Is the construction sector really ready for disruption?
Recently I had the opportunity to speak with Alex Nicoll at Business Insider about why we are keen on investments in the construction space. The article prompted a lot of questions, and I thought it would be useful to elaborate on one in particular…because it came up several times. It is this question around how we can know if a market is truly ready for disruption. Of course, no one can predict the future, but we can use a framework for thinking about it in a systematic way.
There are few industries left that have yet to be significantly disrupted by technology. VCs and founders gravitate to these largely offline, fragmented, sizeable markets in hopes of creating lasting value and widespread adoption for something new. Why wouldn’t someone prefer a slick software solution to an Excel spreadsheet? It turns out, these industries are late to the tech game for a reason. I believe there’s more to it than timing alone.
There are essentially two ways a market can be disrupted by technology — either by building pure workflow software-as-a-service (SaaS) to empower existing players (think Procore- a project management software to help general contractors better manage their projects) or building a technology-enabled, vertically integrated solution that disrupts the full value chain and ultimately competes with existing players (think modular construction companies that use technology and innovative processes to build homes start to finish, competing with traditional contractors and builders).
Let’s look at a few market readiness ‘tests’ for each model, applied to the construction market — one which many would assume is ripe for technology disruption, but which has so far been resistant to change.
Pure SaaS vs. tech enabled services
Construction is the biggest industry in the world and the opportunities for disruption seem like a no-brainer. But building something new is only valuable if people use it. When we think about the impact that technology can make, time-to-adoption is critical.
According to Sidharth Haksar, Director of Corporate Development at Autodesk, “contech start-ups inevitably face challenges when trying to rapidly scale their business with the vast majority yet to punch through the $5 million annual recurring revenue (ARR) mark.” That alone says a lot about the speed (or not) of adoption and the importance of market readiness.
First, let’s look at pure SaaS. It helps to assess three indicators when considering building workflow software: (1) Real workflow problems — there need to be major inefficiencies such as repetitive tasks, disaggregated data, wasted time and ultimately excess costs where the benefit outweighs the annoyance of change. Are you creating a “need this now” type of product? Is there an opportunity to be the system of record for an industry? (2) Generational shift — although you may have a slick product, there needs to be a willingness to adopt and embrace technology. This can come through generational shifts or by following other technology solutions that have paved the way. Momentum here is important. (3) Large fragmented customer base with money to spend — a big market is critical and also one with a fragmented customer pool to sell to that have a willingness to pay. Examples: Bridgit, Agora Systems, Rhumbix
On the tech-enabled services side, there are three different criteria to evaluate: (1) Unhappy customers — to disrupt a full value chain, these unhappy customers typically result from poor service, low trust, or high prices (or a combination of all). (2) Excess costs in existing model — when entering a market where you will immediately have direct competitors, there needs to be clear business model innovation, especially if price will be a differentiator. (3) Strong go-to-market plan — as a tech-enabled service you will be competing directly with traditional service providers, of which there are likely to be many. Although the market size is typically large (making a tech-enabled approach look more attractive), competition is high, and margins are low. A clear strategy to reach customers is critical and this often includes wrapping the service with people to solve the last mile problem. Examples: Resi, Dvele, Mighty Buildings
Applying the disruption lens to construction
Despite being the biggest industry in the world, construction has consistently underperformed. According to a McKinsey report on The Next Normal in Construction (June 2020), productivity growth in construction over the past 20 years was only a third of productivity growth seen across the total economy. This isn’t surprising, when you see how business is done today:
“When it comes to ordering materials on the construction site, pen and paper is still widely used — software can make a big difference here to improve efficiency and reduce costs,” — Maria Rioumine, Co-Founder and CEO at Agora Systems, a materials order management platform for trade contractors.
Based on discussions with people in the industry, the biggest challenge in construction is projects being over time and over budget. It doesn’t help that the complex industry dynamics and transfer of risk between stakeholders (owners > developers > general contractor > subcontractor) results in lack of transparency and trust across the full construction process.
According to Dean Hopkins, real estate expert and CIO at Oxford Properties, “while this may seem contrarian, the entrepreneurs that focus their time on the problem space, rather than the solution; and, on being innovative in the way that they go to market and attract customers, versus being innovative with the technology itself, are the ones that have a much higher likelihood of success.”
To remain viable, transformation is desperately needed and, according to the same McKinsey report, COVID is expected to accelerate change in the industry. If the requirement to do more remotely can break down barriers around technology adoption, then this industry is in for an awakening. Technology can play a big role in everything from capturing data on the job site (through video and photos) to managing teams and resources (labor scheduling to material ordering). When looking at the pure SaaS vs. tech-enabled services criteria, construction checks the box for both right now — the real question will be which one will prevail in the next five years.
At OMERS Ventures, we see a big opportunity for technology to make a meaningful difference to the construction industry. No one knows quite when we will reach a tipping point for widespread adoption, but there are a lot of top rate founders out there who are determined to make an impact on the space. If you are one of them, and we’re not already talking — get in touch! And if, you think we’ve missed anything, or disagree with what I’ve outlined here, feel free to comment. The more we talk about these challenges, the quicker the industry can evolve.
