From stress sensors to cloud-based workflow apps, construction's digital transformation is well underway. And the payoff is likely to be big. According to a McKinsey study earlier this year, adopting new technology and management techniques could add $1.6 trillion in value to the construction industry and improve its lagging productivity.
To address the latter, all eyes are on the field, with several companies developing mobile software that lets the entire project team capture and share information in real-time, or close to it.
"As [construction companies] become more digital and metrics-driven, all these things are forcing the construction industry to change and it's a great opportunity for VCs," said Chris Anderson, CEO of Berkeley, CA–based drone software company 3DR, which raised $53 million in Series D funding earlier this year.
Those investors are certainly biting. The con-tech sector has seen roughly $433 million in disclosed funding across 56 deals to date this year, according to CB Insights. Two of those deals were at or above $50 million.
Anagha Hanumante, an intelligence analyst at CB Insights, says investors are consolidating their bets around a select few companies. Collaboration software like digital scheduling tools and task management apps have earned the most investment so far. And while risk and financial management software are also a draw, those areas are generally smaller.
"Construction tech mega-rounds aren't happening every day, so if a large deal happens, the company is likely doing something right," Hanumante said.
Those companies and others are positioning themselves for that investment through product differentiation and, ultimately, winning over contractors.
Identifying the problem
To some extent, the presence of more companies in a market raises investors' confidence that the space is worth putting money into. Many of today's con-tech leaders laid that groundwork only a handful of years ago.
Alex Schwarzkopf, CEO and co-founder at New York City-based Pillar Technologies, which was founded in 2015, says getting investors interested in a constructed-related project early on was challenging. "I would be pitching an investor and they would just not understand the space," he said. "No matter how good my story was, if there was not a general understanding of the problem, the challenges, the opportunity or the size of the market, I was never going to be the one to convince them."
Investors' knowledge of construction has "grown dramatically" in the last couple of years, Schwarzkopf said.
Broader use of mobile devices for personal as well as professional purposes by contractors and subs is making it easier for their employers to implement digital workflow tools as complex projects, tight schedules and limited budgets demand a higher level of efficiency and productivity than construction has long been known for. That has more investors looking into con-tech now than ever before.
"Most of the opportunity we created the company on was the fact that the project team was suddenly becoming connected to a much higher degree," said Yves Frinault, CEO and co-founder at Fieldwire. "We went from 3% to 5% of guys having access to a computer to 30%, 40%, 50% of those guys connected to a smartphone."
Frinault and Javed Singha, today the company's chief operating officer, were first-time founders seeking support for their first venture-capital-backed company, which makes construction workflow management software and a field-focused app.
The pair looked to AngelPad, a business accelerator based in New York City and San Francisco, for help getting off the ground. "When we started the company, we thought we could raise $250,000 and that would be all we would ever need," Frinault said. They raised a little over $1 million six months in, and quickly realized that wasn't enough. As most founders come to know, building a company requires spending money. And to get that money, they had to win over more than just investors.
"I remember the first few meetings we had with construction companies," Frinault said. "They would say: 'We're not comfortable with the cloud. Are you crazy? A foreman is never going to get a smartphone.'"
Fieldwire drew comparisons to the manufacturing and software development sectors to explain to investors how their tool could help improve construction workflows, even if those contractors weren't necessarily convinced at that point. "That's how you raise seed, which is high-risk capital — you say, 'Let's figure out if that's true.' That's when we started the company," he said.
For con-tech companies to be successful, a combination of domain expertise and software prowess is critical. "At least one founder on the team has experience working with the construction industry and they're solving a pain they personally felt," said Kat Manalac, partner at Mountain View, CA–based Y Combinator. The other founder, then, can build the software to address that pain point.
San Francisco-based PlanGrid, whose namesake app lets project teams store and share digital building plans in the cloud, is one example of that in action. "PlanGrid was founded by two construction engineers, me being one of them, and three software engineers," Tracy Young, PlanGrid's CEO, told Construction Dive last year. "We were two domain experts who were super lucky to have three incredibly talented hacker friends."
Y Combinator has been the most active investor in the con-tech space, according to CB Insights' data from 2012 through mid-2017. It broke into the con-tech funding space with PlanGrid in the winter of 2012 and has funded eight other construction or contractor-related companies since. Those include Airware, BuildZoom and InsiteVR.
Joining Y Combinator, 500 Accelerator, Andreessen Horowitz, Brick & Mortar Ventures, and Borealis Ventures are among the major investors in construction upstarts, CB Insights reported.
"I remember the first few meetings we had with construction companies. They would say: 'We're not comfortable with the cloud. Are you crazy? A foreman is never going to get a smartphone.'"
CEO and co-founder, Fieldwire
The quest for financial support has caused some companies to shift their model.
Pillar was founded based on the idea that adding sensors to sites could help contractors better understand how conditions impact construction. In collecting data for factors such as fire, water, mold and safety, however, Schwarzkopf and his team realized the information would be valuable to insurers as well. The company raised an additional $2.75 million in seed funding this past summer to help them refocus their business model.
Companies with a direct stake in AEC, including Caterpillar and Autodesk, have also made investments in tech upstarts. Still, CB Insights notes corporate venture capital has been relatively flat (12% to 16% of con-tech deals annually) from 2012 to 2016.
Through its Caterpillar Ventures subsidiary, the equipment maker has invested in drone software startup Airware and financial analysis software company Alight, among others. Caterpillar backed equipment sharing and management technology upstart Yard Club before acquiring the company earlier this year. Airware CEO Yvonne Wassenaar said Caterpillar's support has given her team access to company officials and global account reps to discuss ways they can better work together and improve the upstart's market presence.
While it's not likely to be the source of construction's next-hottest field app, AEC software maker Autodesk is doing its part to help the eventual developers of that technology ensure the tool can work with existing, industry-standard products. One way it's doing that is through Forge, an open-source developer platform that can be used to create plug-ins for Revit, Navisworks and other Autodesk software.
Autodesk's companion investment fund helps companies develop tools using Forge and was included as an investor in 3DR's funding round earlier this year.
The future of con-tech investment
Construction technology's future — and that of the companies helping to shape it — will depend entirely on how interested contractors are in making the tools part of their day-to-day.
Unlike industries such as retail, for instance, construction lacks a single Walmart-esque behemoth that can force change along the supply chain, 3DR's Anderson said. Top-down BIM mandates in countries like Russia and the U.K., the presence of AEC giant Autodesk to drive some standardization, and the trend of large construction companies implementing field-based software are starting points.
"Some people on the site use this tool and other people on the site used that tool," Anderson said. "Broadly, when you see digitization of the industry, it starts with point solutions but you want to have end-to-end digital — everyone's using digital files, everyone's using mobile devices, and that information flows up and down the chain."