Breaking the Digital Walls: The Industrialization of Construction

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Construction companies are increasingly tapping venture capital funding. In 2010, few or no start ups would seek Sand Hill Road or Bay Area investors for Series A or Series B. But in 2012, nearly $99 million reportedly financed nine investments. It has soared since then, escalating to $260 million in 2015 for 44 transactions according to CB Insights.

It remains to be seen how 2016 will pan out. But 20 transactions were already recorded for the first half of the year.

At the same time, on October 31, Aeris Partners has announced it brokered the sale of Constructconnect to Roper for an undisclosed amount. This represents the seventh transaction completed by the boutique AEC (Architecture Engineering and Construction) investment bank since 2014. Large private equity (PE) firms such as Genstar and Warburg Pincus owned the majority stake in Constructconnect, another sign the sector is heating up.

Most progress will be carried out in the developing world, where increased urbanization and improved standards of sustainable living are calling for immediate solutions. 90% of construction workers and most infrastructure projects are being implemented in the southern hemisphere.

The United Nations predicts that 70% of the population will be living in urban areas by 2050, up to 54 % in 2014. Vertical buildings will replace current homes in Asia and Africa. Countries with a “highly dense” population (over 200 inhabitants per square kilometer) will need to make room for a booming population.

Few could have predicted that construction would become a topical investment subject in Silicon Valley in 2016. American venture capitalists tend to back startups adjacent to their comfort zone, located within a 30-mile radius, and often bet on intangible intellectual property (IP). The fledgling constructech field looks familiar because its new startups’ software solve real problems at a fraction of the previous cost of ownership.

Many constructech entrepreneurs have roots in Silicon Valley or Boston. General constructors’, architects’ and planners’ productivity and work quality is transformed daily with new IP based on AI; predictive analytics; smart sensors providing immediate feedback; and an array of mobile solutions.

Right now these tech startups are just scratching the surface, merely reducing constructions’ risks and enhancing transparency. In a few years they will unshackle creative thinkers who will reform the way to build.

A $15 trillion industry worldwide in 2015, construction and real estate is growing fast, especially in emerging countries, which will account for 55% of the market–or $10.7tr–by 2020, according to Ovum, a London-based market researcher.

In China, from 1985 to 2010, it is thought that real estate and construction alone contributed to 20% of the country’s growth: new cities emerged quickly while large portions of Beijing, Nanjing or Shanghai were redesigned or rebuilt.

Real estate and construction activity remain a fundamental economic indicator anywhere on earth. They employ millions of blue collar employees. The Bureau of Labor Statistics in America has detailed records of the number of construction workers in 2014: over 6.1 million or 4% of the total US workforce (150 million people).

The largest construction conglomerate in the world, Vinci of France, has over 200,000 employees. Bechtel, the U.S. contractor giant, employed 53,000 in 2015. The sector routinely accounts for 5-6% of the GDP in developed nations. New constructions often feature as a leading indicator on investors’ and individuals’ faith in the future.

The construction ecosystem has not fully embraced technology. Of course, architects and engineers have learned to standardize Autodesk and Infograph PC-based software tools since the early nineties, as a consequence of their 3D graphics’ innovative features. But the rest of the sector was left behind.

General constructors and construction specialists spend a mere 1% of their revenues in technology–a far cry from the financial sector (9%); medical industries (20%) or even agriculture (5%), according to Ovum. Most processes have not been overhauled during the Internet era. Real estate development companies would basically use the same methodology as half a century back. Then, as now, the famous prediction to “prepare for every project knowing it will cost twice as budgeted, and will take twice the expected time” rang true.

There is an easy explanation for this conundrum: construction and real estate are divided into isolated functions with little or no porous interaction. Red Herring has identified 15 segments where skill sets, academic requirements, workers demographics and the final output greatly differ.

Any new project demands land surveying, architectural design, planning, staffing and construction on one side of the spectrum and sales, services, and property management on the other. Technology permeates slowly. Usually when friction becomes too important to fathom between two adjacent segments, does the next one adjust accordingly.

Despite that clumsiness, a few pioneers managed to emerge by 2000-2004. While legacy incumbents (Autodesk, Infograph, Trimble) continued their land grabbing in the construction field, some Bay Area tech veteran executives launched Procore in 2002 (and aptly located in Carpinteria, California).

Simultaneously in Melbourne, Australia, a former civil engineer Robert Phillipot and his co-founder launched Aconex. The Australian company was backed by an established tech PE firm, Francisco Partners, and went public. In August 2016, it released its financial results with $123 million in annual revenue and 11% net profits, touting a presence in 70 countries with 60,000 professional users.

International and U.S.-based tech construction companies are being increasingly bought and sold. A first consolidation phase has led to the acquisition of Isqft and Bidclerk by PE firms such as Genstar or Roper Software from Texas. Nemetschek, from Munich, a German AEC firm with $275 million of annual revenues, acquired Bluebeam in 2015.

True transformation ringleaders have started to show their strength since 2010. Traditional industries morph at their own pace and in a well-ordained sequence, in finance, manufacturing, retail or transportation. In fact, the twenty year innovation cycle follows a three-step pattern.

First, technology applies to SG&A and aims at monitoring financial records, manage sales pipelines or some generic corporate functions. White collar professionals are early adopters: the sector’s financial transparency augments in earnest.

Second, technology addresses the industry’s processes or the segment’s specifics and solves well-entrenched pain points. There it caters to blue collar workflow, redefines basic jobs and tasks’ requirements. Last, tech digs into the fundamentals and transforms the core of the profession. The construction and real estate sector–albeit late–is on the move towards progress.

Architectural, service and brokerage functions, the industry’s lowest-hanging fruit, were transformed at first. For decades document management and blueprint circulation, which are subject to constant modifications, have hampered and compromised construction execution and lent to delays and overruns on the field.

Now a digital, cloud-based solution exists even if it does not yet prevail. Paper trail tracking workforce is still active in thousands of sites. Hundreds of suppliers are still interacting on sophisticated projects without a cockpit overseeing the whole operation. No more: with the ubiquity of iPads and smartphones, instantaneous changes are simultaneously updated.

Recently start ups like Fieldwire, Newforma, Rhumbix or Plangrid, covering the collaboration segment with cloud-based software or mobility solutions, have raised tens of millions of dollars in venture capital.

Equipment.share and others are already at work reducing disconnects within the supply chain. For land surveying, a crucial craft that often requires a foot-by-foot study in dire weather conditions, the emergence of commercial drones has shifted paradigms. Chinese and European drone manufacturers are now competing globally with their U.S. counterparts in construction.

Today a drone tours the perimeter of the construction’s company’s project, and documents every land aspect centimeter by centimeter, for 20% of the cost and 20% of the time billed in 2012. Prices and deadlines are still falling.

CB Insight and Crunchbase have highlighted over 55 construction and real estate start ups since 2012 and the list keeps expanding. Red Herring itself has scouted over 300 companies, from smart city IT services in China (Isoftstone) to a Swedish-based BIM cloud data provider, BIMObject. An underground innovation network is brewing with new ideas.

The construction and real estate sector is twice more exposed to innovation than just two years ago. Not only us significant money channeled to construction tech entrepreneurs, exceeding $100 million per year (mostly in Series A and B rounds), but the funding comes from premier established funds like Sequoia (Plangrid); Formation 8 (Fieldwire); Greylock (Rhumbix); Iconiq (Procore) and Riverwood (Katerra).

Some emerging venture firms are rising, riding the construction wave. Borealis Venture on the east coast and Brick & Mortar Ventures in San Francisco now focus on construction and real estate.

The latter is cemented at the hip to one of the largest construction companies in the world since it is led by Darren Bechtel, scion of the eponymous, privately-held engineering group present in more than 100 countries. Brick & Mortar has poured money into Holobuilder, a software invented in Germany, as well as 15 other startups.

Innovation will accelerate because, construction tech innovators are now eying disruption worth trillions of dollars. Project management in the cloud will bring hundreds of millions to these firms–but they narrowly focus on the tool kits used by the foremen, architect, engineers or workers.

Now, armed with a $75m cash hoard, companies such as Katerra are gunning at the general constructor trillion dollar business itself. Katerra is still in stealth mode but could consolidate all construction steps, and deliver thousand of multi-family residential units at once.

Its secret sauce: Flextronics, a giant electronic manufacturing company. Michael Marks, former Flextronics CEO, has gone back to operations and is spearheading Katerra. This new disruptor could turn the construction world on its head.

According to rumors the startup has already garnered orders exceeding $500m for 2017, in the US alone. Foxcon, a Chinese conglomerate, has also invested in Marks’ team. Katerra should soon announce a second plant delivering high end crafted buildings, incorporating smart devices into the walls and releasing large CLT (cross-laminated timber) frames at once.

A number of Silicon Valley investors are gnawing their teeth while watching Tesla’s latest quarterly results, a burgeoning $7 billion company in the auto sector. Only Draper Fisher, the Sand Hill Road VC firm jumped onto the electric car company bandwagon in 2003 and reaped the rewards.

Entrepreneurs often remind financiers that VCs missed on so many other sectors with solid customer-base and demand, such as the hotel industry (AirBnB) or transportation (Uber). Construction is next. Only a handful of VCs will sit at the winning table.