Part 2 of 6: Venture Capital in AEC — It’ll be a VERY BIG DEAL
I had the pleasure of presenting with Travis Voss, Technology Manager for Mechanical, Inc., on the topic of “Next-Generation BIM Workflows” at the MCAA Technology Conference. (Travis is awesome!) As we were preparing, we posted a graph on LinkedIn that caught some interest and several commenters asked us to post the presentation. We’ve broken the slide deck out as images and will be posting them with commentary as a series of articles. This is the second part of six and focuses on why we think venture capital will have a serious impact on the AEC industry.
To re-summarize, there will be six articles. (Did I mention it was a ninety minute presentation?) The outline is as follows:
- Part 1: Core Concepts & Definitions
- Part 2: Venture Capital in AEC — It’ll be a VERY BIG DEAL
- Part 3: A Different Look at “Teicholz” Productivity Curves
- Part 4: Why Everyone Should Use Game Engines
- Part 5: AEC Design & Root Cause Analysis
- Part 6: Roadmap for Manufacturing Processes in AEC
Let’s get going.
Part 2: Venture Capital in AEC — It’ll be a VERY BIG DEAL
Investment professionals from venture capital are very nice people. They’re smart. They get along with folks. And they are very helpful. VC firms also come in many different shapes and sizes. Early stage, growth stage, corporate, angel — even sovereign funds, controlled by countries. But the most important thing to remember is that venture capital is a business.
VC’s provide support — money, strategy, connection, foosball tables — to small firms so they can grow. Growth for portfolio companies is super important. VC’s aren’t fascinated with hockey sticks because they like Canadians. It’s because their aim is to grow a company into a very, very large company. How large? If you want to dive into a rabbit hole, check out the Power Law Rule and this article or many others. We’re certainly grossly simplifying lots of topics here, but it is fair to say that VC’s like home runs. Let’s examine a venture funded company that is dominating a traditional, entrenched industry.
SpaceX exhibits the best technology the world has to offer. That technology has created a lasting, durable competitive advantage for SpaceX. Without looking into specifics, it’s a fair guess that the VC’s backing Elon Musk at SpaceX will make money in accordance with the top end of the Power Law Rule. They are simply dominating their market. Consider the following graph from SpaceX, shown to the US Congress, which shows their growth within the global satellite launch industry since 2013.
SpaceX is dominating satellite launch despite lots of barriers to entry. For example, ULA is SpaceX’s biggest competitor and it is quite literally a US Government-mandated monopoly. A government, who is also your client, supporting a monopoly is probably the biggest barrier to entry possible in a market. The culture of rocket launch — a clearly high risk activity — is another barrier. When you think about it, there are lots of similarities to AEC. 1) Entrenched design rules and philosophies, 2) incumbents with long customer histories, 3) an abundance of risk, 4) high value.
Returning to our thinking in Part 1, it would be easy to call Elon Musk a “black swan” because he saw the value of reusable booster rocket stages. In our view, this would be incorrect but not for obvious reasons. It’s incorrect because the real “secret sauce” at SpaceX is highly motivated and high-performing engineering teams. If Elon Musk is a black swan, it’s because he can create and motivate engineering teams like few or no others. The amazing technology is a by-product of his abilities more than his vision.
Let’s directly compare the satellite launch and the construction industry.
SpaceX is dominating an industry with a global Total Addressable Market (TAM) of $5.5B USD (2016 — State of the Satellite Industry Report). The AEC industry is $10T per year. Benchmarking off height, let’s compare a Falcon 9 rocket’s height, which represents the size of the global TAM for satellite launch, against the AEC industry.
(I should hire a graphic designer.)
And that’s why VC will be a VERY BIG DEAL in AEC. The global market for construction is huge and we have yet to see technology have an impact that’s even remotely like SpaceX. The potential is there — the odds were certainly stacked against Elon Musk and SpaceX — and once the formula is figured out for AEC disruption, the money flowing into the industry will be truly unprecedented.
Some may point to the uptick in venture funding in AEC in 2018. From my statistics class at Berkeley, I remember that excluding outliers gives you clearer insight into trends. Both WeWork and Katerra received funding from Japan’s Softbank in 2018. Throw out Softbank investment in 2018 and you’ll find that AEC investment is still low — we’re still searching for the answer to scalable, explosive growth in AEC with durable competitive advantage.
In Part 3, we talk about the work of Paul Teicholz from Stanford and productivity trends that show a separation between construction and other industries.
This article was originally posted on LinkedIn on February 7th, 2019.
