tl;dr
- Varm, a European insulation company, raised a €5.7 million seed round
- Nemetschek enters India's construction software market
- "Pay what you want" software pricing models for AECS-Tech
"If you have to invest a lot in R&D and you have to invest a lot in distribution costs, but your AOV is high and your variable COGS are relatively marginal, the SaaS kind of model will actually leave money on the table. In this case, pay as you go priced by the outcome is worth considering in AECS."
Listen to this episode
00:00 Introduction and Funding Round
02:32 Varm's Focus on Insulating Existing Buildings
05:41 Cloud Installer: Varm's Business Model
10:09 Blow-In Insulation: A High ROI Measure
28:06 Introduction to Nemetschek Group's Expansion into India
31:59 The Potential of the Indian AEC Software Market
36:26 Challenges of Pricing Models in the Indian Market
Varm: Insulating Europe's Future with the Cloud Installer Model
A new player is making waves with an innovative approach to a long-standing challenge. Varm, a European company focused on insulating existing buildings, has just announced a €5.7 million seed round. This funding round, which might qualify as one of the larger seed rounds in the space, has caught the attention of industry watchers and investors alike.
Varm's business model is deceptively simple yet remarkably innovative. We first published our thesis on it in 2022. Now, Varm is targeting the millions of residential buildings across Europe that need insulation to meet increasingly stringent decarbonization targets and reduce ever-rising energy costs. Their initial focus is on blow-in insulation, a proven process that's been around for years but lacks a tech-enabled, national leader in the European market.
What sets Varm apart is their unique approach to standardization and scaling. They've created what we here at Foundamental have called the "Cloud Installer" model. This innovative system works by training installers through the Varm Academy, equipping them with standardized processes and proprietary software, and then allowing these trained professionals to start local Varm businesses. This model allows for rapid expansion while maintaining strict quality control, a crucial factor in the construction industry.
The company's growth trajectory has been nothing short of impressive. They've already achieved net profitable months, a feat that's particularly noteworthy for a young startup in this sector. This early profitability is attributed to strong operational discipline and good profit margins, factors that have undoubtedly contributed to their ability to attract high-caliber investors. Among these are Emerge, a UK-based edtech fund, and Pale Blue Dot, widely regarded as one of the leading European climate tech investors.
The Economics of Insulation Allow for A Highly Profitable Business
Diving into the numbers reveals why Varm's model is so compelling. The cost for blow-in insulation for an average 130-170 square meter single-family home in Europe typically ranges from €2,500 to €7,500. To put this in perspective, compare it to the cost of a heat pump, which can run to €15,000 in Denmark or a staggering €30,000-€35,000 in Germany.
The energy savings from proper insulation can be between 10-20%, making it a high return on investment (ROI) measure for homeowners. This cost-effectiveness is why insulation often comes first in the merit order of renovation measures. It's a crucial step before adding other energy-saving technologies like heat pumps or solar panels.
As Patric Hellermann astutely pointed out during our discussion, "If you retrofit a poorly insulated building with a heat pump, it's usually the wrong merit order of the sequence." This insight underscores the importance of addressing insulation as a foundational step in any energy efficiency upgrade.
The Bigger Picture: Europe's Renovation Wave
Varm's success is set against the backdrop of Europe's ambitious push towards energy efficiency and decarbonization. In Germany, for instance, there's a significant political shift towards constraining land for new construction. By 2050, the expectation is that no net new building land will be issued. This policy direction creates strong incentives for renovation and retrofitting of existing structures, playing right into Varm's wheelhouse.
Moreover, the scale of the opportunity is truly massive. Depending on which estimates you look at, there are between 20 to 150 million residential buildings across Europe that need insulation. Just considering the buildings suitable for blow-in insulation in Germany, Benelux, Nordics, Northern France, and parts of the UK, we're looking at roughly 30 million residential buildings. This represents an enormous market opportunity for a company like Varm that can efficiently scale its operations.
Nemetschek: Bridging East and West
Shifting gears, let's explore another intriguing development in the construction tech world. Nemetschek Group, a well-established provider of software solutions for the Architecture, Engineering, Construction, and Operations (AECO) industry, has announced its entry into the Indian market. This move is significant for several reasons and deserves a closer look.
First and foremost, it represents a Western company making a concerted effort to tap into India's booming construction sector. With India's GDP growing at an impressive 7.3% annually and its construction sector outpacing that at 12-14%, it's an incredibly attractive market for construction tech companies. The sheer scale of India's ongoing infrastructure development and the rise of its middle class make it a prime target for companies looking to expand their global footprint.
Nemetschek's strategy for entering the Indian market involves more than just setting up a local office. They've signed a Memorandum of Understanding with JJ Architecture College to foster innovation and skill development in the Indian architecture sector. This move echoes a common strategy in the software world - get your tools into the hands of students who will become future professionals. By partnering with educational institutions, Nemetschek is playing the long game, ensuring that the next generation of Indian architects and engineers are familiar with and proficient in their software solutions.
The Indian Market (for CAD): Challenges and Opportunities
However, entering the Indian market isn't without its challenges. As Patric Hellermann pointed out during our discussion, "In India so far, the market for paying for software is not the same that you might be used to in other parts of the developed world." Issues like software piracy and a general reluctance to pay high prices for software licenses are realities that Western companies need to navigate carefully.
But the opportunities in India are immense and multifaceted. India's vast pool of talented architects and engineers could potentially serve Western clients, enabled by standardized software solutions. This could create a win-win situation, where Indian professionals gain access to global markets, and Western companies benefit from skilled labor at competitive rates.
Furthermore, as India continues its rapid modernization and urban development, the demand for sophisticated AECO software solutions is likely to grow exponentially. Companies like Nemetschek that establish a strong presence early on could be well-positioned to capture a significant share of this burgeoning market.
Pay What You Want: A New Frontier in Software Pricing?
Our conversation then took an intriguing turn towards a topic that's been generating buzz in the software industry: the "pay what you want" pricing model. This concept, which gained widespread attention when the band Radiohead used it to release their 2007 album "In Rainbows," has been gaining traction in various industries, including software.
The idea behind "pay what you want" is disarmingly simple: users get access to the full software and pay what they think it's worth. It's a radical departure from traditional pricing models, and it raises some fascinating questions about the economics of software development and distribution.
Patric Hellermann offered a thought-provoking analysis of this model during our discussion. He pointed out that software development typically involves high fixed costs (R&D, initial development) and low variable costs (distribution, server costs). This economic reality has traditionally favored subscription or license-based pricing models that help recoup the initial investment and fund ongoing development.
For a "pay what you want" model to work, Patric argues, you'd need a situation where both the development and distribution costs are very low. Otherwise, you risk leaving money on the table and potentially undermining the financial viability of the product.
However, there might be scenarios where this model could work effectively. Martin pointed out the example of Rayon, a competitor to AutoCAD that has gained over 100,000 users through a combination of free and paid versions. Their success suggests that for certain types of software, particularly those that can leverage community distribution and have lower development costs, a more flexible pricing model might be viable.
The Human Element in Pricing
Our discussion on "pay what you want" pricing led to an interesting thought experiment: how would we decide what to pay for our favorite artist's new album if given the choice? The responses from our panel revealed the complex interplay of factors that go into these decisions.
Martin spoke about the emotional connection and being willing to pay a premium for something he's passionate about. This highlights the potential for "pay what you want" models to capture value from highly engaged users who might be willing to pay more than a standard price point.
Patric distinguished between utilitarian and emotional value, suggesting he'd pay based on how much he wants the artist to continue creating. This perspective underscores the potential for "pay what you want" models to foster a sense of direct support between creators and consumers.
I echoed similar sentiments, noting that for something truly beloved, the traditional price points might not apply. This suggests that "pay what you want" models could potentially capture more value from super-fans than traditional fixed pricing.
These personal reflections highlight both the potential and pitfalls of "pay what you want" models. While they can tap into customers' emotional connections and perceived value, potentially leading to higher payments from some users, they also risk undervaluing products, especially those with high development costs. The success of such a model likely depends heavily on the nature of the product, the strength of the creator-consumer relationship, and the overall cost structure of the business.
As we wrap up our exploration of these diverse topics - from innovative insulation companies to market entry strategies in India, to experimental pricing models - it's clear that the construction tech industry is in a state of rapid evolution. Companies like Varm and Nemetschek are pushing the boundaries of what's possible, while new ideas about pricing and value creation are challenging long-held assumptions.
As we move forward, it will be fascinating to see how these trends develop. Will Varm's model of tech-enabled, standardized insulation installation spread beyond Europe? How will Nemetschek navigate the complexities of the Indian market? And will we see more software companies experimenting with "pay what you want" models? Only time will tell, but one thing is certain: the intersection of construction and technology will continue to be a hotbed of innovation and opportunity.
Companies mentioned
Varm, Nemetschek Group, Autodesk, Bentley, Hexagon, Trimble, Rayon, Radiohead
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Keywords
Construction tech, insulation, Varm, Nemetschek Group, India market entry, software pricing models, pay what you want, venture capital, renovation, energy efficiency