Drilling Into Construction Tech

Tech companies are continually looking at more industrial, asset-heavy industries where they can make a mark by making processes more efficient and streamlined, and construction is now in the crosshairs. Construction tech is a nascent but emerging field, and chatter is starting to spike, per our trends tool which measures media mentions over time.

We did a full analysis on the construction tech industry using CB Insights data from our webinar. Below are some of the highlights.

Construction is under-digitized and has room for big efficiency improvements

Construction is one of the least digitized sectors, which could also provide opportunity for new companies to enter the space, since legacy IT infrastructure doesn’t need to be overhauled and many processes are being digitized for the first time. With the new president-elect declaring a focus on infrastructure during his campaign, construction spend could increase even more in the next few years (with spend already hitting pre-recession levels).

And, with unemployment in construction seeing historic lows already, we could eventually see a labor shortage in construction, presenting a further need to make the current workforce more efficient.

Construction tech is currently immature

Construction tech is still in early days with less than $800M of financing since 2012 across 165 deals. However, we’re seeing growth mostly in the earlier stages as new companies emerge in the space, and even a few later-stage financings as companies begin to mature.

While we’re slowly seeing more companies reach later-stage levels of maturity, we still have not seen many exits in the space. We have yet to see any year crack the double digits for exit activity, though there have been a few IPOs.

However, despite few exits overall, we have seen some large exits in the space, including 3 $500M+ exits in 2016 of IronPlanet, Textura, and ConstructConnect. There are also several multi-billion dollar public companies like Autodesk, which suggest there is potential for large exits for investors.

Corporates play little role in construction tech

Compared to other sectors, corporates have not been very active in construction tech. Corporate participation in deals has yet to break 16% in any given year, with most other sectors typically seeing corporates participate in 20% or so of deals. When we looked at where contractors, software incumbents, and construction product/equipment companies were investing, we see mostly consolidation and acquisitions of competitors as opposed to investment in innovation.

There are some exceptions, with several corporates setting up their own venture arms to invest in some of the more “out there” ideas. Posco Venture Capital for example invests across a wide range of industries from healthcare to gaming, and Autodesk has invested in several companies through both its parent company and venture arm, like robot fighting league MegaBots and 3D printing companies Carbon3D and XJet. A few have also set up partnerships with private companies: Bechtel partnered with Human Condition Safety to provide better training through VR; Saint Gobain partnered with accelerator Greentown Labs to find potential acquisition targets; and Caterpillar partnered with ScopeAR to use Scope AR’s glasses for remote technician assistance.

Caterpillar is one of the few corporates that has steadily ramped up its activity in private markets in the last few years. The parent company typically invests in companies directly related to its core business (e.g., Yard Club for distribution of its machines and Uptake for analytics about equipment health, etc.), while the company’s venture arm invests in more futuristic technologies, like robotic exoskeletons, autonomous robots, and energy resources.

The company’s increase in private market activity coincides with an increase in patent activity as well. Between 2013 and 2014 the number of patents published by Caterpillar more than doubled. And 2016 has already seen more than 900 patents published*.

*The patent filing process involves a significant time lag before the publishing of applications. This delay can range from several months to over two years.

Construction tech business models

There are a few ways to categorize construction tech companies. The first is understanding whether they work in the hard costs (materials) or the soft costs (labor, services, etc.) of the construction process. Most software companies tend to attack the latter, though several private companies are trying to make new types of construction materials themselves.

From there, two frameworks can be used to understand where the construction tech companies fit in. The first is what part of the process are they attacking, from design to procurement to the actual construction process, and finally the operations. This helps us understand not only what pain points the company solves but also who the potential customers are.

From there, it helps to figure out if the company is replacing certain functions entirely, enabling people to do their jobs more efficiently, or creating new processes that didn’t exist before.

Using these frameworks helps to bucket the different companies attacking this space. We analyzed a few different sectors in the webinar, such as equipment-sharing marketplaces. These companies focus more specifically on the procurement part of the process and can either enable existing brokers to be more efficient, or replace them entirely.

Trends in construction tech startups

A few trends emerged as we analyzed different companies in the space.

• Democratization – The construction industry is still largely relationship-driven, which heavily favors larger companies. Many companies are providing the tools and means for smaller construction companies to market themselves, lower high capital costs, and provide verification services to level the playing field. With an emphasis on individual service providers, many of these companies are also taking a “bottom-up” approach of targeting individuals to become their product advocates (similar to Slack) as opposed to selling to large enterprises that then force their tools on workers.
• Aggregation – Companies are providing better user experiences and simplifying processes to attract people to their platforms. By aggregating those users and that demand, platforms are then forcing suppliers to standardize their offerings and provide transparency.
• Standardization + Scale – As more standards are created, it becomes easier to scale up goods & services and scale down costs. This can be anything from standardizing the permit process to make it easier and faster to get permits to standardizing the parts of a house and thus scaling down costs (like with prefab houses).
• Mobile – Mobile has transformed many industries, but construction is particularly well poised for mobile technology improvements due to the fact that much of the work of the industry takes place in the field. Many companies are now taking “mobile-first” or “mobile-native” approaches in their design and differentiation.

Emerging technologies

Certain technologies are emerging that could potentially change many parts of the construction industry going forward.

• Prefab Housing: Prefab housing isn’t a new idea but one seeing a resurgence, with many companies now marketing themselves in specific niches (sustainability, high-tech homes, etc.). These houses can range in both use case and price.
• Augmented Reality: Many of the initial applications of the Microsoft Hololens augmented reality headset have been in construction, specifically design. AR can also be great to provide remote instruction and guidance to workers, and also potentially provide expertise to the average person for smaller projects.
• 3D Printing: 3D printing is seeing a resurgence, especially in the industrials space, with developments in the types of materials that are printable. This could eventually mean being able to print out parts of buildings at scale, or creating customized pieces for specific projects.
• Robotics: Eventually we should begin to see more robots eliminate highly repetitive and possibly dangerous jobs in construction. Several companies like FastBrick Robotics do this for specific functions (in this case, laying bricks).
• Blockchain: Blockchain applications have been suggested across industries, but construction presents a good possible use case. Blockchain technology could eliminate several problems that face the industry, including complicated webs of contractors and subcontractors plus opaqueness of information. Without as much legacy IT to overhaul, construction could be a good industry to develop an entirely new system with smarter contracts and billing.

For the full analysis, sign up here. If you want to see where this data is from, check out our public collection called construction tech on the CB Insights platform, or sign up for our private market database below.