This week we provide the voiceover to our updated community letter:
We discuss the patterns, fallacies, and regularities in AEC-tech investing;
The flawed VC market and its inefficient capital allocation into B2B technology firms in the firms’ early years;
Our convictions and approach to chasing vertical singularities;
The next 5 years of AEC-Tech and Foundamental, and our pursuit of building a legendary vertical investment firm alongside great founders.
Vertical Singularities
Foundamental's updated mission: Backing vertical singularities in construction-tech for the next 5 years
In this Practical Nerds episode, Shub, Patric and the Foundamental team unveil its updated mission for the next five years, focusing on backing vertical singularities in the construction-tech sector. Patric emphasizes, "We're looking for it, just summing it up, because they are the true nature of category creation potential in a B2B sector and especially in our sectors, architecture, engineering, construction, supply chains." The firm believes that these unique, sector-specific opportunities hold immense potential for disruption and growth. By identifying and supporting these "hidden gems," Foundamental aims to drive innovation and transformation within the architecture, engineering, and construction (AEC) industry. Shub adds, "I think the, I mean, the devil is really in the details here. What we spoke about is looking for something which is hidden, but obvious." The team's deep expertise and understanding of the sector's nuances position them well to spot and nurture these singular opportunities. Foundamental's commitment to vertical singularities reflects their conviction in the untapped potential of construction-tech and their dedication to being a catalyst for change. The firm's approach is rooted in the belief that these specialized, industry-specific solutions will be the key drivers of the sector's future success. With their updated mission, Foundamental is poised to play a pivotal role in shaping the landscape of construction-tech over the next half-decade.
Funding Inflection
Construction-tech funding inflection: From 0.1% to 0.45% of VC funding, still massive potential for growth
The construction-tech sector is experiencing a notable funding inflection, with its share of venture capital (VC) funding increasing from a mere 0.1% to 0.45% in recent years. Shub points out, "Construction tech only had received in aggregate until then about 0 .1 % of the VC funding, which if you think about it is absolutely nuts considering that construction broadly speaking covers about 10 % of the economy." Despite this growth, the industry still holds massive potential for further expansion and investment. Foundamental recognizes that the current funding level is just the tip of the iceberg, given the construction sector's significant contribution to the global economy. As more investors begin to understand the opportunities within construction-tech, the influx of capital is expected to accelerate. Patric adds, "The amount of capital that went into our sectors has actually six x'd compared to the previous 30 years, right? And so that's a real, like that's mathematically the definition of an inflection against the down market." This funding inflection is a clear signal that the industry is on the cusp of a transformative period, with innovative solutions and technologies poised to disrupt traditional practices. Foundamental's early recognition of this trend positions the firm to be at the forefront of this investment wave, enabling them to identify and support the most promising startups in the space. As construction-tech continues to gain momentum, the sector is primed for exponential growth in the coming years.
Unobvious Opportunities
Key to success in construction-tech: Founders chasing unobvious opportunities obvious to industry insiders
Foundamental believes that the key to success in construction-tech lies in founders who pursue unobvious opportunities that are apparent to industry insiders. Patric explains, "You should be gunning for the top right or if you take casino-like risk, the top left, which is hidden to everyone, meaning you're taking a crazy market risk." These opportunities often go unnoticed by generic investors who lack the deep sector knowledge and understanding of the AEC industry's specific challenges and needs. By chasing these "hidden in plain sight" prospects, founders can develop innovative solutions that address critical pain points and drive meaningful change within the sector. Shub adds, "For all those of you who feel like the oddballs in what you're building, I can only tell you that we hear you. I hope this comes across as a source of motivation and inspiration to you that in all likelihood, at least you're in the right, let's say you're in the right half of the quadrant." Foundamental's team, with their extensive experience and network within the AEC space, is well-equipped to identify and support these visionary founders. The firm's emphasis on unobvious opportunities stems from the recognition that the construction industry's unique dynamics require tailored, industry-specific solutions. By backing founders who have the insight and courage to pursue these unconventional paths, Foundamental aims to foster the development of groundbreaking technologies and business models that will shape the future of construction-tech.
Spotlight: Outcome-as-a-Service
Outcome-as-a-service business models well-suited for construction, despite VC herd mentality
Foundamental recognizes that outcome-as-a-service business models are particularly well-suited for the construction industry, despite the prevailing herd mentality among venture capitalists. Patric shares, "For five years have told me how dumb it is and how venture unbackable it is to back companies that start with services. Shubh, honestly, I can't tell you how often I have heard this. And in construction, I mean, we have been saying this for a long time. Outcome as a service is a fantastic way to build a company, to get transactions quickly, to build frequency and discovery quickly, to actually be net profitable quickly." While many VCs tend to favor software-as-a-service (SaaS) models, the AEC sector's unique characteristics make outcome-based approaches more viable and valuable. Construction companies are accustomed to purchasing services, transactions, and outcomes rather than just tools or software. By focusing on delivering tangible results and guaranteeing outcomes, construction-tech startups can better align with the industry's expectations and needs. Foundamental's contrarian stance on this matter is rooted in their deep understanding of the sector's dynamics and their willingness to challenge conventional VC wisdom. The firm believes that by embracing outcome-as-a-service models, construction-tech startups can unlock significant value and drive adoption more effectively. This approach also enables startups to tap into larger value pools and generate more sustainable revenue streams. As the construction-tech landscape evolves, Foundamental's support for outcome-as-a-service models positions the firm to back startups that are best equipped to succeed in this unique industry.
Category Creators vs. Category Clones
Foundamental's contrarian approach: Seeking category creators in construction-tech, not category clones
Foundamental's investment philosophy in construction-tech is centered on seeking out category creators rather than backing category clones. Patric states, "And so the bottom right quadrant if you're watching the video is like where it's obvious to generic people and it's obvious to insiders and as a founder you might think hey That's great because then I can do business and I can raise capital for it. my god No, that is exactly how you build a category clone, right?" The firm believes that true innovation and disruption in the sector will come from startups that forge new paths and define entirely new categories, rather than those that simply imitate existing successful models. This contrarian approach sets Foundamental apart from many other VCs who tend to chase trends and invest in "me-too" startups. By focusing on category creators, Foundamental aims to identify and support the visionaries who have the potential to revolutionize the AEC industry. Shub adds, "Think of like a souped up version of a category creator, a very rare, almost an anomaly in the world of venture or in the world of ACS. And for whatever reason, it's not getting the love from the investor side, as we've discussed, but has an incredible insight into what the market wants, what the customers or the users want." The firm recognizes that these trailblazing startups often face unique challenges and may not fit the conventional mold of what VCs typically look for. However, Foundamental's deep sector expertise and willingness to think outside the box enable them to spot the immense potential in these unconventional opportunities. By backing category creators, Foundamental not only positions itself to generate outsized returns but also plays a vital role in driving the construction-tech sector forward and unlocking new possibilities for the entire AEC industry.
The Importance of Sector Knowledge in B2B VC (early-stage)
Empathy and nuanced sector knowledge crucial for early-stage construction-tech investing
Patric, Shub and Foundamental firmly believe that empathy and nuanced sector knowledge are essential for successful early-stage investing in construction-tech. Patric emphasizes, "Someone like you, someone that is a specialist in a vertical, that actually gives them from a place of authority, experience, empathy for the sector what I think is the right view, right?" The AEC industry is complex, with its own unique challenges, workflows, and stakeholder dynamics. Generic investors who lack a deep understanding of these intricacies often struggle to identify and evaluate the most promising opportunities in the space. Foundamental's team, with their extensive experience and network within the construction sector, possesses the necessary empathy and nuanced knowledge to navigate this complex landscape effectively. This enables them to ask the right questions, understand the true potential of startups, and provide valuable guidance to founders. Shub adds, "For me, you know, we have the four Cs in the categories of fallacies. And I think the ones on company contribution and collaboration, I think that could be said in general for maybe 90 % of the VCs. I feel like operating, unfortunately, whether they're sector agnostic or not, et cetera, to be very honest with you, or honest with our viewers." By cultivating a deep appreciation for the sector's specific needs and pain points, Foundamental can identify startups that are best positioned to drive meaningful change and create value for the industry. The firm's emphasis on empathy and sector knowledge also helps them build strong, trust-based relationships with founders, which is crucial for long-term success in early-stage investing. As the construction-tech ecosystem continues to evolve, Foundamental's commitment to empathy and nuanced understanding will remain a key differentiator and driver of their success in backing the most promising startups in the space.
Find more analysis on the Practical Nerds podcast
Subscribe to the NEWSLETTER here
Keywords: construction tech, construction technology, AEC, architecture, engineering, construction, supply chain, venture capital, VC funding, category creators, outcome-as-a-service, vertical singularities, hidden opportunities, nuanced sector knowledge, industry insights, construction startups, early-stage investing