With a global market of $13T, construction is one of the largest industries in the world, generating 13% of the world’s GDP. It’s no wonder- construction is all around us, and with a 7% CAGR (and growing), it’s not going anywhere. Yet, for an industry this vast and established, construction is trailing the S&P in terms of earnings and return on invested capital. With an estimated $1.6T lost annually due to the sector’s low productivity, technology and digitization can have a tremendous impact. In the last few years, we’ve seen more and more startups enter this interesting space, yet technology adoption is lagging behind even compared to traditional industries like agriculture, healthcare and energy.
Still, we believe that ConTech is nearing an inflection point. Let’s take a look at what’s happening in this sector, and our investment thesis for ConTech at Viola.
What are the Obstacles Slowing Down Innovation Adoption in Construction??
ConTech founders are facing some unique obstacles compared to other industries. First, we are talking about a traditional industry with low openness to new technology, verging on suspicion. With ample engineers, the slogan “if it ain’t broke, don’t fix it” extends to the overall appetite for innovation. With high workforce churn and ample uncertainty in business cycles, it’s hard for decision makers to invest time and effort implementing innovation.
Supporting the overall suspicion are the industry’s low margin. While the construction sector brings in big money, the margins are relatively low, making every expense pivotal for the bottom line. Volatility and high dependency on a fragile supply chain (even more fragile since the pandemic) only exacerbate this problem.
Another point to consider is the highly fragmented and non-standardized nature of this industry. Processes are hyper-localized and can wildly vary between contractors and projects, and that’s before we consider the variety and heterogeneity of builds. This poses a challenge for startups trying to build one system or product to service the industry at scale and on the other side for virality in adoption. When every project is different it’s hard to look at your neighbor and adopt what they’re doing.
Finally, with multiple contractors across the value chain, it’s challenging to attribute success to just one factor, adding complexity to measuring and proving success or return on investment of a specific technology or system.
Technology is Positioned to Solve Major Issues
While the construction industry is hesitant to change, let alone innovation, it’s facing some major issues. And with great challenges come great opportunities. The major pain points that the industry is facing offer opportunities that technology can be instrumental in solving.
Poor communication is costing construction $17B a year in the US alone. And it doesn’t end there. The industry is notoriously inefficient when it comes to using data. 22% of reworks in the US are caused by poor data management. Poor data management ranges from poor handling and limited access to data to inefficient data collection, subpar accuracy and gaps in presentation and actionable insight generation. Communication can be significantly improved through new UI and platform consolidation, personalization, collaboration of multiple users and applications. Supported by a shift towards cloud-native applications that can be managed from every worker’s mobile, these new technological improvements have the potential to be game-changers.
60% of construction costs consist of material costs, which are spiraling due to global supply-chain pressures and skyrocketing material costs. Lack of visibility into the supply chain is complicating things even further. Big data and incorporation of proprietary and non-proprietary datasets open new possibilities for supply chain management and optimization. Harnessing technology can optimize the supply chain, lower costs and cut project durations.
Construction projects are also extremely complicated, with multiple stakeholders, lack of replication and scalability and projects taking an average of 24-36 months to execute across multiple phases. Productivity is a major pain in construction, with labor shortages, high demand and low tech adoption. All leading to a drop of 27% in productivity over the last 25 years. Both these issues, of complexity and productivity, can see moon shot improvements through leveraging different AI and ML technologies, such as NLP, ASR, anc CV, for automating data extraction, for synthesis and insight generation, and for actionable real time decision making.
Why Invest in ConTech Now?
To be fair, not much of what we outlined so far is new. However, all these advancements on the technology side and adoption side, coupled with business model innovation, have made the market ripe for investment. Albeit not straightforward, construction players are implementing technological solutions to solve the critical issues we outlined, leading to significant opportunities. We estimate the global ConTech software market at $12B annually, with an expected 14% CAGR, making it a $20B market by 2025.
ConTech is reaching an inflection point. Globally, the vertical has reached over $10B in cumulative capital invested by 2022. VC funding and innovation accelerate when reaching scale and breaking certain thresholds. We are expecting a meaningful inflection point for ConTech within the next few years.
Not only is more capital invested in early stage companies, we also see the first wave of mature companies – like Procore – emerging out of the private market into the public market. ConTech is growing to be a fully fledged innovation ecosystem.
In Israel, we’ve seen VC funding in this vertical grow from a few million in 2018 to half a billion in the first half of 2022 alone, and we’re already seeing local leaders starting to emerge.
The ConTech Landscape in Israel
Over the past few months we’ve mapped the ConTech Israeli startup ecosystem. We’re sharing our map to the benefit of all.
Our map is roughly based on the construction project lifecycle. We divided different solutions based on the phase of construction they come into play such as pre-build, build and post-build. ConTech segments and subsegments reflect those phases. The pre-build segments include Design and Engineering, Planning and Scheduling and Procurement. In their core, these are companies that innovate mainly, although not only, before construction begins. Companies in the build phase focus on optimizing and solving pain points in the construction process itself. We’ve named this segment Process Management. Subsegments of which include companies in the Site Management space, that innovate in workforce management or inventory management for example. Other subsegments include Machine Productivity and Safety Management which are self explanatory. Our third main phase of construction, meaning post-build, is somewhat arbitrary as construction is an ongoing and sometimes iterative process. To address this fluidity we’ve called this segment, Monitoring and Quality. We’ve included in this segment companies that monitor progress or focus on improving the quality of the structure, materials, surface or subsurface of the site. Other interesting subsegments take a more horizontal approach, including Advanced Materials, in which companies innovate in the materials used in construction, or Building Methods, in which companies innovate in the methodologies used such as prefab. Last but not least are the End-to-end Solutions. We’ve identified companies that operate in multiple segments and thus act as more holistic solutions.
We estimate that roughly~100 Israeli startups that have raised some sort of venture funding and operate in this space. With the growth rate of the industry, we expect this figure to significantly grow in the next few years.
Our Investment Thesis and First Investments
Looking at this versatile ecosystem, we at Viola have focused on 3 key indicators to identify attractive sub sectors for investment within the ecosystem at large. First, we are looking for innovation, meaning the adoption potential and readiness in the industry for specific tech solutions in a desired space. Second, we are on the lookout for companies solving critical pain points, which even an industry suspicious of innovation simply has to solve. Lastly, we look at the startup and investment activity per each category.
With this in mind, and without excluding other sectors, we found that Process Management and Monitoring & Quality are extremely attractive subsegments.
Process Management has many low hanging fruits to solve. The first round of innovation – which already has some emerging leaders – is focused on process automation and digitization. In the second wave, we expect to see step changes in automation of data entry, AI application and deep insight generation, as well as integration across players and variables (inventory, workforce, time).
As for Monitoring and Quality, technology can be a real game changer with a local edge. Winners will solve integration challenges, assimilation challenges and will innovate with new business models. Computer-vision based technologies have the potential to disrupt this category, and generate orders of magnitude of impact through improving productivity and efficiency.
We are proud to have already invested in two exciting ConTech startups in these categories. 4M Analytics is creating the first comprehensive map for underground infrastructures and utilities. Mankind has been to the moon over 50 years ago but still is clueless about what’s going on 3 feet below the surface. 4M is poised to change that. Buildots uses hardhat-mounted cameras to capture imaging of every detail of an ongoing project during regular site walks. The data is then analyzed using AI models to transform random visual data into highly accurate, actionable insights that are correlated with the project’s designs and schedule.
And make no mistake, this is only the beginning.