The rise of construction industry startup funding.

We have been noticing something striking the last couple of months. The amount of funding invested into startups who are tackling problems in real estate and construction is increasing drastically. We were wondering where this trend was coming from. So we decided to write a blog about it!

Is the construction industry becoming the next telecom?

While construction and real estate may not be as flashy as delivery services, driverless cars or drones, they’re both industries that are drawing ever increasing amounts of real money from investors looking for new markets under-served by technology. The industry has seen an uptick in deal activity over the last couple of years, as investors look to “legacy” sectors with lots of room for major software efficiency improvements.

Whether that’s applying image recognition with drones, monitoring of the sites or a one-stop shop for getting a building up off the ground these startups have found themselves flush with funding and looking to chip off bits of the process that are ripe for obvious improvement. According to data found on AngelList, about 1,500 startups make construction tech products. So, while some companies have sprouted up to provide innovative technology products to construction firms, there’s still a lot of room for upstarts.

A worker in the Phoenix factory of Katerra.

The reason for this increase in interest isn’t hard to find. The market is enormous: more than 700,000 construction companies exist in the United States alone and revenue for the industry is expected to grow to $15.5 trillion over the next 10 to 15 years.

Explanations for this drastic increase in revenue are easily found. On the one hand there’s the ever increasing pace of global urbanization. If 2.5 billion people need a new roof over their head in the next 3 decades the demand and need for decent and affordable housing will increase at an unprecedented rate. Another one could be President Trump’s proposed $1 trillion investment in U.S. infrastructure projects over the next few years. Although, knowing his track record up to this point, this still remains to be seen of course. In short, construction already is, and will only increase to be, big business.

“The construction industry is ripe for digital disruption.” — Michael Marks, co-founder and chairman of Katerra.

The opportunity becomes even more enthusing once realized that the companies in the construction industry either employ legacy technologies or don’t use technology at all. According to collected data , construction firms invest less than 1% of annual revenues on research and development.

So, with an already enormous but still growing market, increased willingness to investment and the industry badly in need of better tech products, the opportunities for constructions tech startups seem endless…

But what’s the catch?

It can’t all be rainbows and sunshine though moving ahead. What are the main challenges standing between us and an endless amount of construction innovation?

Time and complexity: The main obstacle to overcome is the time and effort required to develop the needed construction and technological skills. At Bao Living we know a thing or two about this. While developing our modular building solution SAM we experienced at first hand the amount of time and effort it requires to assemble the right stakeholders in order to successfully create an innovative, new solution in the complex building space.

Resistance to change: Landing big customers in the construction industry, which is known for being particularly resistant to adoption of new technologies, will most likely be a challenge. The resistance to change by these big players isn’t illogical either. The projects they work on are of such scale that it’s very risky to trust new, unproven business and technologies.

Long sales cycles: Digital startups are all about failing fast, iterating quickly and pivoting. However, when running a construction startup this mantra needs to be taken with a grain of salt. The consequences of a ‘small bug’ in your launch product can be much more dire, and costly, in construction than in software. One needs to be much more patient and holistic during development. This will almost always leed to drastically longer development times in comparison with the digital sector.

Another element that needs consideration is the timescale one is selling for. An average construction project can take up to 3 years, beginning to end. So depending on what in the project you and your cash strapped startup need to get involved multi year sales cycles are no exception. This will most definitely lead to fun negotiations for payment terms!

Digital startups are all about failing fast, iterating quickly and pivoting. However, when running a construction startup this mantra needs to be taken with a grain of salt.

The above mentioned points are only a small selection from the overall menu of challenges that will present itself while getting your construction startup from the ground. However, you shouldn’t let these discourage you because as mentioned in the beginning, the potential at the other side of these challenges is almost limitless.

It’s an incredibly lively time for urban and construction tech startups and innovation. The venture capital firm and tech accelerator Dreamit Ventures believes that market dynamics and trends will lead to enormous growth in the next 10–15 years. This expected growth is accompanied with more potential to strike a deal with a VC fund or well established construction company and an increase in overall interest for the industry. One should however be prepared for the challenges along the way. It’s a bumpy road but without some construction innovations it isn’t becoming any smoother!