Watch Episode 3: Fallacies

^{Proudly produced alongside Bricks and Bytes.}

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Repetitions

Specialist VCs in construction tech have a unique advantage: deep sector empathy from repetition, repetition, repetition in architecture, engineering, construction and its supply chains (AECS).

At Foundamental, we've dedicated years to understanding the intricacies of the architecture, engineering, construction, and supply chain (AECS) sectors. This laser focus and routine allows us to spot opportunities that generalist investors often overlook. As Patric explains:

"It's not because we're smarter than every generic VC investor. The difference is the generic VC investor has to look at pharma, and then the next day at agriculture tech, then the next day at logistics tech, the next day at a consumer play, and then once a year that person looks into construction."

This depth of understanding from repetition pays dividends in our interactions with founders. Patric notes, "We regularly have founders telling us, 'Finally, someone who gets my business.'" This understanding goes beyond surface-level market knowledge. It's about grasping the nuances of why a founder might choose a business model that seems counterintuitive to outsiders but makes perfect sense within the construction industry.

Adam, reflecting on his extensive experience, adds, "In 5-6 years I'll say I've worked in the construction sector for 12-13 years, and I will barely feel like I've scratched the surface." This humility, combined with deep sector knowledge, is what truly sets specialist VCs apart in the construction tech space.

Our empathy extends to understanding the unique challenges and opportunities within the industry. We recognize that construction operates differently from other sectors, with its own set of priorities, workflows, and economic models. This insight allows us to provide more relevant advice and support to our portfolio companies.

Fallacies

Generalist VCs often fall into traps when investing in construction tech, misapplying lessons from other sectors and overlooking industry-specific realities.

One pervasive fallacy is the "SaaS everything" approach. Patric breaks down why this doesn't work in construction: "If you look at the P&L of a construction company, typically 50% of costs are materials, 48% labor and machinery, and only 2% IT." Yet many generalist VCs push startups to focus solely on software solutions, addressing only that tiny 2% slice of the market. This myopic view often leads to products that fail to address the core needs of the industry.

Another common fallacy is the "growth at all costs" mentality that has been successful in some consumer tech sectors. Adam points out the shift in thinking: "The old mentality was growth for the sake of growth. You could maybe get by with zero percent interest rates, but today it's just not going to fly." In construction tech, profitability and sustainable business models are crucial from day one.

We've witnessed startups burn through cash trying to apply consumer tech strategies to B2B construction. Patric shares a telling anecdote:

"We had a founder pitch us who was ex-hyperscaler, and his strategy was to have negative gross margins to subsidize growth. We told him, 'You're not going to do business that way because your customers will actually say, 'I don't think you will be around in a year from now.'"

This is just one of the generic approaches which might have worked in consumer-focused rapid scaling scenarios, but it's often disastrous in the more conservative, relationship-driven construction industry.

Another fallacy we've observed is the misapplication of marketing strategies. Patric recounts a board meeting where a generalist investor advised a construction tech startup to "just open the valve for marketing, just increase the marketing spend." However, in construction, traditional digital marketing often falls flat. Instead, we advised the company to "go offline, go after the local associations, the craftsman associations. You need to go to local events, have a booth there, walk around. You need to build other referral mechanisms from customer to customer, contractor to contractor."

Heuristics

Relying on herd mentality or common investment heuristics can be particularly detrimental in construction tech investing, where industry-specific knowledge is crucial.

Patric explains one framework Foundamental views opportunities through:

"We look at what's hidden or obvious to construction experts and early customers, versus what's hidden or obvious to generic investors."

The sweet spot for investment is finding opportunities that are clear to industry insiders but not yet visible to the broader market. This approach allows us to identify promising startups before they become obvious to generalist investors.

Adam reinforces this point by quoting Charlie Munger: "Herd mentality is a regression to the mean. If you're following the herd, it's essentially going to be working against you in the long term, especially if you're trying to find these white truffles within their respective vertical." In construction tech, these "white truffles" are often companies that look unconventional by general tech standards but are solving real, significant problems in the industry.

This understanding led us to be skeptical of trends like the "quick commerce for construction" startups that emerged, mimicking consumer-focused rapid delivery services. While these models gained traction in consumer sectors, they often failed to account for the fundamentally different needs and behaviors in the construction industry. As Patric points out, "In quick commerce in construction, you have a 150 euro basket to make an emergency purchase once a month. Those cohorts don't work as a marketplace."

Our approach to heuristics also involves challenging our own assumptions and constantly refining our understanding of the industry. We recognize that the construction sector is evolving, and what worked yesterday might not work tomorrow. This mindset allows us to stay ahead of the curve and identify truly innovative solutions.

Outcomes

In construction tech, it's crucial to understand that the industry purchases outcomes, not just products or services. This insight fundamentally shapes how successful startups approach the market.

This understanding led us to back a company that initially looked like a service business, with impressive metrics that confused generalist investors. Patric recalls:

"No generic VC touched the firm at the pre-seed round. They were like, 'This cannot be something because it's not SaaS.' We looked at it and said this fits exactly what the sector needs. It's outcome-as-a-service."

The company had 75% gross margins, was net profitable, and had a 1.2 million revenue run rate at the pre-seed stage - metrics that would be attractive in any sector, but were overlooked due to the company's unconventional model.

The key was understanding that this company was delivering outcomes that the construction industry values. As Patric explains, "It's exactly the core reasons of AECS to purchase companies is to deliver outcomes. This company was delivering the outcome and it was rewarded with terrific customer love, cash flows, margins, etc."

Adam emphasizes the shift in focus: "There's a higher emphasis on better-run firms with demonstrated successful business models." This often means looking beyond traditional SaaS metrics and understanding the unique value propositions in construction tech. It's about recognizing that in this industry, a service-oriented approach can sometimes be more effective than a pure software play.

This outcome-focused approach also influences how companies should price their offerings. Adam notes, "We've come to the conclusion that you should essentially be marketing or pricing your service as an outcome in some respects." This aligns with how construction companies typically make purchasing decisions, focusing on the end result rather than the specific tools or technologies used to get there.

Convictions

Success in construction tech VC requires deep conviction and a willingness to go against the grain, backing approaches that may seem unconventional to outsiders but are tailored to the industry's needs.

We've seen cases where following generic VC advice can be actively harmful to construction tech startups. Patric shares a telling example: "I'm sharing the board with a generic SaaS investor. The advice that person has given that company for a year has even been detrimental." While the generalist investor pushed for increased marketing spend - a common strategy in B2C tech - we advised focusing on offline channels and industry associations, recognizing the relationship-driven nature of the construction industry.

Adam emphasizes the importance of avoiding the trap of following the crowd: "You want to train those behaviors to get away from that natural inclination of 'Oh, all these other funds are investing in this space, it must be smart.'" It's about having the conviction to back unique, industry-specific approaches rather than following the herd.

This conviction extends to how we structure our team and make decisions. We keep our team small and focused, ensuring seamless information flow and decision-making. As Patric explains:

"In a knowledge-based job where the whole value is driven by decision-making like VC, you need to make sure that information flows exceptionally seamlessly."

Our conviction is also reflected in our investment strategy. We're not afraid to back companies that look different from typical tech startups, as long as we believe they're solving real problems in the construction industry. This might mean investing in companies with physical products or service components, rather than pure software plays.

Ultimately, our conviction comes from our deep understanding of the construction industry and our belief in its potential for technological transformation. We're committed to backing founders who share this vision and are building solutions that truly address the industry's needs, even if they don't fit the mold of traditional tech investments.

Continue Watching

Ep. 1: Origins

Ep. 2: Patterns

Ep. 3: Fallacies

Ep. 4: Convictions

Ep. 5: Singularities

Ep. 6: Disruptions

Ep. 7: Destinations

Ep. 8: Freestyle

tl;dr

Repetitions: Specialist VCs in construction tech leverage deep routine and repetition to identify opportunities others miss, providing uniquely valuable support to founders.

Fallacies: Common VC approaches like "SaaS everything" and "growth at all costs" often fail in construction tech, requiring industry-specific strategies for success.

Heuristics: Success in construction tech investing requires looking beyond general investment heuristics, focusing on opportunities obvious to industry insiders but hidden from outsiders.

Outcomes: Construction tech startups should prioritize delivering valuable outcomes rather than just products or services, aligning with how the industry makes purchasing decisions.

Convictions: Thriving in construction tech VC demands deep conviction and willingness to back unconventional approaches tailored to the industry's unique needs and dynamics.

Crafted Proudly In Partnership With Bricks & Bytes

This video and associated content was produced alongside Bricks and Bytes. Please support the amazing work they are doing for the AEC founder community by visiting their full Super Series page here.