Introduction
Despite growing momentum in the built world, venture capital investing in this sector remains in its infancy. The technological revolution the global economy has experienced since the pandemic has hurled construction into the 21st century. Corporate leaders in the built economy are shifting their focus from traditional risk mitigation to the digital future of this industry. Still, venture capital models for this sector have yet to evolve to its unique needs.
New technologies and ideas have been pouring into the digitalizing built world and related CleanTech with $55B in VC funding being deployed across more than 1,850 deals since 2020. Yet, the coveted unicorn status (a startup that breaches $1B valuation) remains largely elusive for most emerging solutions in the architecture, engineering, construction, and building operations (AECO) space today.
Mission-critical startups emerging in the maturing built world and cleantech niche share several similarities, including the need for patient capital and significant capital investments, both of which can be fulfilled by long-term investors, corporations, and public institutions.
Of the 1,403 active unicorns across the globe (according to PitchBook), the built world and related cleantech account for just 31 (or 2.2%) and can claim only a few successful exits - the number of $100M+ acquisitions or IPOs can be counted on two hands. This is incredibly disproportionate to the size of this $15.5 trillion industry which accounts for ~15% of global GDP and is expected to grow at a CAGR of 6.6% over the next 10 years (according to AECOM & The Business Research Company), more than twice the rate projected by economists for the broader global economy.
The Built-World's Sliver of The Unicorn Pie
Global Construction Primed For Outsized Growth
This current state of affairs begs some critical questions as we assess the right approach to investing in the built world and clean tech sectors.
What’s causing this economic imbalance and is there a VC approach that would yield better results for the built economy’s startup ecosystem?
Is there a common thread among the built world unicorns and those that have had successful exits, that we can learn from?
What are the lessons (if any) to be learned from the startups in this space that failed or were forced into a less-than-ideal exit?
Lessons Learned
Some of the most notable startup failures in the built world have (unsurprisingly) shared similar narratives. Industrialized construction (a.k.a modular, prefab, panalization, etc.) has seemed to be the hardest innovation nut to crack. Despite the billions of dollars poured into this “disruptive” niche over the past 5 years, industrialized construction only seems to disrupt investors’ IRR.
One key case study to consider is the “Tesla approach” to construction, which constitutes an extremely capital-intensive vertical integration and requires secular market demand that this cyclical sector has yet to achieve.
Ex-unicorns Veev, Nexii, and Katerra all employed the “Tesla model” and have become cautionary tales for VC investors everywhere. The infrastructure required to profitably scale an industrialized construction business is incredibly resource-intensive and would require flexible manufacturing plants (ideally autonomous or semi-autonomous), strategically located warehouse facilities, distributed and nimble supply chain models, etc. Additionally, these businesses need to effectively weather the high-beta cyclicality of construction (offsetting business segments to hedge operations), both of which are beyond the scope of a traditional VC-backed startup.
The downfall of Katerra, Veev, and Nexii cost VC investors $2.8B and wiped out over $6.6B in value from the built world’s startup ecosystem within the past 3 years (depicted below), but does this truly imply that industrialized construction is an unviable investment?
Fully integrated prefab/modular construction may not be VC backable, but it is bankable if the investors can support the required infrastructure. A consortium of strategic investors with the propensity to provide the resources outlined above to viable startups may be better suited to support the inevitably long lead times and resource-intensive nature of industrialized construction.
That being said, there has been little evidence that startups backed by corporate venture capital arms have had any more success than those backed by financially motivated investors, leading to the “corporate investment conundrum”.
Of the 34 failed and 57 distressed built world startups, 40% had strategic investors on the cap table, similar to the sector’s 42% deal participation rate by strategic investors. So…
Why haven’t corporate-backed VC arms been able to produce better results for founders in this space?
Are CVCs in the built-world too far removed from the core business units to make an impact?
Are their motivations more financially driven than their strategic theses would suggest?
Does having competing corporations on the cap table stunt growth instead of nurturing it?
What Success Looks Like
CVC involvement does appear to be a good pipeline for M&A with more than 50% of acquired AECO startups having had financial/operational support from their strategic acquirer.
For example, Hitli first invested in Fieldwire during its Series B round in February of 2018 and continued to support the business through its Series C, allowing the startup to mature under a corporate wing to set it up for a meaningful acquisition scenario. Hilti’s acquisition of Fieldwire for $300M in November of 2021, 8 years after its initial launch, represents one of the few successful exits in this space.
Additionally, startups that partner with the right corporate investors have been able to achieve much stronger growth than their pure-VC-backed competitors.
Of the 31 active unicorns in the AECO space, 28 (90%) have strategic investors on their cap table supporting their growth, which suggests that success in this space may require corporate investments, but from the right channel partners who have the resources to guide innovators to that next level of growth.
The growing list of emerging built-world unicorns (5 new unicorns gained unicorn status in 2024) illustrates the industry's wide array of pain points and scalable solutions, not to mention the breadth of regionality among AECO unicorns, which span 10 different countries.
The average technology unicorn takes roughly 7 years from launch to reach unicorn status, while the slow-to-adapt build environment has pushed that timeline to a decade.
This underlines the need for patient capital in a space where lead times are measured in quarters not weeks, making this space less conducive to traditional VC models which generally have 5 to 7-year fund cycles.
Contemporary Venturing
The built-world and cleantech space remain ripe for the right investors, who are able to support more substantial resource requirements (not just financial), display a patient approach to investment, commensurate with the industry, and provide a straightforward path to industry adoption.
The vast majority of leading AECO technology innovators have been focused on solving the most basic of pain points with capital-light SaaS solutions, such as basic risk mitigation, GC & subcontractor financing, access control, and document visibility (getting this industry out of Excel).
The next wave of emerging solutions is more focused on aligning the built world’s historically fragmented stakeholders. These emerging startups address more complex, but integral pain points as this digital transformation process matures to include innovations such as a new approach to industrialized construction, robotics, cross-functional project visibility (IoT-enabled), collaborative building & design platforms, new sustainable construction practices, sustainable materials, renewable energy generation & storage, etc.
A strategically oriented investment platform that supports stakeholder collaboration with both startups and investors may be the most direct and efficient path forward for venture investing in the built world and clean tech.
There have been a number of CVC consortiums, angel funds, pure-play built-world VCs, and partnered CVCs that have attempted to address this, but we have yet to see a unified solution. There always seem to be implicit barriers that restrict the notion of free-flowing idea-sharing and collaborative implementation.
This lock-jaw hold-up is only natural among competing organizations. However, the lack of cooperation along the built-world and clean tech value chains is a critical issue that can be solved.
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