A new appetite for next-generation technology has taken hold of the built world’s leading C-suites. Promises of project efficiency improvement, profit-driving benefits, and market share substantiation have led corporate captains of construction to develop corporate venture arms, innovation accelerators, and incubators, to remain competitive in the digital future of the built economy.
Yet, after nearly $50B in fresh venture capital being injected into the growing built world innovative niche since 2020, this critical economic sector remains highly fragmented leading to the enormous productivity gap shown in the graphic below (BLS Labor Productivity; 1987=100).
Most of the recent AECO efficiency gains have come from architectural and engineering services, with easily implementable improvements to the software tools (SaaS, AI/ML, XR, data-driven solutions, digital twin technology, etc.) propelling the innovation curve for design and engineering software ahead of the remaining segments of the building value chain. These productivity gains still noticeably lag overall US labor productivity gains.
These top-of-funnel efficiencies have yet to flow downstream to the jobsite as industry fragmentation along the value chain continues to plague.
According to FMI research, contractors lost roughly $30B - $40B to labor inefficiencies in 2022, while nearly half (45%) experienced a decline in labor productivity.
This productivity disconnect can be traced back to a misalignment of stakeholder efforts, ineffective investment practices coupled with poor implementation control, and a lack of clear communication about the measurable impacts of new technologies.
The Growing Influence of Corporate Venture Capital (CVC)
Many leading corporations in the built environment have launched open innovation programs with strategic venture capital arms (CVC) and startup accelerators in the past few years with the hopes of gaining an innovation edge over the competition and avoiding obsolescence. These programs have had mixed success for several reasons including:
Investments that CVCs and corporate accelerators focus on are not ready for commercialized use/production.
There is a communication gap between executives and field workers as it relates to pain-points and usable solutions.
Many CVCs & innovation groups are hired from outside the industry and aren’t appropriately empowered to make investment decisions or provided with the proper communication channels within the organization to run an effective program.
CVCs and innovation groups are too far removed from day-to-day operations to make a real impact.
Innovation programs are often the first thing to be “reassessed” when there is C-Suite turnover, particularly those without a dedicated investment fund.
These factors have resulted in pilot program exhaustion for startups over the past decade as early-stage solutions cause more problems than they fix for those early adopters who weren’t educated on the real risks and benefits of piloting this new technologies.
The industry’s paper-thin profit margins make it naturally apprehensive toward potential project-disrupting innovation ("if it ain’t broke don’t fix it"), especially when hyperboles like “market disruption” are used by founders or VCs. Successful built-world founders and VCs need to temper their growth expectations and be patient with this sector’s digital transformation.
That being said, our data suggests that the built environment is entering a new phase of development driven by this sectors primary stakeholders through corporate venture capital. As illustrated below, over half of 2023 VC deals involved a strategic investor compared to less than 30% in 2020.
Growing Importance of Strategic Investors In The Built World VC Ecosystem
Contemporary Venturing
Many of the largest generalist VCs have stepped back from the built environment after some notable losses, whether from the failure of overfunded modular martyrs like Veev (>$600M invested) & Katerra (>$2B invested) or from the PropTech sector's cyclical valuation contraction. Most recently, sustained valuation compression in the PropTech niche drove the median pre-money valuations down ~25% in 2023 compared to 2022, temporarily turning off larger generalist VCs that had been supporting most growth rounds from the broader built ecosystem, despite continued strength in the infrastructure and construction tech segment.
The traditional VC "Rule of 40" (sales growth % + operating margins > 40% = good startup investment) to which the most successful venture investors can attribute their fortunes may not be the appropriate investment for startups in the built environment, given the sector's long development cycles and capital intensive nature.
In an industry where lead times, project schedules, and inevitable operational delays are measured in months, patient capital is king.
Procore (PCOR), which is generally cited as the high-growth pioneer of today’s construction tech niche, took nearly two decades to IPO after its initial launch in 2002. Procore’s journey from a $4M Series A valuation in 2004 to its $11B IPO in 2021 sounds like a home run for early investors, but it took 12 years for it to reach unicorn status (valuation of >$1B) after its Series A round, which is longer than any traditional VC fund cycle.
Other notable vertical SaaS disruptors were able to achieve a ten-figure valuation in a fraction of the time: Airbnb touched a $1B valuation within 2 years of its launch, Salesforce and Stripe breached this valuation in less than 3 years, CrowdStrike hit this illustrious benchmark in 5 years. In fact, the average time to a ten-figure valuation for a SaaS startup sits at just 5.5 years as of 2023, well within a VC fund’s 7 to 10-year investment horizon.
The built world is one of the most complex and nuanced industries in the global economy and innovative success requires an enormous amount of patient capital beyond traditional VC cycles. Corporate VCs are ideally suited to provide this patient capital, and the ecosystem support that startups can leverage.
There have been a growing number of pure-play built-world VCs focused on the earliest stages of this industry’s innovation curve (looking for a bigger piece of a smaller pie), leaving many well-positioned but under-resourced commercialized startups (post-seed round) struggling to break past $5M - $10M in revenue (a top-line hurdle that has become infamous among built world founders and investors) without extensive corporate partnerships.
The earliest stages of the built world's innovation curve continue to see the most investor activity, with 47% of H1 2024 VC deals focusing on Pre-Seed and Seed stages, while Series B and later rounds only comprised 26% of investments.
Series A capital raises, generally regarded as the full commercialization stage, continue to be an area of investor interest, representing 30% of the more than 1,600 VC deals completed since 2020 (Series B generally follows Series A by 12 to 24 months). However, less than half of startups that raised a Series A round between 2020 and mid-2022 have successfully raised another round of funding.
The probability of survival for a startup before its Series A is only 35%, but once that critical funding round is successfully raised survival rates jump to 65% (more details on check-size ranges and success rates by stage below).
The Value Gap
While the shortfall in later-stage funding can be partially attributed to the current interest rate climate (which is expected to soften before the end of 2024), there appears to be a clear value gap for founders and corporate players alike as a tidal wave of newly commercialized solutions (post-Series A) comes to market.
Corporate innovators are seeking a way to strategically align their growing tech stacks with stakeholders along the value chain to maximize visibility and minimize disruptions. At the same time, internal coordination of tech needs and knowledge sharing among divisions/teams is critical for effective productivity improvement. By taking a stake in fully functional commercialized solutions, corporations can work hand-in-hand with the founding team for the best results, and provide business units with a quantifiable risk/benefit understanding of the technology to maximize utilization and minimize surprises.
At the same time, many commercialized built world startups are struggling to break above the $5M to $10M revenue hurdle (a figure cited by many founders in the space), and have been seeking corporate support to expand their customer base. A critical mass of adoption is needed for these founders to hit the famous hockey stick inflection point of high growth. Adding strategic investors to the cap table appears to be the most clear-cut way to do so.
That being said, without the proper internal and external alignment from corporate VCs, founders may find themselves with more boardroom headaches than easy customers.
All this being said, it leads one to wonder if there’s a better approach to corporate venturing in the budding built economy.
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