What’s bigger this year? ConTech or PropTech? 4 insiders, 4 viewpoints.

May 11, 2021

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:

Pattern recognition: Once $10B of VC funding are reached, sector inflects
Pattern recognition: Once $10B of VC funding are reached, sector inflects

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?

Patric’s view:

Patric Hellermann
Foundamental

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 😉

Enrico’s view:

Enrico Mellis
Project A Ventures

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.

Lucian’s view:

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.

Digital maturity across different industries
Digital maturity across different industries

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.

Hendrik’s view:

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.

So what…

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.

Time to dust off: 5 reasons why 2021 is the best time to build a tech company in construction

Feb 3, 2021

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.

1. The market is huge

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.

Total funding per sector between 2000-2019 ($B)
Total funding per sector between 2000-2019 ($B)

2. It’s still full of opportunities

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.

3. Funding is inflecting in 2021

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.

Construction is inflecting
Pattern recognition: Once $10B of VC funding are reached, sector inflects

Also, we see the world’s best early stage investors flock into ConstructionTech – sector-focused & generalists.

Deals made by the world's best early stage investors
Deals made by the world’s best early stage investors

4. Incorporate learnings and best practices from prior failures

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:

Organize, not replace existing supply

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.

Outsource full processes, not dis-intermediate existing processes 

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.

When you can’t scale selling the tool, sell the end result

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.

5. Talent is entering the industry

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 Homes

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”.

011h

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:

  • I analyzed 108 companies that were founded in the last 12 months that I have come across until today. I’m sure there are far more companies out there so I always appreciate receiving some hints.
  • For published deal data I used Crunchbase and Tracxn as data sources. Please note, that not all deals are published, so there might be more. 

Why Iron Man is the solution for one of construction’s biggest problems

Dec 4, 2020

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.

The young don’t want to get their hands dirty

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.

Exoskeletons are here to stay

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

  • Reduction in Work Related Injuries: Resulting in saving on medical fees, sick leave and lawsuits
  • Increased Productivity: Expanding physical boundaries by 10-20% and engage in activities that have previously been out of their reach or decrease worker fatigue
  • Labor Preservation: Improving longevity of quality and experienced personnel past their physical prime in the workforce longer.

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.

The Holistic Fitbit

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.

A tech orchestra is what construction needs

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.

The case for tech in construction

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:

  • Sites will always be geographically dispersed. Ten billion construction sites will always be in ten billion locations.
  • Assembly will always be hyper-local as fully-assembled structures are just too heavy to be transported.
  • There will always be physical and temporal distance between involved parties. This invisibility needs to be dealt with.

The road towards orchestration

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 notion of a self-managed construction site

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”.

How not to build an airport – lessons from an infrastructure disaster made in Germany

Nov 1, 2020

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.

I. Bad planning (and a wrong approach)

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.

II. Too many hands (not aware of each other)

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.

III. Weak progress monitoring (and an even worse crisis management)

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.

The case for solving construction CO2

Why tackling construction emissions is one of the biggest levers we have

‘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.

Huge potential with little attention

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.

Things get worse

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.

Construction needs to change

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).

Orchestration is part of the answer

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.

Tech and founders – fueled by venture capital

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.

There is an immediate effect (and money to be made)

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).

Why VC and data science is a love marriage

Would you believe anyone who says that data and digitisation doesn’t matter in their industry, because their domain is different?

Great suggestive question, I know, but the point is: You don’t. And neither do we.

So what’s our industry? Well, construction and mining on the one hand. But venture capital on the other. We believe data will change construction and mining and we believe data will change venture capital.

But here comes the cool part: Data and VC is not just a match, it’s a match made in heaven.

Big words? Maybe, but what is love without a little exaggeration. Besides, often it takes a second (closer) look to understand why the best matches are working so well.

So, let’s take that look!

Venture capital has been driving innovation and digitisation across industries, but ironically the VC industry itself can’t really claim they have been ahead here when it comes to their industry.

Today, VC still largely relies on networking and building relationships. Being in the right room at the right time (although COVID19 already raises critical questions about how this practice can be continued in the future). 

To a large part this is due to the nature of VC itself. Young tech firms are private, information about them is scarce and thus valuable. And founders can only give so much of their equity until they lose control over their company, so there’s another scarcity.

No wonder why the industry keeps their cards close to the chest.

But there is another point, young firms are abundant. And they all look alike. Who would have been able to point out exactly that one garage in the 70ies where Apple was being built? It’s the notorious needle in the haystack (and the haystack is quite big).

So firms and VCs have been bundling up in a few hubs worldwide to be close to each other, to mingle. But this excludes everyone from the party that is not located around the corner and is therefore not able to quickly discuss some awesome new project over coffee.

This will change and has to change. The world is growing more globalised and the tech scene is growing with it. It will be more democratic, more inclusive and more fair. Data and data science will be a driving force of this change and thus it will not only be an add-on, but a must-have.

And here’s why.

VC is and has always been a fundamentally human game, but even more so it is a decision game. Ultimately it’s about making the best decisions concerning incredible uncertainty, given the very limited amount of information available.

We believe any major decision a VC takes in the future is underpinned with data and algorithmically prepared, seamlessly, enabling the investor to focus her attention where it is most needed and where the machines can’t help.

To make the point, we, of course, turn to the sector we love and know best: construction and mining.

There are three things about our beloved sector that you probably heard us telling everyone that is willing to listen and also everyone else:

  • It’s ripe for disruption,
  • It’s opaque
  • And it is both global and scattered.

The first is why Foundamental as a dedicated construction VC exists. Two and three make the case for data science.

We try to understand the hows and whys on-site, the processes on the ground and the local peculiarities, but also the global themes. We need to be efficient enough to cover developments in Bangkok, Barcelona, and Boston at the same time, while also being able to recognize patterns across them.

This is why a quarter of the Foundamental team were data scientists, when starting in late 2018.

After two years of obtaining, juggling, and connecting data as well as integrating it in our workflows we see clear results: faster and better decisions.

Here is the key take-away: Think data science as an enabler, not data science as a service.

After all, what type of language would the word “service” be in a marriage…

Our evolving platform helps us observing, clustering, sourcing, evaluating, and tracking deals. It makes our day-to-day work more efficient and transparent. It reduces wasted time and frees up human resources that can be applied in areas where humans are superior to machines (think of empathy, soft skills, or communication just to name a few).

Any organisation is a decision making machine. Humans are driving it, processes are the cogs and data is the oil. Did someone say “Data is the new oil”?

This is why data science can return even more value if it isn’t just focused on a decision, but on the decision making process. Meaning that any bigger decision (say, investing in a startup, for completely unrelated reasons) is always done in a context.

This context is actually a long chain of smaller and smaller decisions that everyone involved takes. Making any part of this chain of decisions more efficient and accurate, even only slightly, will therefore compound along the way.

And, the final outcome will be better. Any investor’s heart glows when hearing the term “compounding interest”, but it’s not just money that accumulates, it’s also efficiency.

(As a side note: Interestingly often a gain in efficiency has to be paid for by a loss of resilience. In the current pandemic this all too often got painfully visible. Also traditional VC processes are heavily affected by pushing more and more decisions to be done remotely. Tapping into more data sources here greatly increases the resilience of the decision making process.)

But let’s finish with the best part (yes, the best always comes last): as our key workflows are now based on and done through the platform, we create tons of data that allow for learning loops, making the platform not just efficient, but self-improving.

To drag the analogy along one last time: A good relationship is not just benefiting from each other’s strengths, it’s growing together.

This is artificial intelligence beyond the buzzword.

So, if you are equally passionate about how data is changing not only the industries VCs are investing in, but also VC itself, hit us up and join the ride. We would love to hear your take on it!

The Future of Blue-Collar Work

May 22, 2020

Most of us have been chilling , losing our mind, staying calm, operating as WFH professionals for the better part of the last two months. It remains to be seen just how much WFH becomes a part of a white-collar worker’s future if when things return to normal.

You know…the before time… when we might get to be a part of delightful conversations like this …

Image source : Dilbert.com

And while COVID-19 might be accelerating existing trends in the white collar economy, it might also lead to the backbone of our economies — The blue-collar workers powering industries such as trucking & transportation, construction , manufacturing and warehousing — playing an entirely different role in the future.

Here are my predictions for what this New World Order might look like

1. Blue-Collar workers will benefit from being in Hot Demand…

A trend that we had already started seeing in the before time was the relative and growing scarcity of blue collar workers in mature markets like the US and Europe.

Headlines like this…

Image source

or this…

…had starting becoming more common.

This is consistent with our own research which points to constraints in the blue-collar workforce for industries such as Construction. For example :

  • The construction sector employed 11.8% fewer people in 2015 than it did in 2008 in the European Union
  • Correspondingly, the median age (42.4 in 2015 vs 40.8 in 2008), the proportion of workers aged 25–49 (61.8% in 2015 vs 65.3% in 2008), and the proportion of workers aged 50–64 ( 28% in 2015 vs 22% in 2008) suggest an ageing workforce

Clearly, construction and other blue-collar centric industries have been becoming less attractive to a younger, more millennial workforce.

(This clearly represents an important bottleneck, and one we will keep returning to in this article.)

But surely, you might think, COVID-19 will (continue to) hit the frontline blue-collar workers very hard?

Perhaps not.

Several market signals and first-hand data, especially from Asia, suggest an unexpectedly strong rebound in infrastructure projects and spend, with the backlog from the last 3 months possibly resulting in a “post-pandemic construction tsunami“.

The one catch : There aren’t enough workers.

Even in markets like India that have a huge labour surplus and a disproportionately skewed employer — labour ratio, news items like the one below are becoming more common with the resumption of construction in a post-lockdown scenario:

And this shortage is the most pronounced in industries that are highly dependent on blue collar labour, such as construction, manufacturing and logistics.

But have we seen something similar before ?

But of course we did !

One of the more long-term effects of the very scientifically named Black Death, was the acute shortage of peasants and urban workers in Europe.

So dramatic was the shifting of economic bargaining power in favour of the blue-collar workers that even though the rulers of the time imposed harsh punishments on workers demanding higher wages, there is clear evidence that worker wages and living wages improved considerably after the plague.

Might the improvement of the workers’ living conditions also have seeded the Renaissance Period ? And if yes, what might this signal for the future of workers ?

Will history repeat itself in the form of a post-pandemic world that offers blue-collar workers higher wages and greater financial security ?

2. …But those demands will come with new expectations.

However, it is prudent to remind ourselves that the higher wages paid to blue collar workers in the future will likely come with new strings attached.

Workflows which were largely executed using paper, face-to-face meetings and whiteboard sessions and phone calls/ messages will shift to being driven through remote collaboration tools (especially when blue-collar workers need to interface with white-collar workers) that are tailored for Blue collar use-cases.

While, on the surface, the use of digital collaboration tools might seem a trivial ask (especially for white-collar readers), it assumes and implies a certain degree of familiarity with the use of IT and digital tools — Something that is in fact quite unfamiliar to most blue-collar workers (and which is probably just one of the reasons why blue-collar professions are becoming less appealing to a more digitally-savvy millennial workforce)

Oh, and while we are on the subject of expecting our blue-collar workers to become adopters of technology, they will hopefully have no objection with adopting location and contact-tracing solutions as well?

Image source : Dilbert.com

3. These expectations will be fulfilled by new education programs…

With the blue-collar workers now expected to become proficient at using digital tools, what formal avenues could they turn to, in order to upgrade themselves ?

How about an expensive, full-time education program that requires all tuition costs to be paid upfront, might not ensure job-fit, and which also doesn’t necessarily deliver a positive ROI, right after a global pandemic makes the job market highly volatile ?

I know what you are thinking…

Image source : Dilbert.com

No wonder our blue-collar workers are highly circumspect when it comes to signing up for education/skilling programs.

But it doesn’t have to be that way.

As the likes of Lambda School and Scaler are showing in the White Collar world, the future of higher education for Blue Collar workers might be highly targeted 6–9 month programs administered digitally, require no upfront payment, and which are tied to future success through income share agreements.

And perhaps the need to seek out a learning cohort will influence a rise in labour union memberships, not just to seek collective security, but to foster collaborative and peer-to-peer learning in an “on-the-job” environment.

4. …which will see the Blue Collar turning Gold

Ever heard the term “Gold Collar“? I hadn’t, until quite recently.

It was coined by Prof. Robert Kelley in 1985 to describe highly-skilled and essential knowledge workers whose value comes from brain power and mastery over their trade, and describes professions such as doctors, surgeons, pilots, lawyers and technologists (and probably does not include Venture Capitalists).

While it might seem like a stretch to suggest that Blue-collar professions could yield Gold collar capabilities, think of how auto mechanics levelled up to become Mechatronics experts as a result of highly focused skill development programs implemented in Germany and Japan.

What if similar skilling programs can yield a selective new genre of Gold Collar professionals that come with mastery over new / hybrid disciplines, mastery that makes them highly valuable knowledge workers , representing aspirational value for a millennial workforce that demands intellectual stimulation and social validation ?

At Foundamental, we have often debated if the typical Construction worker for the future will be a PhD.

Perhaps the equivalent of the future PhDs in Blue-collar professions will be highly sophisticated Gold Collar workers who will be prized for their brain power as employees, gig professionals and entrepreneurs.

If you are a Founder building for the Future of Blue Collar Work, we at Foundamental would be grateful to hear your story!

  • Our in-house research and insights are built upon information collected from the stellar founders we have had the privilege to invest in, and/or have had inspiring conversations with.
  • For more of such posts, head to Foundamental.comand follow us on LinkedIn

Construction & Workers’ Insurance: a triple threat scenario (lose-lose-lose)

May 12, 2020

We’ve become quite enamored with exoskeletons

… if we’re being honest, ever since we saw Ripley dance toe-to-toe with Aliens on the silver screen …. “get away from her you b%$^… ”

& the multi-parameter value add such devices could proffer the construction industry.

A distant second, or third-order benefit could be a play to compliment new underwriting insurance structures & safety risk management applications to be birthed in the current construction-tech renaissance.

This got us thinking about the insurance industry & its dance partner, construction… What’s the tempo?… discordant partnership? … two left feet?

Let’s take a look …

Globally, 1,000 fatalities are recorded every day from occupational accidents, and that’s without counting occupational disorders. In both Europe and the US, ⅕ of these work-related fatalities are happening on construction sites.

In 2018US construction sites accounted for 1,008 work-related fatalities. Moreover, according to OSHA, 10% of construction workers in the US received a work-related injury in 2019 and the Bureau of Labour Statistics reported that there are roughly 150,000 construction site accident injuries each year.

Every US worker is covered by Workers’ Compensation insurance, whereby medical expenses and time-loss wages are covered in the case of work-related injuries.

Given how each company/project is unique, one would think insurers write policies dynamically, and help institute a holistic safety & risk management platform.

The truth is, insurance companies lack the data to do so. The pricing set by insurance companies for Workers’ Comp is based on an “industry-wide” classification rate, and does not take into account the risk profiles of individual construction sites.

As a result of this “one size fits all” underwriting process, the following pain points occur:

  • Low monetary incentive to increase safety — undue/unfair burden on companies that operate a safe workplace environment
  • Expensive insurance — premiums paid by construction employers is 3x higher than national average
  • High claims costs for insurers — high injury rates means high losses for insurers. 15% of losses incurred by insurers from Workers’ Comp claims in the US are spent on workers injured on construction sites

The status quo is broken.

Insurance firms lack the data and domain expertise to accurately assess risk, dynamically. In other words, construction and insurance are playing a game of telephone: speaking to one another albeit from great distances.

Data is a much needed antidote. And given the recent construction-tech renaissance, data is not an issue it once was.

“Peek not through a keyhole, lest ye be vexed”

-Stephen King

From AI to onsite cameras and sensors, millions of venture capital dollars have flowed into sophisticated tech companies able to both capture and process quality data from construction sites, real-time. Yet, this treasure trove of information is mainly being used to allay immediate business-related pain-points.

This is a stride forward as it builds a foundation of ground-truth enabling multiple stakeholders access to a shared set of facts. It’s our opinion: If there is no transparency, there’s zero accountability and if there is no ground truth we are in essence writing bad checks from our collective memory bank. Ergo: Memory is fallible (and limited) at the end of the day.

As referenced, there are new innovative solutions providing real-time visibility and transparency, tracking jobsite health to minimize schedule surprises and a select few providing immediate value during COVID-19 crisis tracking (labor) density & prolonged proximity. As an example: IndusAI, a Foundamental portfolio company, proffers such a look through a keyhole to make data-driven decisions with actionable insights whilstdecreasing time on claim disputes — providing end-users H&R Block-like “Peace of Mind” level of service— and subcontractor coordination.

This is our onramp to a high-speed highway for tiered services and solutions, leaving the old dirt road, connecting to the digital era. Similar to Google becoming the gateway to the internet because they answered your first question

…this is our onramp, turn right.

So far in the construction-tech space, companies have become increasingly successful in leveraging data for many services/solutions such as project management, internal collaboration and incident reporting to reduce rework whilst harvesting productivity/efficiency gains. At Foundamental, we’re searching for firms who are going through an evolutionary growth spurt — introducing new models into the ecosystem — by leveraging captured data in an entirely new way.

As previously established, and in our opinion, the solution rests with (actionable) data in the hands of those wielding domain expertise. Rather than looking at reinsurers who may expand their offerings into the construction industry, we believe innovation will spark & be orchestrated from the other side of the aisle: construction-tech firms evolving, building a ground-up solution to the insurance ecosystem. As such, we are inordinately interested in firms who can vertically integrate risk from the front line — literally from the gals/guys with the tools onsite all the way to the insurance industry. This takes domain expertise.

Similar to the waltz, someone must take lead; It is our belief that construction will take the lead given the highly specialized nature of the industry.

We have the What, the Why. We need the How.

More specifically: how can we solve the multi-pronged pain-points illustrated above?

The US market is full of companies that monitor and improve safety performance of construction sites: we believe these platforms will inevitably invite collaboration with the Insurance Industry. This provides reinsurers greater access to the specialized high hazard segment of the workers’ compensation segment.

Much like insurance, some safety monitoring companies are analyzing their data to capture the risk profile of various construction sites, on a real time basis, thus providing an entirely different yet compatible format to the insurance industry.

Hence, risk assessment on the basis of real-time field data is the key via which construction-tech companies can penetrate the insurance market.

Construction safety & risk management platforms can maximize the value of its risk assessment by playing an active role in the underwriting and pricing of insurance policies such as Workers’ Comp.

With risk analysis of live, individual projects, construction-tech startups with underwriting authority would have the ability to apply both tailored pricing and dynamic pricing to different construction companies, which isn’t possible for traditional insurers. In this way, the premiums faced by construction companies will be more in-line with their risk profile, not only passively monitoring & improving safety performance but directly contributing to their premium. As such, these new startups can renew the Workers’ Comp policies for “low-risk” construction companies at a discount rate, and keep the premiums high for high-risk companies.

In answer to the multi-pronged problem:

  • Pricing: abolish uniform pricing
  • Compliance: higher safety yields lower insurance premiums → incentivised to drive safety measures, increase worker safety
  • Profit: Insurers have the ability to arbitrage the market, making more profit

One way construction-tech startups can acquire underwriting authority is by becoming a MGU (Managing General Underwriter) i.e. a specialized insurance broker with key functions such as pricing, binding coverage and settling claims, sitting at the intersection of carriers and clients.

MGUs have been successful (in other industries) when markets signal a need for more specialized products, as their underwriting discretion allows for more product customization than traditional brokers. At Foundamental, we believe the construction industry is in need of a tech-enabled MGU business model as conventional safety & risk management platforms are saplings in infertile soil.

Safety & risk management platforms who can navigate to a tech-enabled MGU structure (with aim to pivot to a full-stack carrier) is an elegant (and defensible) evolutionary path to providing greater value to both construction & insurance industries alike.

We remain bullish on the blueprint design in its ability to alleviate festering pain-points that have yoked the construction & insurance industry. If you are a Founder building such a firm, Foundamental would be grateful to hear your story!

Big thanks to the Foundamental Insights team for uncovering unique nuggets of information for this article.

Sources:

  • Occupational Safety and Health Administration
  • Bureau of Labour Statistics
  • Eurostat
  • Insureon

The Future of Construction Supply Chains

At a recent panel discussion, one of my colleagues was asked how about a new and improved construction industry could deal with the global challenges of uncertainties in costs, and uncertainties with….you know…the Coronavirus situation (Sure, why not?)

As Tech-VCs are wont to do when presented with such a question, I resorted to the #vclogic approach of bringing up obvious facts that have happened in the immediate past, and which most of you are probably already familiar with — That while most public market indices and stocks took a beating over the last month, Slack & Zoom gained ~50%.

This prompted the totally original and groundbreaking thought that the construction industry ought to be run on an open network, transparently connecting the world’s supply chain.

I know, you are probably thinking…

Image Source: Dilbert.com

But to what extent are supply chains in Construction truly connected?

The truth, almost without exception in construction, is that the “supply chain” more closely resembles clusters of disconnected ecosystems that comprise players as distinct as owners, builders, material producers, logistics firms, equipment suppliers and workers & labour suppliers being held together in a state of delicate equilibrium.

What keeps these firms functioning as a cohesive supply chain? An under-appreciated set of companies, typically referred to as Contractors.

Source: Foundamental research

As might be apparent from the above illustration, Contractors often don’t employ their own staff on projects and therefore, as a corollary, don’t actually “do” most of the tasks they have been hired for.

They instead hire firms, suppliers, and workers often for specific projects and engagements and “manage” the project.

You are probably thinking “Why hire a Contractor if subcontractors and suppliers do all the work ?“- A question that’s particularly relevant when reminding ourselves that the top 250 global contractors reported $1.5 Trillion in revenues in 2017.

Source: Dilbert.com

Contractors play much the same role as wedding planners. Wedding planners are hired, not to cook the food, bake the cake, prepare the flowers, or play the music, but to make sure everything comes together to make the event successful.

In a very similar way, Contractors provide their project management expertise, their knowledge of building materials and methods, and their expertise in choosing subcontractors and workers.

But a Contractor’s greatest value-proposition, without question, is the promise of being responsible for the quality of work delivered, or the promise of delivering peace of mind.

And for the most part, Contractors do a great job in maintaining a semblance of order, in coordinating processes and stakeholder relationships.

However, as tends to be the case with so many industries and business models ripe for disruption (Threw that word in there for good measure), the strengths that traditional contractors represent (Locally/hyper-locally strong relationships and focus on execution/hustle) also expose just how fragile the supply chain in construction is.

It might surprise you to learn that most Contractors continue to rely on “low-tech” methods such as :

  • Microsoft Excel or other spreadsheet tools
  • Material and services orders are typically awarded from within a small group of trusted suppliers, subcontractors and vendors, rather than through an open marketplace that allows for transparent price & capacity discovery
  • Phone calls and WhatsApp/text messages for real-time scheduling and coordination
  • Drawings, checklists, inspection reports, approval requests etc. primarily exist as paper-based documentation

From our in-house research, we have identified the following pain-points in the traditional Contractor model that point to a pent-up demand for an alternative.

Source: Foundamental research

What if a new and emerging genre of firms is capable of operating with a different playbook that allows them to orchestrate construction supply chains?

Before answering the question of what those firms might look like, lets take a look at the image below that describes the opportunities McKinsey & Co. identified for technology use-cases in the construction industry:

Source: “The new age of Engineering and Construction Technology” — McKinsey & Co.

At Foundamental, we believe that a new archetype of firm will emerge in Construction to either directly solve the above use-cases, or effectively plug into other solution providers, one that we like to call “Digital Contractor”.

Digital Contractor is a unique fusion of three very different business models, that have typically been thought to occupy three entirely distinct market opportunities:

  1. Project Management & Collaboration software
  2. [Curated] B2B & B2C Marketplaces for materials, equipment, services and labour
  3. End-to-end design & building services
Source : Foundamental research

We believe, and are seeing early evidence in multiple markets, that Digital Contractors “work” for the following reasons :

  • Linkage to a marketplace-backed supply chain provides price transparency
  • Curated marketplaces provide levers to vet and control quality on the supply-side
  • Adoption of a unified project-management layer through the supply chain allows for real-time visibility of project progress, fulfillment and quality issues [To reduce time & cost overruns]
  • Being able to assess and predict demand allows for efficient asset & labour sourcing utilisation (by the material and service-providers)
  • End-customers can be given greater security over service delivery and payments as the Digital Contractor is able to take responsibility for a supply chain that has become far more transparent and controllable
  • The connected and open supply chain allows the Digital Contractor to always choose the best supplier/vendor/subcontractor in real-time, thereby eliminating failures causes due to over-dependence on certain stakeholders

While the jury is still out on how our thesis on Digital Contractors will play out, we are very bullish on the model and its ability to (finally!) solve pain-points that have saddled the construction industry for far too long.

If you are a Founder building a Digital Contractor or want to create a firm that orchestrates the construction supply chains of the future, we at Foundamental would be grateful to hear your story!

  • This article was only possible because of the excellent research led by the Foundamental insights group, especially my colleagues Sebastien and Dominik
  • Our in-house research and insights were also built upon information collected from the stellar founders we have had the privilege to invest in, and/or have had inspiring conversations with.
  • For more of such posts, head to Foundamental.comand follow us on LinkedIn

Thanks to Foundamental.