Often, industries that have great potential to be disrupted are also the most resistant to adopting bleeding-edge technology. While legacy sectors like transportation and energy have embraced new tech, innovation in the construction industry has been slow to take hold.
Even though many large construction firms manage internal R&D units, more than a third of employees say they’re reluctant to adopt new technology. “This is a structural problem of the industry, as there are fairly low margins and everything is project-based,” said Heinrich Gröller, a partner at Speedinvest. “It is difficult to find a project manager who is willing to take the risk to implement bleeding-edge tech on their project.”
All the investors we spoke to agreed that finding workers is one of the biggest challenges in the industry, but the pinch isn’t limited to job sites. Due to the Great Resignation and restrictions to immigration laws, “this labor shortage affects both blue-collar and white-collar labor,” said Sungjoon Cho, partner at D20 Capital. “We recently heard of a major construction company’s regional office that lost around 10% of their white collar workers last year alone to employees leaving the construction industry altogether!”
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Even so, investors are backing startups bringing robotics, data management, automation and augmented reality into the construction process. With the industry representing about 6.3% of the U.S. GDP, the market opportunity is huge, especially as spending climbs — the U.S. construction industry saw spending reach an all-time high of $1.57 trillion last year, according to a recent Deloitte study.
The U.S. government wants to help boost innovation in this crucial sector, too. Its recently enacted $1.2 trillion Infrastructure Investment and Jobs Act includes only $100 million for digital construction technologies, but if new tech is used in public infrastructure projects, it could prove a boon for the industry.
To better understand the market forces driving this sector and learn about the opportunities they’re seeking, we spoke to five active investors:
- Nikitas Koutoupes, managing director, Insight Partners
- Heinrich Gröller, partner, Speedinvest
- Momei Qu, managing director, PSP Growth
- Suzanne Fletcher, venture partner, Prime Movers Lab
- Sungjoon Cho, general partner, D20 Capital
Nikitas Koutoupes, managing director, Insight Partners
What’s the most exciting development in construction tech right now? Where are you seeing more interest from investors and founders — residential or commercial?
We are excited about how the industry is shifting its mindset from simply digitizing workflows to transforming how projects get built using insights, automation, and AI. Every important builder is exploring how these new technologies will drive productivity on the job site.
At this point, we’re seeing more interest in commercial projects. In large commercial projects, there are so many places where delays and other issues can pop up, so new technology providers can drive serious ROI by improving workflows.
Given the large scope and budgets of these projects, being more efficient can save a lot of money, and owners and general contractors (GCs) are willing to pay for innovative technology. What excites us about the timing now is, it seems GCs and owners are willing to adopt and pay like they haven’t before.
Where are you looking for opportunities in construction tech in Q3 2022?
We’re interested in investing across the entire construction lifecycle – from pre-construction tools like scheduling and bidding, to job site tools, including progress tracking and data + analytics to drive efficiency.
Given the flexibility of Insight’s platform, we’re able to partner across all stages — from seed to late-stage growth — so are looking to partner with interesting startups addressing the industry’s challenges at any stage in their growth journey.
In large commercial projects, there are so many places where delays and other issues can pop up, so new technology providers can drive serious ROI by improving workflows. Nikitas Koutoupes, MD, Insight Partners
Despite the current market conditions, we intend to stay quite active in Q3. We don’t think the long-term outlook on construction tech has changed, and have several high priority segments that we’re eager to make investments in.
For example, we haven’t yet partnered with any companies in robotics, procurement and finance, and labor management, but we’re seeing a lot of interesting early players emerge. We plan to stay true to our strategy and will continue to invest across a very wide range of stages.
How has this space changed since the pandemic began? How mature is the sector; are these still early days?
We’ve seen COVID as a tailwind for the construction tech industry. Due to the pandemic, many contech workers were unable to freely visit their job sites, and realized they had less visibility than they’d like into what was happening onsite. For an industry that has historically been averse to tech, feeling this pain point was a real catalyst for adoption.
Across segments, we’ve seen field workers become more open to exploring digital platforms and to the ROI they can deliver to projects.
We think construction tech is still in its early innings. In the last few years, Procore and Autodesk have shown that the industry is ready to adopt software and capable of building big public tech outcomes, but there are still so many workflows left to be addressed. It’s an exciting time to investing in construction tech.
A lot of this tech is focused on job sites, but given the need for data collection and analysis, what advances are you seeing in back-end technologies? Is there a killer app?
One of our portfolio companies, Versatile, is a great example of using job site data collection to drive actionable insights for GCs. Versatile is at its core a data science company, not just a data collection tool. Data collection from the perspective of the crane is Versatile’s wedge into getting structured data at a job site.
From there, they’re able to generate powerful insights into efficiency. So while there is a strong need for data collection, the real winners will be the companies that have a strong back-end to provide actionable insights from all this data.
Which areas of the construction industry can tech help improve right now? Where do you see the biggest potential breakthroughs in the next five to ten years?
We see a lot of companies in the data collection and analysis space. The market is very fragmented today, but we’re very excited about the potential of all of these systems to talk to each other, and for one comprehensive suite of tools that can ingest data from all angles.
As these platforms consolidate in the next five to ten years, we’re excited to see GCs using one single source of truth for their projects, which would greatly help track progress, efficiency insights, safety measures, and more.
We’re also excited about the potential impact of cutting-edge robotics. Take layout, for example. Today, many project sites sketch out their layout using chalk and string — even for infrastructure projects that can span miles. Next-gen robotics companies are building robots to automatically print out precise models on the project floor. They’re meaningfully more accurate than the human-drawn layouts, and are much faster.
This is just one example, but it’s illustrative of the way that new technology will dramatically change the way we build for the better.
The construction industry has been fairly reluctant when it comes to adopting bleeding-edge tech. Is this a marketing problem, or a product-market fit problem?
We think a big part of why the industry is thought of as reluctant to adopt technology is because some construction tech tools have not been designed to integrate into existing construction workflows. Construction teams are first and foremost focused on project execution, and if a new tool doesn’t immediately help them execute and drive ROI, they have little bandwidth to explore it.
The other challenge is that most solutions have to be incorporated into the broader construction process. You can’t have half the team using one system and the rest using something else. The customer has to see how the change management will be seamless.
How easily tools integrate into existing construction workflows, and how quickly they can drive quantifiable ROI on a project (whether through time savings or cost savings) are two of the key things we look for in contech startups.
The $1 trillion Infrastructure Investment and Jobs Act the U.S. passed this year is expected to be a shot in the arm for construction tech. How large a role do you think governments will play in promoting construction tech via procurement, incentives, grants, subsidies, etc.?
We are hopeful that more public funding will come with mandates to use software to reduce project risk and improve job site safety. There is a direct corollary with Obamacare driving adoption on medical records.
That said, we believe buy-in on the field is essential, even if new tools are being procured by the office. It is difficult to push solutions on people, whether that’s a GC pushing it onto subs, or owners and government pushing it onto GCs — you must be able to show real value.
Are lower labor costs making construction-related automation a harder sell in some parts of the world? Conversely, in areas like the U.S., where there have been long-term labor shortages, where do you see this tech lowering costs and speeding up project timelines?
A lot of the technology is about helping keep labor coordinated, productive, and on track more than its about replacing labor shortages. Even in markets with low cost of labor, the costs of mistakes, rework and delays are all material enough that contractors care about using technology to build correctly the first time.
That said, labor shortages can be a compelling reason for customers to procure new solutions, and we see a lot of new tech companies pitch the labor shortages as a positive tailwind.
How do you advise portfolio companies to approach potential clients who don’t see an urgent need to modernize?
The construction industry is skeptical of outsiders coming in to tell them they need to change, but they also understand they have to change to keep up with competition.
We advise our companies to make sure they are showing up as true partners to the industry and emphasize how their solutions can bring reliable and demonstrable ROI. A lot of our companies find success through deep partnerships with their early pilot customers — they’ll work closely with a large GC to design a solution that directly meets the needs of the customer, and then once proven, can work towards broader rollouts (both within their pilot customers’ projects and outside).
We’ve seen this “land and expand” approach across a number of portfolio companies and prospective companies.
When investing in a construction tech startup, what green flags do you look out for? Are you open to backing founders who don’t have experience in the industry?