Watch Episode 6: Disruptions
Proudly produced alongside Bricks and Bytes.
Disruption
The construction tech industry stands at a critical juncture.
Foundamental's take on the current state of construction tech is both provocative and evident. We've been watching this space evolve for years, and we're now seeing a perfect storm of factors that are forcing incumbents to adapt or risk becoming irrelevant.
The truth is, most incumbents in our industry have been resting on their laurels for far too long. As Shub bluntly puts it, "No one's innovating. The big general contractors, I mean, you're seeing a lot of people trying to adopt, collaborate with startups, but if I'm being brutally honest and provocative, no one's really innovating at the rate they should be."
This lack of innovation has created a massive opportunity for disruptors. We're seeing a new breed of startups that are not just incrementally improving existing processes, but completely reimagining how the construction industry operates.
Take Infra.Market, for example. In just a few short years, they've become the second-largest concrete player and one of the top cement and paint companies in India. As Shub explains, "This is a firm that is less than 10 years old. It came into existence only in 2016, and we've been involved with the firm for just four years."
The success of companies like Infra.Market highlights a crucial point: you don't need to reinvent the wheel to disrupt an industry. Sometimes, it's about executing better on existing ideas and truly understanding market needs.
As Adam points out,
"You're seeing these founders invest in seeing those margins, those very chunky margins, and that's going to be their opportunity to build something very, very large."
The message to incumbents is clear: innovate or be left behind. The construction tech landscape is evolving rapidly, and those who fail to adapt risk becoming the next Kodak or Blockbuster of our industry.
Acquisition
Strategic acquisitions could shape the next 12-18 months of construction tech (NB: At the time of recording, May 2024).
We're expecting an unprecedented wave of acquisitions in the construction tech space over the next 12-18 months (NB: as of May 2024). This isn't just idle speculation – it's based on a confluence of factors that are creating a perfect storm for M&A activity.
Adam explains it best: "You have these hyper-growth firms that are catching the attention of these large incumbents like Autodesk. They're growing at an unprecedented rate. You have the IPO market essentially frozen, so you have a lot of fear, uncertainty, and doubt that gets spewed into the founders' psyche."
This situation creates a unique opportunity for incumbents with deep pockets. Companies like Autodesk are sitting on billions in cash, and they're going to be looking to put that money to work. As interest rates come down, we expect to see a flurry of activity.
But here's the kicker: for startups, being acquired isn't just about cashing out. It's about truly disrupting the industry. As Shub puts it,
"If the objective is to be acquired for a substantial sum... there is no way you'll achieve an outcome like that without legitimately scaring the daylights out of the incumbent."
In other words, startups need to be more than just "cool new toys" – they need to present a genuine threat to the status quo. This is where the real value lies, both for the startups and for the industry as a whole.
However, we're also seeing a shift in how these acquisitions are approached. The traditional corporate venture capital (CVC) model has largely failed in our industry. As Adam notes, "A lot of startups don't really want to have those corporations or entities on their cap tables because it's really kind of almost a negative signaling effect."
Instead, we're likely to see more direct acquisitions, with incumbents looking to integrate promising startups directly into their operations. This approach allows for faster innovation and better alignment of incentives.
The next 12-18 months will be crucial. As Adam predicts, "I think you'll see an unprecedented amount of acquisitions at the top level or like medium range... across the fields."
For startups in our space, the message is clear: focus on building genuine value and disrupting the status quo. For incumbents, it's time to start seriously evaluating potential acquisition targets. The future of construction tech is being shaped right now, and those who move quickly and decisively will be the ones who come out on top.
Innovation
True innovation in construction tech requires a fundamental shift in thinking.
When we talk about innovation in construction tech, we're not just talking about incremental improvements or fancy new features. We're talking about a fundamental reimagining of how our industry operates.
The problem is, most incumbents are stuck in old ways of thinking. As Shub points out, "A lot of firms and by firms I mean cement companies, paints companies, chemicals companies and so on, they assume hey this doesn't look like cutting edge tech so sure you know we'll do the same thing it's just better logistics better supply chain so we'll do it right no big deal."
But this kind of thinking is exactly what leaves incumbents vulnerable to disruption. True innovation often comes from unexpected places and takes forms that might not look like "cutting edge tech" at first glance.
Take the example of Vertiv, which Shub shared. "Until recently it was just an electrical products company. You'd think you know what's so cool about that. Sorry boring, exactly right... What is really fascinating is about a year and a half ago, they I guess saw or predicted the demand for data centers picking up, so they decided to focus themselves on going from the electrical side to specializing on cooling products and full stack cooling solutions for data centers."
This pivot allowed Vertiv to tap into a booming market, with their stock price outperforming even tech darlings like NVIDIA. It's a perfect example of how innovation doesn't always mean creating a new product from scratch – sometimes it's about seeing new applications for existing expertise.
But innovation isn't just about products or services. It's also about business models and approaches to the market. As Adam notes, "You're seeing an abundance of cash coming in and rewarding those founders for innovating and trying to steal, you know the old saying, your margin is my opportunity."
This influx of capital is creating opportunities for startups to challenge incumbents in ways that weren't possible before. But it also means that incumbents need to be more proactive in their approach to innovation.
One area where we see massive potential for innovation is in services. As Shub explains, "There's this enormous opportunity just to integrate these software pieces of software into your ecosystem... I think there's an opportunity to bring these services into a new tech-led future either employing AI or making them more efficient."
This focus on services represents a shift from purely product-focused innovation to a more holistic view of the construction tech ecosystem. It's about creating value at every stage of the construction process, from design to execution to maintenance.
The key to successful innovation in our industry is to stay focused on solving real problems. As Shub puts it,
"The person who I love to surround myself with are those people who are just free thinkers, the radical thinkers. You have a sense of autonomy and come to the right question."
It's this kind of radical, problem-focused thinking that will drive the next wave of innovation in construction tech. Whether you're an incumbent or a startup, the message is clear: challenge your assumptions, look for opportunities in unexpected places, and always stay focused on creating real value for your customers.
Opportunity
The construction tech market is expanding rapidly, creating unprecedented opportunities.
At Foundamental, we're incredibly excited about the current state of the construction tech market. We're seeing what we call a "trifecta of opportunity" – a combination of factors that are creating unprecedented growth potential in our industry.
Shub explains it best: "You have a secular demand, a secular trend of demand increasing and it has to increase because in every major market whether we realize it or not there's something which is forcing the hand of governments and large companies to build more homes."
This demand is driven by a variety of factors. In the US, there's a need for up to seven million more homes to address housing shortages. In the EU, the push for green energy is driving demand for two to five million new, more energy-efficient homes. And in emerging markets, rapid growth of the middle class is fueling demand for new housing and infrastructure.
But it's not just about the size of the market – it's also about the pace of change. As Adam points out, "10 years ago there was really no capital really being injected into the into the space at all. Now they're starting to be billions of dollars being sunk into the ecosystem at large."
This influx of capital is fueling innovation and creating opportunities for both startups and incumbents. But it's also raising the stakes. As the market expands, those who fail to adapt risk being left behind.
For startups, this environment presents a unique opportunity. As Adam notes, "You're giving these founders that are very, you know, the best and brightest within the respective verticals, an abundance of cash to go and innovate and make these large potential Autodesk-like firms."
But it's not just about creating the next Autodesk. We're seeing opportunities across the entire construction tech ecosystem. Adam highlights the potential in services: "There's this enormous opportunity just to integrate these software pieces of software into your ecosystem... I think there's an opportunity to bring these services into a new tech-led future either employing AI or making them more efficient."
For incumbents, the expanding market presents both opportunities and challenges. As Shub puts it, "Frankly it's up to you to not f it up for yourself and if you're not effing it up for yourself you will generally do well which is the cool aspect about construction."
The key to capitalizing on these opportunities is to stay focused on solving real problems. As Shub explains, "What we have done over the last six years or so has allowed us to build up a position of privilege and unfair advantage... it's our game to lose now."
But maintaining this advantage requires constant vigilance and a willingness to challenge our own assumptions. As Shub notes,
"When you start coloring outside the lines of the thesis, the structure, reaching for just for the sake of reaching, I think that's when it becomes very dangerous."
The construction tech market is at a critical juncture. The opportunities are immense, but so are the challenges. Those who can stay focused, innovate effectively, and truly understand the needs of the market will be the ones who thrive in this new landscape.
Advice?
Hey Incumbents ! Stay curious, be proactive, embrace change.
If there's one message we want to send to incumbents in the construction tech space, it's this: don't f*** it up. It might sound harsh, but in an industry that's changing as rapidly as ours, complacency is death.
As Adam bluntly puts it, "A lot of people are gonna do [it] up in terms of incumbents. I mean, I think you know they're old saying like they can't see the forest through the trees. I think a lot of them are just seeing bark."
This myopic view is dangerous. It's not enough to just keep doing what you've always done. The market is changing, new players are entering the field, and customer expectations are evolving. If you're not actively working to stay ahead of these changes, you're already falling behind.
But here's the thing: despite all the challenges, incumbents still have significant advantages. You have established customer bases, deep industry knowledge, and financial resources that most startups can only dream of. The key is leveraging these advantages effectively.
Shub offers this perspective: "If the size of the pie were to remain the same or shrink... that would be the case. What is quite interesting and a very cool thing... we have this fascinating trifecta of opportunity in construction right now where you have a secular demand, a secular trend of demand increasing."
In other words, the market is growing. There's room for both incumbents and new players to succeed. But success isn't guaranteed – it requires active effort and a willingness to embrace change.
So what does "not f***ing it up" look like in practice? Here are a few key points:
Stay curious: Don't assume you know everything about your market or your customers. Be willing to challenge your assumptions and look at your industry with fresh eyes.
Embrace innovation: This doesn't just mean buying new technology. It means fostering a culture of innovation within your organization and being willing to fundamentally rethink how you do business.
Be proactive about acquisitions: As Adam predicts, "This year is going to be an unprecedented amount of acquisitions within the space." Don't wait until a startup becomes a threat to consider acquiring them. Be proactive in identifying and pursuing promising companies that could complement your business.
Focus on creating real value: It's not just about having the fanciest technology or the biggest market share. It's about solving real problems for your customers in ways that create lasting value.
Don't be afraid to disrupt yourself: Sometimes, staying relevant means being willing to cannibalize your own business models before someone else does it for you.
Hey Incumbents ! You have advantages – don't squander them. The opportunities in construction tech are enormous, but they won't fall into your lap. You need to be active, engaged, and willing to take risks.
Remember, in a rapidly changing industry, standing still is the same as moving backwards. So our advice remains the same: don't f*** it up. The future of construction tech is being shaped right now, and you have the power to be a part of it. Don't let that opportunity slip away.
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Ep. 6: Disruptions
tl;dr
Disruption: Construction tech is at a critical juncture with incumbents facing pressure to innovate or risk irrelevance. New startups are reimagining industry operations, creating opportunities for significant disruption.
Acquisition: Big acquisitions is expected in the next 12-18 months (as of 2024) due to market conditions and cash-rich incumbents. Startups need to present genuine threats to incumbents to achieve substantial acquisition outcomes.
Innovation: True innovation in construction tech requires fundamental shifts in thinking, not just incremental improvements. Successful innovation focuses on solving real problems and creating value across the entire construction process.
Opportunity: The construction tech market is expanding rapidly, driven by housing demands and infrastructure needs globally. This growth is creating unprecedented opportunities for both startups and incumbents who can adapt effectively.
Advice: Our message to incumbents is simple - don't f*** it up. Stay curious, embrace innovation, be proactive about acquisitions, focus on creating real value, and don't be afraid to disrupt yourself to stay relevant in this evolving industry.
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