Construction Tech's Startup Scramble
With a flood of new interest in construction technology from traditional venture capitalists and technology startups, many in the industry can feel burnt out from the relentless boosterism and showmanship of Silicon Valley elevator pitches. But beneath this cacophony is a general wave of adoption of new technologies, and many in the construction industry are dead set on not missing out.
The headlines for investment in complete solution tech companies have soured recently. Office-space middleman wunderkind WeWork saw its $20-billion IPO flame out earlier this year, but that doesn’t mean that investment in construction technology is waning. If anything, it is seeing accelerated growth.
While outside interest in construction funding has grown, long-term investors in construction technology are seeing the benefits of starting off with knowledge of the industry. “There are a lot of investors who don’t have a background in construction,” says Curtis Rodgers of construction-focused venture capital firm Brick & Mortar Ventures. “They don’t understand the constraints of the industry.”
Building out a product takes time, and getting real adoption among construction users can be slower than in other industries, explains Rodgers. “There are certainly venture capitalists writing too big of a check for too little demonstrated performance,” he says. And that can have a detrimental effect on construction technology startups that have to hit growth targets the industry can’t support. “Raising too much money is a bad deal—setting yourself up for a lot of illusion and pain. It puts you in a bubble,” he says.
Rodgers advises startups not to chase so-called unicorn status with the tenfold growth some VC firms are after. Instead, he suggests focusing on establishing customers and finding a niche in the construction space. With Brick & Mortar, Rodgers tries to steer new ideas toward the specific problems they address.
Plenty of Room To Grow
“What I keep telling everyone is that construction matters,” says Jose Luis Blanco, a partner at consulting firm McKinsey & Company. “We’ve been very insular, and now you’re seeing successful companies from other industries looking to construction.”
While there is great interest in construction technology, there are hurdles. Studies show that construction companies invest a smaller share in research and development than other industries, and adoption of new technology is slower and more fragmented. “Technology investment is very low compared to other industries, but it’s like a wheel,” explains Blanco. “Once you start spinning it, you’ll see more benefits, more progress. Investment will drive further investment.”
While traditional investors have staked some construction technology companies, there are real hurdles, says Blanco. “Frankly, the contracting environment is not welcoming,” he says. “This industry is not short on good ideas, but it is short on the ability to execute.” Despite these obstacles, McKinsey research shows many firms are adopting new technology, and startups are finding customers. “It’s all driven by incentives, and self-performing contractors and owners are finding the benefits of better productivity,” he says.
Lack of investment in new technology also isn’t as massive a roadblock as it sounds, says K.P. Reddy of construction venture capital firm Shadow Ventures. “The lack of R&D spending in construction is a false argument,” he says. “We are a service industry, not a product industry.” For Reddy—whose firm offers early seed funding for construction technology startups with targeted products—the real problem is construction’s skilled labor shortage. “Our industry struggles to attract tech talent to drive innovation. We can be an unsexy business.”
When startups and outside venture capital makes it to construction, they can be thrown by how differently it operates. Entrepreneurs used to traditional business-to-business sales get frustrated pitching owners and contractors afresh on every project. In the banking industry, says Reddy, “you convince their technology guy, and they buy it and deploy it.” But if you pitch a contractor with a great solution, “they say great, talk to a guy on one of our projects. It’s hard having to initially sell project by project to get momentum.”
So Who Are Your Customers?
It can be hard finding a customer who has a business case for your product, no matter how useful it is. Airworks is a small image-processing startup that offers a web-based service to convert satellite and UAV imagery into usable 2D and 3D model files. The BIM-ready files are available for download after a couple of hours, with topography and built infrastructure clearly delineated over the aerial images. While it has a product that does a useful tasks faster than normal, Airworks initially found that its customer targets were not interested, because greater efficiency was not their goal.
“When we started this, we tried working with surveyors, since they were adding drones to their toolkit. We thought we would be a good fit,” recalls David Morczinek, CEO of Airworks. “But they’re working on a cost-plus contract, and having extra staffers on site [instead of drones] isn’t a problem. While they don’t want to do work too slowly, there’s no real business-case incentive to speed up.” Airworks quickly realized that the ideal customers were civil engineers who “have bids they want to win—and they’re more likely to win if they have better data up front.” Finding this reliable stream of customers has kept Airworks going. The company is raising its second seed round of funding, at $2.5 million. While Airworks is still developing the machine-learning algorithms that classify all the objects in the aerial imagery and generate the 3D data, it expects the process to be fully automated soon. As its real data set expands, “the results are only going to improve,” says Morczinek.
Six-Year Startup Sees Results
On the more mature end of the startup spectrum, Fieldwire has learned some hard lessons. Currently in its sixth year of providing a document field-management app for workers on site, Fieldwire has seen other technology startups come and go. “The investors’ check size is definitely increasing,” says Yves Frinault, Fieldwire founder and CEO. After years of construction not attracting the attention of the broader venture capital world, several breakout stars have brought in larger investors expecting big returns. “Back in 2013 we heard one VC say they do not invest in construction technology startups due to the $100 million curse—every great startup in construction will do well and get bought out for less than $100 million,” Frinault tells ENR. “But that’s changed.” Aconex, PlanGrid and BuildingConnected all sold above or near the billion-dollar mark, he adds.
Despite those major acquisitions, cautionary tales like the recent implosion of the WeWork IPO have cooled off the more wild-eyed predictions. Frinault advises other startups in construction to focus on fundamentals. “Startups need to have solid economics. WeWork was definitely a shot across the bow.”
With Fieldwire, Frinault has gone through a round of seed funding, including investment from Brick & Mortar Ventures, and that long buildup has given it the flexibility to adapt its product to the direct feedback of its users. Working with contractors who self-perform has proven to be a sweet spot. General contractors who subcontract work don’t always see the need for a field-focused project documentation tool, but self-performing Clark Construction knows the pains of maintaining document control. “Our operations-based team did a selection of Fieldwire to allow access to the marked up documents from the field to avoid running back and forth to the job trailer,” says Steve Stankiewicz, Clark director of field applications. “We had a home-built system that did something similar, but this brings some horsepower.”
Getting the documentation right required some back and forth with Fieldwire, but Clark was able to make it work, despite all the data they were throwing at it. “We had to make sure Fieldwire could handle the volume of transactions we incur on design-build [projects],” says Dave Golden, Clark CIO and senior vice president.
Focusing on work in the field has drawn the attention of more technology-focused subs. Electrical subcontractor Power Design has seen a major acceleration in its technology adoption since it put thousands of iPads in workers’ hands just a few years ago. Recently the company migrated from PlanGrid to Fieldwire for its entire on-site document management. “For us, PlanGrid got really big and was going to a more complete BIM-to-prefab-to-field approach, and they lost some of the focus we liked,” says Brad Moore, VDC technology manager for Power Design. With the staff already trained up to use iPads over the last four years, the transition to Fieldwire was easier than Moore expected. Power Design was able to migrate over 2,100 users working on hundreds of projects totaling $1.4-billion in contract value to Fieldwire without any interruption in project work. With 65% of their users already migrated, Moore expects to have the entire company switched over by the end of the year. He credits the willingness of Fieldwire to assist in the massive training effort that saw 3,500 hours of training in eight weeks.
Moore tries to judge new technologies by actual performance, and says some newer startups are surprised at how technologically sophisticated an electrical subcontractor can be. “One of the first things I do when I evaluate technologies is ask for references,” he says. “Seeing it on a jobsite, where people are using it day-to-day, that makes a big difference.”
With many products aimed at schedule- and cost-conscious owners and GCs, Power Design has to look harder for the right startups to partner with, says Raghu Kutty, the company’s CIO. “We’re looking for partners trying to solve the same problems that we are,” he says. But beyond past successes, Kutty says he looks for a few key qualities in any startup. “One requirement is for partners to have open APIs, with a fully documented guide and its team available to talk to our developers,” he says. Open API standards means Power Design’s in-house programmers will be able to more easily move data in and out of the tool, and avoid future bottlenecks.
While major decisions on which tech products and platforms to use on projects often flow downstream from owners and general contractors, Kutty says Power Design has actually been able to push new technologies upstream to its project partners. “We find as long as we are solving a problem that exists in construction, everyone is open to it.”
For Golden and the team at Clark Construction, there are established metrics for any technology startup partnership. “We love working with smaller startup companies that are willing to work on meeting our requirements and needs. They allow us to influence where the product goes,” explains Golden. But it takes time for a company like Clark to evaluate the many startups that come knocking. Golden advises looking past the big promises and asking for proof of performance. Taking the time to evaluate tools can pay off later, as a company can standardize around a product or platform that works. “There are a million technical solutions we could chase,” he says, but the best efficiencies come from adopting a common tool.
What Happens if Construction Cools Off?
While the boom times in construction have helped drive investment, economists are forecasting a dip ahead. But that doesn’t necessarily translate into a drop in construction tech investment, says Brick & Mortar’s Rodgers. “It’s possible that less smart investors will pull off, but we’re a very diverse industry,” he says, with market sectors that don’t all move at the same time. And as the mix of work shifts, firms need to stay on top of the changing technology landscape or risk getting left behind, says Power Design’s Kutty. “We expect construction technology to change drastically in the next five to 10 years.”