a strong recurring pattern we can apply to the real estate tech sector: it takes 5-7 years for a sector to go from $5B to $50B of venture capital (VC) funding. There is usually accelerating growth in this pattern, as the step-up from $10B to $50B only takes 2-4 years while the step-up from $5B to $10B takes the other 2-4 years within that time frame. That pattern is extremely reliable:
ConTech just shattered the $10B barrier in early 2021. In other words: the conditions are near-perfect for all ConTech founders. Even more so, they are perfect for companies with media attention and capital to accelerate their growth.
From here, it’s safe to assume ConTech is breaking out. It will be a vertical ride for technology in construction in the next 3 years.
With Foundamental, we invest in early-stage technology ventures in construction. We do so on a global scale (and are the only ones doing so). 40% of our venture capital is invested in Asia, the rest across North America + Europe.
What we realized across all those markets is that 3 models in particular are getting commercial traction and fundraising traction:
Time-out, Mr. Author. If tech-enabled general contractors are breaking out, and all market conditions are near-perfect for ConTech ventures and scale-ups. What went wrong here?
I’m glad you asked. 👇
When we started Foundamental 3 years ago, we had done our diligence. We had done almost one-hundred discussions with operators from the industry. It took us close to one year to build our thesis about the sector.
And now, 3 years later, I am writing these lines fully conscious how little of the sector I really know. Construction is a humbling business to be in. And it reminds me every day of it.
Everybody knows construction operates under a low degree of standardization (to date). As a result, workflows tend to be roughly similar but can be very different in detail. So far so good.
But consider this: Construction projects are the result of mechanically integrating millions of parts into a final product. In regard to its number of mechanical parts, it is similar to aerospace and automotive.
Every moving part – every screw, every roof shingle, every faucet – might eventually be a single point of failure during the construction process, holding up the entire project.
That means, an insane amount of institutionalized knowledge is required to master a complex construction project. The more variables you try to master, the more institutionalized knowledge it demands.
That’s the exact point where aerospace and automotive mastered their respective complexities. They standardized. They reduced variants. And then they built the same part a million times, over decades, and retained those workers and engineers to institutionalize their knowledge.
Construction, on the other hand, has not done that as an industry (yet). For that reason, construction requires a ton of detailed operator knowledge. It is the most humbling of all businesses I have encountered in my life to date.
Here’s what we learnt about tech-enabled general contractors (“Digital GCs”). There’s really a whole new generation in the market, which was built on fundamentally different assumptions in the last 1.5 years.
The Digital GC 1.0 model is trying to handle construction’s complexity and single points of failure by physically integrating the assets and workflows. The thesis is that thereby these 1.0 players gain a higher degree of control over the boundaries and interdependencies, thus – so the theory – ultimately reducing complexity. More control = more standardization = less parts = less complexity.
There are 3 issues we observe with this assumption in the 1.0 model:
(i) the physical vertical integration introduces new unwanted complexity.
(ii) it creates static supply chains, less fit to deal with flexibility requirements in construction (think about this: if you build a few big a** factories across the country, you want them to be fully utilized. However, if those factories only serve you, then it’s up to you to fill those factories with demand. What if demand changes? What if timelines change?). As a result, the standardization you dreamt of never comes to pass, because you are fighting a constant struggle to keep your factories utilized and you take orders for completely different buildings. Paradoxically, the 1.0 model wants standardization but is adversely incentivized to accept demand that harms standardization.
(iii) it accounts for institutionaliz-ing knowledge – but it does not account for institutionaliz-ed knowledge (meaning: the 1.0 model thought they could learn construction fast and retain that know-how. What the 1.0 model forgets is that there is decades of experience in the industry that you could more easily partner with already on day 1).
We have seen the 2.0 (multi-family focus) and 2.1 (single-family focus) models emerge since mid-2019. We have an inside view in five 2.0/2.1 firms in North America, Europe and Asia, and we are keen to add even more to our portfolio.
We learnt that the 2.0 and 2.1 models are built on assumptions that fit the construction fundamentals much better with a venture approach!
Curiously, the 1.0 model was initially hailed to bring “automotive manufacturing to construction”. If you ask us, the asset-lite nature of the 2.0/2.1 models is much closer to how the automotive industry operates. A car OEM prescribes a certain model (eg. a Toyota Corolla), what parts are required to build that model (eg. airbags, electrics components), goes out and qualifies a group of Tier-1/-2 suppliers and purchases capacity from those suppliers against a guaranteed volume. But the OEM does not manufacture those parts. They assemble them, brand them, distribute them, and organize the supply chain. This, in essence, is the new Digital GC 2.0/2.1 model. This is what the 1.0 model taught us to do in construction. Don’t own the factory – own the platform.
Prefer to see the numbers? I’ll give you numbers – here is how much funding went into 1.0 (asset-heavy) vs. 2.0/2.1 (asset-lite) Digital GC models:
We see 1.0 models in any industry ending prematurely all the time, and showing subsequent founders and investors what they could learn from it.
Today, ordering groceries online has become a multi-billion $ business, driven by Unicorns such as Instacart (founded 2012; a company that my co-GP Adam Zobler had invested in) or Flipkart (founded 2007), and recently fueled by ecommerce giants such as Amazon. COVID has made grocery deliveries so normal for us, I bet you can’t even remember a time where online grocery shopping was not around. Today, in hindsight, this innovation opportunity looks like a safe bet, doesn’t it?
A car OEM prescribes a certain model (eg. a Toyota Corolla), what parts they want to build that model (eg. the airbags, electrics components), goes out and qualifies a group of Tier-1/-2 suppliers, and purchases capacity from those suppliers against a guaranteed volume. But the OEM does not manufacture those parts. They assemble them, brand them, distribute them, and organize the supply chain. This, in essence, is the new Digital GC 2.0/2.1 model. This is what the 1.0 model fail taught us to do in construction. Don’t own the factory – own the platform.
Few remember that Webvan had been trying to innovate online grocery shopping + delivery already in 2001. This was the 1.0 model of online grocery shopping. Webvan owned the fleets, owned the storage facilities and distribution centers. The result: Webvan went bust and burnt $830 million in the process. What Webvan got wrong was that in 2001 they bet on multiple major assumptions they all had to get right at the same time: consumers shopping more online, consumers trusting the quality of perishable goods without seeing them first hand, intra-city delivery networks emerging, route optimization software emerging, and retail competitors reacting slowly.
Instacart and Flipkart were able to be successful just a few years later because delivery networks were beginning to emerge then, and because they built a 2.0 model that utilized an asset-lite infrastructure around the gig economy. The 2.0 grocery shopping model learnt from Webvan to be the platform that prescribes and coordinates how their customers get their groceries – and not do all moving parts of the model themselves.
In summary, the 1.0 model believed that it could redefine an entire high-complexity industry by owning and operating as much as possible themselves. A lot of the 1.0 core thesis was about automation and procurement volumes. But to get there, the 1.0 model creates new problems: Static supply chains and lack of institutionaliz-ed knowledge contributed to their fall from the sky before they reached the sun.
The 2.0/2.1 models like Juno, 011h, Welcome and Brick & Bolt are built on different levers. A Digital GC is not about automating as much as possible, or controlling every aspect of the execution out of one hand. A Digital GC 2.0/2.1 is about:
The last 4-5 years in ConTech taught us that we as ConTech founders and investors should be grateful for anyone’s trailblazing and ambition. We can build an entire generation of 2.0/2.1 ConTech pioneers on the back of the 1.0 model’s earned learnings. And those learnings are the fuel to ignite ConTech’s rocket booster.
We are four months into 2021. As the year-end holidays are approaching in big steps – time to do the first review, isn’t it.
While absolutely nothing about 2020 and the start into 2021 has been normal (COVID, anyone?), the last few months gave us many reasons to be optimistic about 2021 and beyond for PropertyTech (PropTech) and ConstructionTech (ConTech). We realized that 2020 brought major milestones for the real estate technology sector:
2020 had also shed some light on where PropTech and ConTech stand in the bigger picture compared to other sectors. There is a strong recurring pattern we can apply to the real estate tech sector: it takes 5-7 years for a sector to go from $5B to $50B of venture capital (VC) funding. There is usually accelerating growth in this pattern, as the step-up from $10B to $50B only takes 2-4 years while the step-up from $5B to $10B takes the other 2-4 years within that time frame. That pattern is extremely reliable:
PropTech had reached the $50B mark at the end of 2020. ConTech is probably going to shatter the $10B barrier in the next few weeks. From here, it might be a vertical ride for both real estate tech sectors.
And then, let’s also not forget what COVID meant for ConTech and PropTech in 2020. COVID created scenarios in multiple global markets in which commercial properties have come under market pressure, and owners, developers and investors have to find answers. It also created a scenario in which the residential asset class has seen even more transactions than ever – and also reallocations between residential markets which initiated bigger shifts and created new opportunities. For example, folks leaving the US Bay Area for other places to live because they now can.
Sounds like lots in store. Quo vadis from here though?
These are good reasons for us to have four insiders take a (controversial) look at which sector they expect to flourish in 2021 and beyond – and why.
With that in mind, we ask our four insiders: Will the next year be the year of ConTech or PropTech?
It’s an interesting question. When you look at the funding numbers above, PropTech is more advanced as a sector. On the other hand, ConTech looks poised to break out. Both attractive features for a sector.
As an early stage investor, I’m slightly biased towards a sector breaking out as a whole (ConTech). That’s not to say there won’t be deals and companies in PropTech that will be breakouts in the next years anymore – there absolutely will be. But a sector breaking out as a whole is a different game.
Imagine you had committed to invest in early stage FinTechs in early 2011. At that point, FinTech was at ca. $9B funding-to-date – which is where ConTech is as we write this. FinTech crossed the $50B mark in 2014, meaning it took FinTech pretty much exactly 3 years to get from $9B to $50B – which is in line with the patterns shown above. If you had a strategy dedicated entirely to FinTech, and you had built a good early stage portfolio dating back to 2011, you had an above-average chance of making excess returns by benefiting from the 5x influx of capital. A similar bet can be made for ConTech right now (and less so for PropTech).
Same goes for founders, by the way. If you’re a founder looking to found again in 2021, one big criterion for you certainly is to go where the money will be inflecting 5-10x right now. That is ConTech.
So that’s one macro view for 2021. A second macro view is to look at which asset classes PropTech and ConTech are serving, and how those asset classes are doing this year.
Almost all PropTech addresses two asset classes: residential and commercial buildings. On the ConTech side, we see a wider range of asset classes addressed: residential, commercial, infrastructure, industrial and renovation. I expect and hope ConTechs to become a bit more concentrated in the near-term, ip. on residential, infrastructure and renovation. Commercial assets will probably stay under pressure in 2021. On the one hand, that should create new asymmetric opportunities for great founders in PropTech and ConTech (just check out Reef Technology‘s last round and how the Reef model might pop up in multiple countries now with commercial/retail assets under water). On the other hand, I like that ConTech has a broader range of assets to build value for, which I expect to make ConTechs quite resilient and provide more opportunities for asymmetric growth. On this point it’s mostly a tie for me, but I’m leaning slightly towards ConTech having a few more asymmetric opportunities in 2021 from the multiple asset classes.
So, just staying on a macro level, much to like about both sectors, but I would (and do) bet my own money on ConTech inflecting more from here on.
I could go on here with more arguments, such as CO2 reduction potential and the role technology plays in improving either sector, but I’ll save that for a second round of debate 😉
We have invested in several PropTech startups and one construction tech company. I guess that serves as a good descriptor for what has been happening. As a generalist VC, we’re free to look broadly across sectors. Our attention gets drawn to where we see the largest opportunities – and we’re definitely spending a lot of time in construction at the moment. We’re also observing cooling interest around some sub-sectors of PropTech. The strongest founders are currently looking at or starting in the construction space vs. PropTech. It seems like the next 1-2 years will be the time for construction technologies. However, that doesn’t mean that the interesting opportunities in PropTech are over. I’d say: far from it.
Over the last years, we saw the emergence of winners in PropTech in several categories and the consequential funding explosion. First, there was a clear opportunity in the classifieds space, followed by another one in the brokerage space. Look at ImmoScout24 in Europe, Zillow in the US, Homeday in Germany, Opendoor in the US, Casavo in Italy, Compass in the US and now Evernest in Germany. It’s important to notice that the main drivers were consumer expectations on the seller & buyer side. That’s usually where technological adoption happens earliest and fastest. Amazing entrepreneurs identified the right timing for choosing a problem that’s still “pretty hard to do, but not impossible”. Defining what this is in a given industry is a complex function of technological capabilities, stakeholders’ willingness to adopt new models & technologies, fragmentation of the market, the role of incumbents, etc.
The funding explosion in PropTech also was, in line with Power Law, largely attributable to a few winners – including the anomaly that was WeWork. A large chunk of these multi-billion dollars of funding went to only a handful of companies. A lot of others, trying to hop on the PropTech bandwagon, didn’t do so well.
Sharing-economy models (Co-Living, Co-Working, etc.) were promised to be the next big thing – but proved more difficult to scale than many have thought. Equally, many other models in PropTech have been having a harder time. For example, I have not seen many smart-building and IoT-solutions companies really take-off – until now. COVID prompted property managers with huge problems around understanding usage and processes around their buildings. So, where formerly the problem wasn’t pronounced enough to stir up demand, this is now changing. These large shifts in an industry – economical, legal, technological, etc. – they determine the inflection point for certain models.
I think in construction, the time is ripe. Stakeholders such as general contractors, real estate developers, yellow machine OEMs, etc. are looking for methods to digitise their processes, optimise, and automate. To use the old analogy: the fruit is hanging lower now. Strong, entrepreneurial talent is moving into the space. Capital influx is increasing. We’re seeing first potential breakout cases. Procore, PlanGrid, and some others. We will see decacorns emerge, which will further accelerate interest in the space. It’s a good time to be a tech founder in construction. But it’s likely to be equally good in PropTech. Of course, only if you’re betting on the right model.
Let me start from a completely different viewpoint than Patric and Enrico. Consider this:
Many roof tiles today usually still have some sort of bend in their shape, which goes back to the Romans who put the wet clay over their thigh to mold it. This is certainly an extreme example (although I think a quite entertaining one) of the rate of innovation seen in construction and – as always – there have been many examples of tremendous technological innovation in the industry over time. However, it does exemplify to a certain extent a degree of inertia and resistance to change that is quite inherent in the construction and building materials industry as a whole.
Across the value chain, the adoption of digitalization has been extremely poor over the last decade, making construction a digital laggard, while other industries (consumer goods, healthcare, banking) have thrived significantly: It starts with the producers of building materials who are at large still struggling with how to forge a direct path to the end-consumers via digital means, distributors who run websites that look like they have not been updated since the early 2000s and finally construction companies that are planning highly complex processes based on hand-made XLS-sheets, mainly driven by the predominant paradigms of the industry: cost discipline, uncertainly avoidance, incremental improvements, fast ROI.
While there are of course examples of construction organizations have started to integrate such innovations as robotics, onsite drones, and building information modeling into routine construction it is fair to say that these are baby-steps and we are still quite far away from a mass-adoption of such techniques. As an example, German-based PERI has received a lot of praise for completing the first 3D-printed multi-family-home in Germany at the end of 2020 – while this is a true milestone in (European) construction (especially since PERI is actually a supplier of formwork systems, not a construction company!), demonstrating how completely new construction technology can change traditional construction practices, we are talking about one building only at this point, so there is still some way to go until being able to do this at scale. Also when it comes to innovative business models, industry-changing moves have been rare. Katerra, the much-praised US-based company that has gained a lot of attention in the last years because of their approach to integrate the entire value chain from design to erecting buildings, cutting out the distributors along the way and thus seemingly creating a new standard procedure, has burnt through $2B in financing and had to be bailed out by a $200M injection from Softbank to survive – not the best marketing for the new business model the company tries to establish for sure…
The picture changes, however, when going one step further in the value chain and also the lifetime of a particular building, now moving beyond erecting a building to running and servicing a building that already exists and further to managing the transactions of real estate thereafter – developing and including technology-aided / digital solutions with the general objective to make life for the inhabitants of those buildings more comfortable has become more or less standard procedure, starting with simple things like wireless scanners for remote measuring of heat consumption all the way to integrated, intelligent “smart building” solutions that are becoming the standard for new buildings. Similarly, Patric and Enrico have already alluded to the many good examples of already successful plays geared around, e.g., the brokerage and classifieds space.
Looking at the current dynamics outlined above, I would thus argue that from a practitioner’s perspective, construction is not yet at an inflection point towards exponential adoption of new business models, technology and digitalization. I also believe that the COVID-context will not fundamentally change the trajectory here, also because the social distancing restrictions we had to live with for almost a year now have mainly spurred solutions to avoid interactions between a household and everything outside the household – so, again, rather the PropTech space – while the construction process itself remained largely unaffected (in fact, the Construction industry was one of the few exceptions that carried on in most countries even during the strictest phases of the lockdown). This may of course be driven by the fact that the work is actually being performed outside and thus infection risk is minimized significantly in this context – on the flipside, this also minimized (and still does) the need and urgency to find new solutions for working together that are different from before COVID.
So contrary to my two co-writers before, from a practitioner’s perspective on the ground in the market, I would rather put my money on PropTech than on ConTech for the next years – even more so in the current context of COVID and at least until someone comes up with a fresh idea of what a roof tile could look like.
First of all, I’d like to respond to Lucian’s illustration and add my point of view: Knowing it stands symbolic for the industry’s alleged inertia, it’s not decisive whether the roof tiles are given a new shape. It has been used over centuries and has proven to be practical, economical to produce, easy to transport and simple to replace. Certainly, today there are other ways to protect a roof from weathering. But the real question is rather complex: Will we find a way to plot the roofing digitally? Can we enable software to automatically calculate material requirements, compare price-performance ratios and evaluate thermal insulation? And one step further: Will we be able to teach robots to lay the fragile bricks independently in the future? My prediction: Yes, we will. In ConstructionTech, we certainly still have a comparable long way to go – but that also means we can easily start on a new page and flip the industry on its head.
The situation is somewhat different in PropertyTech. Here we’ve already walked a large part of the distance quite successfully. In B2C and C2C, prosperous business models have emerged all over the world – from classifieds like German Immobilienscout24, sharing economy companies like AirBnB, to “wholesalers” like Opendoor, or InsurTechs like Hippo. However, all of the above can be seen as “classic” tech companies which have transferred the platform idea, already well established in many other industries, to the real estate sector. Still, these models aren’t less attractive to investors like VCs or family offices – the first PropTech-focussed SPACs are an impressive evidence. However, this was the comparatively easy part of the trail with low-hanging, ripe fruit along the way.
In PropTech’s B2B sector, I still see a huge need for development. Currently, most of the players only offer partial solutions to complex problems instead of thinking new and holistically. To have a lasting impact on the industry, the software solutions should consider and map the entire life cycle of a building to find end-to-end solutions that accommodate the needs of as many market participants as possible – benefiting owners and users, facility and property management. Particularly in the areas of Smart Buildings and Internet of Things, the full potential has not yet been exploited. Perhaps it is bold to think that one company can do it all by itself. But to take life-cycle thinking into account, start-ups should at least work with APIs. A software that can be easily integrated into an existing system automatically contributes to the big picture.
As a construction and real estate entrepreneur, I naturally watch both PropTech and ConTech very closely. However, since design and construction is the significant larger part of our business, I am perhaps a bit more passionately involved here. Unlike PropTech, ConTech requires far greater expertise to find actual digital solutions to complex challenges – for example optimizing the many interlinked processes at construction sites or automizing machinery in constantly changing environments. This is new territory and copycats don’t stand much of a chance. For the transformation, real construction know-how and engineering savvy have to be lumped together with tech knowledge. That alone is challenging. Just imagine how rarely a Silicon Valley Techie finds himself on a major construction site asking the question: Can’t we find a way to technologize the bolting of exterior wall panels? And how likely is it that a Software Developer teams up with a Construction Manager to develop software-driven solutions to efficiently document construction progress? Some companies, including Aeditive, have successfully set up interdisciplinary and competent teams: Experts from architecture, engineering, materials science, robotics, simulation and programming have joined forces. Other best practices are HILTI with their Jaibot, Okibo from Tel Aviv or Built Robotics and SafeAI – former Tesla, Google, Apple and Stanford guys have teamed up with construction people and are automating construction the Silicon Valley style. And this is where things are getting interesting! All mentioned are well on their way to exploiting the innovation potential of the construction industry.
And with that in mind, I am approaching the answer to the initiatory question “will the next year be the year of ConTech or PropTech?”. I am convinced: the time is ripe for both! The property sector was relatively easy to digitise “out-side in”. As a result, PropTech is more advanced and already at a fairly high level. As we are still a long way from market consolidation, now it’s time to professionalize the offering and increase the breadth and depth of services. ConTech, on the other hand, is still at the very beginning but about to break out. The segment is highly complex, but just as high is the potential for exciting innovations to change the game for good. What is required from start-ups is the desire to really understand the industry and to go beyond the simple equation “hardly digitized, easy to improve”. Therefore, start-ups should interlock with ACEs at a very early stage in order to start with the right problems, jointly looking for new ways to overcome them. Close cooperation only will support developing solutions that later fit through the door. Needless to say, but of course the market that can be tapped is enormous. I believe ConTech will make a big leap in 2021 and thus catch up to a degree – however, we have 10-20 years of significant value chain transformation in front of us which will allow the bold movers to benefit from tremendous new value pools.
Alright. 4 roles, 4 viewpoints. So what is the one right answer on whether the next year will be the year of ConTech or PropTech?
Honestly, none of us know – and that’s the great part. After debating about this question for a while, we all realized: the opportunities are massive in both sectors. And that’s the exciting part. PropTech seems to provide more opportunities for additional efficiencies on top of some groundwork of digital infrastructure that has been laid.
ConTech is earlier in its lifecycle and represents a big breakout opportunity as a whole.
Meaning: it’s a good time to be alive in both sectors!
If you are a founder, or consider founding, in either ConTech or PropTech: We want to hear from you. Drop us a line!
We ❤️ ConTech . We ❤️ PropTech.
We all know that manufacturing, e-commerce, hospitality and many other industries have faced dramatic changes in the past 20 years. Construction had been rather overlooked, like the stuff in your attics – dusting. Construction is indeed dusty in any sense, no question. But like they say: diamonds are made out of dust under pressure. We believe the pressure on construction is on, ready to create diamonds. Being well aware we can’t predict the future (nor will we try), we see patterns unfolding upon us. Here are our observations making us believe that way that 2021 is the best time to build a company in construction.
Construction is responsible for 10% of the world’s GDP, a $13 trillion market and still growing. As the world’s population is growing, 13,000 net new buildings per day are required to match this growth until 2060. Looking at investments, the industry still has a headspace of at least 10-20x. If you factor in the overall sector sizes, we believe ConstructionTech might have 30x+ headroom during the 2020s.
While the demand for new builds rises, the industry’s procedures still look not much different from 20 years ago. Do you remember when was the last time you sent a fax? I don’t.
Believe it or not but in the construction material supply chain the fax is still a common tool to send orders in the Western world. Architects spend more than four hours a day searching for product information, workers still buy around 20% of the needed materials by going to Home Depot and spend 3-5 hours on manual and repetitive communication daily.
Raising the bar to overcome this obstacle even further, between 25 and 41% of the construction workforce in the Western world today will be retired by 2030. This is a problem in itself, but it gets worse: while 74% of young adults (18-25) know in what field they want to pursue a career, only 3% are interested in the construction trades.
Like other industries have been, construction is in dire need of new technologies to face the challenge.
We observed in other industries that VC funding inflected, once $10B accumulated funding in a sector was reached. On average it took a sector around 3 years to get from $5B to $10B funding. Construction reached the $5B mark in 2018, meaning according to this pattern we are close to an inflection point.
Also, we see the world’s best early stage investors flock into ConstructionTech – sector-focused & generalists.
After early models got weeded out and some businesses failed, we see top-founders of companies incorporating today draw on the learnings. The following are our top 3 takeaways:
We believe to make supply more discoverable and fulfillment more reliable combined with an easy user interface is key to success. Not an easy task, especially in mature markets with legacy supply chains, we often see high resistance to a disintermediation of supply-demand relationships. Here our advice: either enter a market where discovery and trust is an issue and become the trusted go-to supplier, or don’t disintermediate but enhance existing supply-demand relationships – like a Shopify for materials distributors.
Transactional monetization aligns well with project budgeting and purchasing decisions, especially when not much IT integration is required to keep existing workflows on the client side. To our experience replacing single steps of a legacy process e.g by offering a saas-enabled tendering marketplace, finds hardly adoption. But we see a trend for services offering the entire process and delivering the end result, think of it like outsourced procurement offices covering sourcing, negotiation and delivery.
This is an interesting trend we see, but haven’t fully validated just yet. Selling software or hardware e.g. a robot to fulfill a task – printing mechanical layouts on concrete – can be very difficult. Easier adoption can be achieved by offering the print and using the robot to do the job for you.
First instinct might be that starting an own company in this current time of unknowns and instability, is not the best idea. But every change creates new opportunities, resulting in great companies like Uber and Airbnb being founded in troubled times.
One of the most difficult tasks in building a company is finding great talent. The current crisis sets free a great number of talents – by working remotely people do not feel restricted to a certain location, which leads people to rethink and consider next steps.
Spending more time at home 57% of homeowners found time for home improvements, letting them experience the inefficiencies first hand. Many are not willing to accept those crux processes and are inspired to change construction for the better.
Of the hundreds of companies we have seen being founded in the last year, 50% of the founders do not have a construction background. 4 out of 108 teams have established successful companies (+100M exit) in other industries before. For example the founders of:
Welcome allows you to buy a custom built house online. The company manages the construction in-house, using local contractors and sources all materials. The team previously exited Digital Ocean before entering construction. The team sees “a growing need for new inventory, especially among millennials cycling out of major cities”.
The team of 011h digitizes the construction process of eco-friendly multi-family houses, by providing a platform to utilize and qualify a network of existing third-party manufacturing facilities and service providers. The team is led by two of the founding fathers of the Spanish tech scene. Asked about the industry, they said “construction is a dirty business – and a big one. Digitising the construction process will reduce building costs by 20%, potentially providing much-needed affordable housing around the world”.
Just like the aforementioned founders we find construction as the next El Dorado frontier for the 2020s. The industry is big and full of opportunities, capital in-come is just hitting off and entrepreneurs can leverage first learnings and best practices. In other words, the time couldn’t be better.
Excited to see how construction becomes orchestrated? If you want to make a change in construction or if you’re already working on a new solution, let’s talk 👋
For those of you interested where the data comes from:
What may sound like a catchy title, is our argument for the use of exoskeletons in the built world. Well, not exactly Tony Stark custom bespoke “Mark VII” duds as seen in Iron Man (super-sonic flight might be product-feature overkill – maybe?), but lightweight and affordable devices.
Construction has many big problems (CO2 to name one that comes to mind), but an aging labor force is among them. Between 25 and 41% of the construction workforce today will be retired by 2030. This is a problem in itself, but it gets worse: While 74% of young adults (18-25) know in what field they want to pursue a career, only 3% are interested in the construction trades. The young, obviously, don’t want to get their hands dirty. Combine that with a moderate increase in productivity and output growth and you have a labour shortage of three million workers by 2030 in the best case(!). For the worst case scenario you can roughly add another five million workers the US construction industry will be short in ten years time. Put differently: we are on a trajectory of building the most complex projects we’ve ever built with the least experienced workforce we’ve ever had.
Can you blame the 97% of young adults who shy away from construction trades? Working onsite is a hell of a job. We say that with the deepest respect for construction and its workers, but you can also take it literally: OSHA estimates that Musculoskeletal Disorders (MSD) that result from lifting heavy items, bending, reaching overhead, pushing and pulling heavy loads, working in awkward body postures, and performing the same or similar tasks repetitively are one of the most frequently reported causes of lost or restricted work time in the US. Like we said, it’s one of the toughest jobs on earth.
Professionals, throughout the globe, have their edges defined by what their body lets them do. With today’s Exos you can both reduce the strain on the user’s body and enhance the user’s physical capabilities – to increase strength, endurance and mobility. Sounds too good to be true? Not to us.
We actually believe that wide-range use of exoskeletons in construction will lead to
The key drivers are lightweight and affordability. Looking at companies like Roam Robotic we are on the brink of checking both boxes.
Traditional robotic techniques – resulting in very heavy, power hungry costly machines – are romantic however quite unrealistic, suitable for only a narrow range of applications. Where previous exoskeletons went wrong: early designs were heavily influenced by pop-culture films in the 80’s/90’s. Think of the Power Loader Exoskeleton in Aliens. Cool, right? Absolutely. BUT exoskeletons true value is when you capture motion, enabling continuous, fluid & dynamic movement. Those devices were anything but agile.
The goal: lightweight (i.e. high power to weight ratio) & affordability (suitable for mass manufacturing).
Once technology is flushed out, adoption is still an obstacle. While we admit construction has notoriously been a late bloomer in tech adoption, the current renaissance period may signal new trade winds ushering in new, innovative solutions.
Just think of Iron Man again: at a very high arc, you as an individual can do more good when wearing a suit of technology. Getting support with heavy lifting will not only make you achieve more in the same time, you also do it in a much healthier way – humans are notoriously bad for appropriately accounting for long term injury risk. For short term injuries pain is usually an indicator. However, for long term injury risk, improper movement/posture, we’re terrible at it. So, drive assistance through intelligence by cataloguing movement deviations over time at an individual level, to optimize the long-term problem. Thus, resulting in fewer injuries (happy employee, happy employer!). If exoskeletons support ease of use without strenuous training and doesn’t look like a walking death trap, we are convinced construction workers will go for it, and companies will encourage them to do so. Again, we are on a trajectory of building the most complex projects we’ve ever built with the least experienced workforce, why it’s our opinion preserving aging labor through augmentation will become a pull market.
As a company your benefits are both immediate and long-term, too. With your workers expanding their physical boundaries and decreasing worker fatigue and labor productivity increases. With less day-to-day physical strain & work-related injuries, you (as a craft worker and employer) benefit from a career-longevity gain. Having the worst-case scenario in mind, you get more done in less time and the trades may become more attractive to the younger demographic (who doesn’t want to be Iron Man?).
Long-term we think of exoskeletons as a holistic Fitbit. A next generation wearable that measures and optimizes physical-labor (J.A.R.V.I.S anyone?).
For example, given real-time site visibility/capture is fast becoming a requirement in the construction industry as the importance and value the data is being realized, exoskeletons could integrate with growing site-level solutions: digitally geo-fence an area to restrict any human interaction within specified coordinates, proactively reducing the 150,000 accidents and injuries each year. The construction site becomes more preventive and less reactive.
In addition, an employer can leverage imbedded sensors and other data capture technologies on exoskeletons to compliment new underwriting insurance structures or develop productivity or site management applications. You’re going down that road? Hit us up.
Iron Man has a 94% Rotten Tomatoes rating. Now you know why our excitement for exoskeletons in construction rates pretty much the same. Let us know how you rate the prospects of exo-suits and stay tuned. We’re definitely keeping an active eye on the space and its leaders.
This article was originally published in Construction Tech Review.
Don’t we all share that romantic notion of a self-managed construction site, where planning and execution are seamlessly integrated and fully automated? Well, we at Foundamental aren’t known for being the biggest romantics (though we all share a big passion for construction and tech), but we sincerely believe that construction is set to become an orchestrated economy. Now, I know what most will say: If wishes were horses, beggars would ride. But hear us out, here is what we mean by it and how we think it’s going to happen.
Construction is big, inefficient and undisrupted. It accounts for ten percent of world’s GDP, but productivity dropped by 27 percent in the last 25 years, while most other industries have seen steep increases in productivity. Construction seems to be left behind in an era of rapid change. While in other sectors half of all companies have been acquired or gone bankrupt in the last 20 years, 85% of construction companies are still there. Unchanged and undisrupted. Fragmentation and inaccessibility obviously hinders change from within and outside. All this won’t be much new to you, but it perfectly makes the case why our beloved sector is in urgent need of some tech. Especially as lots of construction is yet to come. Until 2060, we will add the floor area of Japan to the planet – every year.
To make matters worse, construction is hamstrung by an aging workforce. Between 25 and 41% of the construction workforce today will be retired by 2030. This is a problem in itself, but it gets worse: while 74% of young adults (18-25) now in what field they want to pursue a career, only 3% are interested in the construction trades.
What isn’t changing is the unique set of first principles that construction is made of:
Given construction’s first principles, we at Foundamental only see one way out: construction becomes an orchestrated economy. Orchestrated by autonomous and circular supply chains that build on integrating all the data pools that currently emerge as known problems or simple tasks get solved with technology. Once those data pools are connected, you get closer to achieving transparency over entire processes and using data to improve them. But how to get there?
First, we need a better vertical view of a site, a warehouse, a plant — to understand the processes and, more importantly, their local contexts. Who does what, when and why. Which material flows at what time, and why. There are new innovative solutions providing real-time visibility and transparency, tracking jobsite health to minimize schedule surprises. A select few are also providing immediate value during COVID-19 crisis tracking (labor) density & prolonged proximity. As an example: IndusAI, a Foundamental portfolio company, offers such a look through a keyhole to make data-driven decisions with actionable insights whilst decreasing time on claim disputes and subcontractor coordination.
Second comes the horizontal view. By this we mean having the ability to see a workflow end to end (something we also call the “critical path view”). As we shift focus upstream, we need a better understanding of specific construction workflows and, again, their context. Just think of the interplay between batch plant, truck and site. Remember, the bird’s eye view helps you identifying every step on-site, including arriving trucks and their loads. Now, imagine these trucks are equipped with telematics and your system is able to factor in that data as well (something Loconav does very well already today in India). Such solutions will be able to request more or fewer trucks at the concrete plant and can even advise the truck to hurry up or take its time to perfectly arrive on site. All this can be done autonomously and in real-time. To be honest, we also don’t see a reason why robots shouldn’t take care of the pouring. Especially in times of COVID, but that’s a different story.
Our point here is simple: always start with data that creates context either vertically (what happens on a site) or horizontally (what happens in the workflow end to end).
That is the shortest road to orchestration.
The winners will be those who orchestrate supply chains end-to-end and are able to build a reliable, predictive engine that is able of both schedule generation and management as well as resource optimization and sequencing. They become the system of record across the full lifecycle of the project, from planning, procurement, and supply chain management, all the way through construction execution. From there one can flirt with the romantic notion of a “self-managed construction site”.
We don’t want to blame former US president Ronald Reagan. Still, in his famous Berlin speech in 1987, he not only called upon Gorbatschow to “tear down this wall,” he also looked “to the day when West Berlin can become one of the chief aviation hubs in all central Europe.” While his first call to action became a reality just two years later, the second one took until today (lucky us, it wasn’t the other way around). But back then, he obviously sparked the obsession of Berlin’s administrators to build a mega airport that can compete with other major cities in Europe.
Thirty years later, that airport becomes a reality these days, with the first planes taking off at BER. The only problem: the largest infrastructure project of Germany and Europe’s biggest construction site for a while has cost nine times more than planned and now opens nine years after the announced opening date. It comes after six missed openings in the past and has led to countless lawsuits, three parliamentary inquiries, and several corruption scandals. The Economist calls it Germany’s best-known infrastructure disaster. It’s a story of megalomania and politicians that considered themselves the better general contractor but were proven wrong in a way that has become the subject of daily jokes in Germany and draws schadenfreude from around the world.
The sheer fact that a public infrastructure project is delayed and gets more expensive is nothing unusual (didn’t we all get used to it somehow?!). It happens all over the world. Oxford professor Bent Flyvbjerg studied over 250 public megaprojects in 20 countries and sees a reoccurring pattern: they deliberately misrepresent costs and risks to increase the likelihood that it gains approval and funding. This leads to the “survival of the unfittest,” in which often not the best project, but the most misrepresented ones are being built.
For all we know, that is undoubtedly true for Berlin airport, too. However, there is more to the story. It’s one of 120,000 construction defects with a head-spinning list of failures: automatic doors lacking electricity, escalators not being long enough; a roof twice the authorized weight; and miles of cables mislaid. Let alone “the monster,” a vast smoke-extraction system that was ineffective (we believe it got the name after the fourth missed opening some years ago…).
That list goes on and on, but we guess you got the point, which leads to the looming question: what the f**k happened? We looked through the available sources, and found three overarching answers. All not new to construction pros, but they were exaggerated at Berlin airport. That’s for sure.
Besides an ineffective “monster” (aka the fire protection system), cable shafts were dangerously over-burdened, and there weren’t enough check-in counters and luggage retrieval systems. The cooling units were too weak, creating potential overheating and emergency cut-offs to the entire IT system, which would have left Berlin’s new airport without computers. On top of all that, flight paths and sound protections zones were incorrectly calculated.
Well, all that sounds like bad planning, doesn’t it? And that’s no surprise. After a year-long dispute over where to build the airport, they decided to contract out the construction and operation of the airport in 1999. The accepted bidder was a consortium, including Hochtief and the operator of Frankfurt airport. Despite alleged corruption during the bidding process, experts are pretty confident Berlin airport would have been up and running in 2003 (pretty dull, right? But wait for the next act). After all, construction giant Hochtief had just successfully built mega airports in Athens and Saudi-Arabia.
But when Berlin mayor Klaus Wowereit took office in 2001, things changed. Backed by a center-left coalition in the city, he canceled the agreement with Hochtief just 18 months later and turned it into a city-managed project. Without any external general contractor in charge, the city had almost 70 different engineering firms working as planners on the site at peak times.
Learning: 70 engineering firms is a lot to coordinate, but that is construction reality. You will always have many different players in a construction project. Whether it was a good idea to have state institutions orchestrating all the players is another question. But you need someone that solves your project’s most complex constraints, optimizes essential project resources like labor, equipment, and materials, validates the constructability of your baseline schedule, and improves your project planning using data, not heuristics. And certainly not hoping or guessing. Tech firms such as Alice or nPlan are building the scheduling optimizers for 21st century construction.
Fragmentation is one of the critical characteristics of the construction industry. 80% of value-add in construction comes from companies with less than 250 employees – and those companies make up 99.9% of construction revenues. To us, that’s a textbook example of “fragmentation.” It is due to all the different trades involved and is one of the significant challenges of any construction projects: steering all the different hands most efficiently. That is usually the task of a general contractor – which in this case didn’t exist, right. But it gets even worse.
Intending to boost the local construction trades, they invited even more hands than necessary. In the end, the major contract for the construction of a passenger terminal is not, as initially planned, one lot for a general contractor, nor are there seven lots (as planned for a while); but instead, everything was fragmented into 40 individual contracts. Total chaos.
The once proven idea that the state finds a general contractor turns into a bazaar organized by the state.
Learning: It doesn’t have to be that way. Even with many different contractors, site workflows, including quality, safety, workforce management, and maintenance, can be automated and accessed using mobile devices. The data captured provides insights to streamline operations and drive results. With workflow automation solutions like Novade or Procore all modules, projects, and contractors are connected on one platform, and all processes can be managed digitally.
The result of the above: 40 separated construction sites, where the left hand didn’t know what the right one was doing. In many cases, the right plans were missing, leading to unpredictable collisions – a thousand times. Where a pipe would have to be laid, there was an air flap, and where there is a flue, cables would have to be pulled. Of course, that is everyday life on construction sites all over the world. But due to the particular circumstances described above at Berlin airport, you didn’t have a functioning monitoring that would help to detect and manage such collisions.
In the end, it led to some form of on-site anarchy. Building contractors no longer reported collisions and cleared them up together with planners and site managers but simply resolved them on their own through improvisation. Walls were drawn that weren’t in any plan, and ordinary walls were billed as fire protection walls, pipes were laid that belonged elsewhere, sprinkler heads were installed but not connected to the water. Just a great deal of botching going on.
It was at that time when a pub owner who leased a lot at the airport was charged with 36,000 € for a single electrical socket he needed to offer his guests free phone charging. It doesn’t matter whether it was just profiteering or the real cost of an additional socket. It tells you quite a lot about what was going on at Berlin Airport.
Learning: The bigger the construction site, the more critical is the need to know precisely what goes on at any given moment and in real-time. It’s the only way you can deal effectively with unpredictable changes and avoid situations where you have to cancel a long-planned opening just a few weeks in advance. Reality capture-and-compare solutions like HoloBuilder or Buildots give you precisely that kind of accurate transparency. They let you easily capture, view, and control project progress in 360° and with one single point of truth.
Would have all these tech solutions had helped? Maybe. We also don’t have the full picture of what happened in the last thirty years from Ronald Reagan to the first planes taking off today. We actually aren’t sure whether there is anyone out there having that full picture. However, we genuinely believe that Berlin airport is another impressive example that our beloved construction industry is in urgent need of some tech. It seems to be left behind in an era of rapid change. That might be due to its high fragmentation or the low R&D spend in general. What we know: there is more construction to come, and we should start building smarter – for the sake of costs, emissions, and the people of Berlin that waited decades for a new airport.
‘Our house is on fire.’ That was the message Greta Thunberg addressed the global Davos elite within early 2020. You don’t have to agree with the picture she used, but the fact that we need to get our sh*t together is something that science is unusually united on. To be honest, we actually quite like that picture because we really believe that the world is on the brink, and we got no time to waste.
And we’re into houses. We have an undeniable passion for all kinds of buildings (though not for fire) and, more importantly, think that buildings hold one of the biggest levers for climate impact. Here is why.
Construction and mining account for 17% of global CO2 emissions. That is a lot, but attention instead goes to mobility (9%) or air travel (3%). The lack of awareness wouldn’t be a problem itself, as long as action was taken. But the industry is not solving the problem from within, because it’s not only one of the biggest polluters, but also highly inefficient and undisrupted (see a connection here?).
Construction seems to be left behind in an era of change. Productivity dropped by 27% in the last 25 years, while most other industries have seen steep productivity increases. In all these other sectors, half of all companies have been acquired or gone bankrupt in the last 20 years, but 85% of construction companies are still there. Unchanged and undisrupted. How come?
We believe it’s the high fragmentation that hinders substantial change from within: 80% of value-add in construction comes from companies with less than 250 employees – and those companies make up 99.9% of construction revenues. To us, it’s a textbook example of “fragmentation”. And it might also explain why R&D spend in general is also pretty low compared to other sectors.
To make matters worse: A lot of construction and its emissions are yet to come. In 2016, an estimated 235 billion m² of total floor area was reached. It took us more than a hundred years to get here.
Over the next 40 years, an additional 230 billion m² buildings will be constructed. Meaning that the floor area of the world’s buildings is projected to double in just four decades. That is the equivalent of adding the floor area of Japan to the planet every year to 2060(!). Or adding 13’000 net new homes every day for the next 40 years. Every single day…
Add the ongoing megatrend of urbanization, and you see why projects become ever more complex and constrained, while the sector will remain inaccessible and fragmented. That’s no surprise as sites will always be geographically dispersed. That’s for sure. Ten billion construction sites will always be in ten billion locations. Assembly will always be hyper-local as fully-assembled structures are still too heavy to be transported, and there will always be physical and temporal distance between involved parties. All this piles up to the massive challenge of solving emissions from construction and mining – but also shows why construction holds one of the biggest levers for positive climate impact.
Well, there obviously is no way around it. The challenge is existential and immediate. The way we do construction today will become impossible quite soon. Climate requirements and regulation will significantly increase (for obvious reasons), while shareholders already demand answers today and bring up the notion of stakeholder capitalism. No doubt, construction needs to change. But how?
Bringing down emissions in construction is not as easy as plugging out conventionally generated electricity and plugging in renewables. Looking at the construction phase, the vast majority of emissions come from the materials used to build – a stunning 93%. Think of steel, cement, or other mineral materials and chemically engineered components (e.g. insulation). Even though materials’ production has become less CO2-heavy in the past decades, it’s clearly not enough. While carbon capture can and must be an answer in parts – especially to bridge us – we also need to turn to the choice of materials (increase of carbon-neutral substitutes) and the amount of materials used and waste produced (drive efficiency over the whole supply chain).
More efficiency, less waste – this is precisely why we believe construction needs to and ultimately will become an orchestrated economy. Orchestrated by autonomous and circular supply chains that build on integrating all the data pools that currently emerge as simple tasks get digitized. Just think of the interplay between batch plant, truck, and site and what could be done if an artificial intelligence understands the on-site video feed and autonomously steers involved parties. You get better decisions that are based on trillions of data points and end-to-end visibility over workflows. This transparency over whole supply chains makes it possible to reduce emissions in any part of the chain.
Here is how: eliminating material waste at the design stage can lead to an 18% reduction of GHG emissions (e.g. applying computer-optimized engineering in the pre-construction phase). Looking at concrete, digitalisation, improved mix design and new admixtures can reduce cement in concrete by 15% and its emissions by 6%. And let’s not forget logistics. Obviously, the source of the material being used has a tremendous effect on its footprint. But just the optimized utilization of trucks and truckloads will shrink the fleet by 20 percent. Add electrified and semi-autonomous machinery and you can get a 98 percent reduction in carbon emissions on-site. That is why we believe in orchestration.
No matter if we go after efficient pre-construction choices, sustainable and circular materials, or carbon capture, construction needs to change. And we need to do it fast (remember our house being on fire?). How do we do that? Well, we think the fastest solutions come from the best tech founders around the globe, fueled by venture capital. This might be a bit obvious given our line of work, but we deeply believe in the innovative power of venture capital (if you don’t, have a look here or here).
However, there is a remarkable gap between the massive amount of global emissions that construction and mining account for and the super small investments thrown at the problem in the last 20 years. Why don’t we put it to use where it has the most significant impact? That is why we back the bold and bright founders that transform the industry’s carbon footprint by scaling masterable(!) technologies.
We have learned from the mistakes made in the first cleantech wave. They underfunded the cost-degression of superior tech (did mostly overspent on POCs), while overfunding hard-to-master tech before scientific advantage were shown. We combine scientific know-how with the deep industry insights we have as specialist VC to identify tech and ventures where an influx of capital will allow for radical cost-degression, industrialization and scale.
Remember the massive net-increase in new buildings, aka adding Japan to the planet every year? That’s right, we go after construction emissions because there is an immediate effect – no triple down effects over decades, but actually bringing down upfront emissions of buildings. But the massive net-increase has another effect. It creates a pull market for green building tech with instant demand. That pull gets even bigger when regulation increases, and all the green stimulus packages around the globe start to work. A value chain delivering approximately $12 trillion of global value-added and $1.5 trillion of global profit pools looks set for overhaul, and a $265 billion annual profit pool awaits disrupters.
Now you know why we love construction and want everyone else to love it too (or at least bring it into focus when it comes to climate action).