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New York, New York- The much-anticipated Procore IPO, valuing the company at over $9B, was deemed a success. As they reported positive earnings for the past quarter, the same day that Katerra was back in bankruptcy court, the vastly different scenarios for what were once two unicorns, raises the question, “Is all the attention around construction tech really good for the industry?” It’s easy to think the answer is yes, especially if you have a stake in PCOR. Yet from a larger, industry perspective, Procore’s IPO and Katerra’s bankruptcy calls into question the real value of technology in the construction industry.
Now, even more eyes are on construction tech, believing the roads are paved with gold. Long before the Procore IPO, the sector kept popping up as an emerging market. More than $25B was invested in construction engineering between 2014-2019, according to McKinsey. When you factor in that construction represents 6.3% of the GDP, has traditionally been slow to adopt technology, and VC investments in construction tech outpaced the overall VC industry 15-fold through 2019, it’s no wonder the players in the traditional tech industry are gravitating toward it. Many will not succeed.
The most prominent cautionary tale is Katerra. In June, the company, once valued at $6B, filed bankruptcy. There’s no lack of stories about the company’s rise and fall. Most point to Katerra’s growth at any cost culture and a misguided belief that the same principles of manufacturing electronics would work for manufacturing buildings. Executives at the company pointed to rising labor and materials costs due to COVID-19. Other Monday morning quarterbacks say the downfall was due to having too much money and not enough focus on execution.
All of those factors contributed to Katerra’s fall. Along with trying to solve all the perceived problems in construction – notably the variables in the supply chain that impact cost of goods – through vertical integration. They wanted to be the architect, engineer, manufacturer, supplier, general contractor, and subcontractor. Pandemic aside, the construction supply chain is far too complex for any one company to dominate it.
In the wake of Procore’s IPO and Katerra’s bankruptcy filing, here are three takeaways for construction tech startups.
1. Don’t apply the traditional tech playbook to construction and expect it to work. Construction is an industry that’s slow to adopt technology, suspect of marketing, and highly localized. Another difference is that in many tech companies, sales focus on the knowledge worker in the office. In construction, it’s the GC or superintendent that makes the purchasing decision and their priority is the jobsite. These buyers want a non-technical conversation and expect an immediate ROI. Immediate in the construction world means days or weeks, not months or years. Unlike tech VCs, GCs aren’t looking to disrupt. GCs want to reduce any risks that halt them from building. Those risks span health, safety, HR, finance, compliance, supply chain, and more.
2. Focus on one thing and be flawless at it. Trying to solve every challenge in construction is a fool’s errand. Instead, solve a small problem and that will create an opportunity to tackle even larger problems.
3. Know what GCs value. It’s not that different from the demands of the C-Suite. If you’re selling construction tech to a GC, know that nobody likes surprises. Therefore, if they buy software, they don’t expect to have to pull workers or subcontractors away from the jobsite for training. They also don’t want to have to hire IT to set it up and manage it. Any project that detracts from building, impacts their bottom line. In an industry where margins are already razor thin, a construction tech company needs to quickly prove its value.
Construction tech will continue to boom. The opportunities are there for startups that invest in understanding just how different the construction industry is from their traditional tech roots.