A Construction Deep Dive
a look at one of the first vertical ecosystems
It’s been super fun thus far philosophizing about vertical SaaS. I am more confident than ever that vertical SaaS will become the biggest software movement of the 2020s. What has been especially fun is to see a community start to form around this newsletter who are building, investing, and thinking deeply about how vertical SaaS will continue to transform everything. So thanks for being a part of this. It’s been a blast.
This week is a bit different and marks where I hope to go more. Today is all about construction.
What I think is particularly unique about construction is that to date we have a highly successful vSaaS company in Procore. It poses the question: what kind of vertical companies begin to form after a vSaaS company has transformed critical workflows?
In short, I think the construction vertical gives us some cues on how vertical ecosystems form. By vertical ecosystems, I am talking about the group of tech companies that all enable the critical workflows across an entire industry’s value chain to come online.
The real reason these industry specific tech companies start to form an ecosystem, is that over time interoperability begins to characterize the major software players. Since the goal of every vertical business is to generate second-order insights, even though certain workflows might be only provided by a couple different companies, it is in everyone’s best interest to become interoperable in order to more fully form second-order insights across the industry value chain.
I’ll leave a full account of vertical ecosystems to next week, but it’s become clear to me that construction gives us one of the better looks at what vertical ecosystems will become.
So today, we look at construction, both in its own right as an industry burgeoning with possibilities for further digitization and also as an instance of what the future of vertical ecosystems looks like.
Breaking Down Construction
Construction is of course about building things. But more specifically, the construction industry is about ensuring things get built at the intersection of quality, cost-effectiveness, and on the proper timeline.
To do so requires a series of miracles involving a whole value chain of construction lenders, material suppliers, general contractors, subcontractors, and stakeholders that want the actual building built. It’s somewhat of a mess.
And since most of the industry was highly analog and resistant to technology, there has been huge data silos not only within individual businesses, but across the whole value chain. Everyone is fully aware of how long it takes to build things. But it’s not only the physical building that takes forever, it’s pretty much every aspect of construction communications, documentation, workflows that require more than one part of the value chain, payments, financing, and anything else you can think of.
The good news is that in this mess a new sort of thing is forming. A crucial part of the industry has been transformed: the jobsite. And by digitizing the key workflows within the jobsite, Procore has opened up new possibilities for the startups to go after workflows and companies that now have exposure to what good technology can provide.
It is because of this that in many ways construction represents the future of vertical ecosystems. There’s a couple key things to watch out for:
An initial vSaaS solution brings core workflows online.
Firms start to crave further workflows and problems to be digitized.
Companies in different aspects of the value chain start to desire better software and startups emerge to serve them.
Better scaffolding and infrastructure emerges to connect the vSaaS companies across the value chain together to better share data and key workflows.
So while we will leave further reflection on this for another week, I hope you can begin to trace how this is happening in construction.
The story of construction tech can begin with none other than Procore. And that’s for an important reason. Tooey saw something that was quite unpopular to believe: construction software could be a massive market.
Like all vSaaS, Procore struggled along for about a decade hearing all of the common pushbacks on vSaaS businesses. The industry was finding it hard to digitize and of course the concern was that vertical solutions could never become big enough to justify venture dollars. Tooey just didn’t care. And for about a decade Procore was built in relative obscurity.
Tooey and Procore ran into a lot of problems, most of which mirror the tale I told last week. GTM is really hard and it wasn’t until Brian Feinstein and Bessemer made an incredible bet on Procore and helped bring in Dennis Lyandres to run the GTM that Procore really began to take off.1
The whole Procore story is worth reflection but for our purposes, we are going to focus on what Procore has accomplished for the entire construction ecosystem.
Procore’s greatest impact was in digitizing the key workflows that the entire industry was built around solving: ensuring buildings are actually getting built.
One of the key reasons that construction found it so hard to digitize (and still does) is that workflows and data collection happen at the jobsite. In the 2000s, this meant that tech adoption would mainly happen back at the office if at all. Nobody was going to haul their laptop to the jobsite to document how the project was coming along and phones were just not powerful enough to house workflows. Two companies changed this: Apple and Procore.
Procore’s insight was that the tablets and smartphones coming onto the market opened up the possibility for workflows to be digitized at the jobsite. And so Procore built a mobile first experience, betting that if they built a good enough software product, construction workers would happily use an iPad rather than lug around binders of papers.
This is what really got the construction tech revolution underway. Now every single workflow that depended upon someone at a jobsite collecting and punching in the data could be effectively captured. And this also solved the tech adoption problem that has plagued the industry. Procore was less frictionless than every other competitors and far less frictionless than sorting through a binder of paperwork that housed all the relevant information.
The terminal workflow
You can imagine the construction process as terminating on the jobsite. Every single workflow throughout the construction industry is ultimately centered around making stuff happen at a jobsite whether thats materials supplies, financing, workers, or more.
So in building the terminal workflows, Procore completely transformed one end of the industry. And since all roads now lead to a digitized jobsite, this common endpoint has created an appetite for further digitization up the value chain.
Procore is brilliant and realized this. They built a platform for rapidly plugging in tools that would be utilized by their customers. But importantly, many parts of the industry don’t need Procore, even if their own workflows depend upon what’s happening at the jobsite. A construction financing firm doesn’t need jobsite management software. However, they do want software that can communicate how projects across their portfolio are shaping up.
So now we have a race across the value chain to digitize the industry end-to-end. And overtime, this will also become interoperable to enable the kind of data sharing that seamlessly ties data and workflows together. This is how a vertical ecosystem is formed.
For construction, there are a couple different ways this is shaking out. And the rest of this piece will cover how the ecosystem is forming. From what I can tell:
The entire value chain will get vSaaS platforms with which to operate.
Construction materials procurement will start to look a lot more like an e-commerce experience.
Fintech will transform all of construction financing and payments.
Lastly, interoperability is becoming table stakes.2
The important thing to note is that this isn’t a linear process. These steps are happening simultaneously and bleed into each other. And often tech companies will operate across multiple aspects of the ecosystem.
So let’s dive into construction and check out what is happening along the stack.
Within construction, there are three different independent parts of the value chain that are undergoing vertical revolutions.3 The first is easy: anyone involved with actively managing or working on a jobsite. Procore has pretty much transformed these workflows and so it doesn't need much further reflection here. 4
The second large group consists of material suppliers. In my best estimate, there are no established vSaaS solutions that have brought the key workflows to the cloud in vertical forms. There are however startups tackling this part of the value chain but doing so in different ways.
For instance, Nickel is first dedicated to solving the workflows around complex procurement and payments for material suppliers. This seems like a natural entry point upon which a full platform can be built to capture the remaining workflows for building material suppliers (cf. Toast’s GTM strategy). This aspect of the industry remains highly analog and thus any success story will dramatically change what data is available for interoperability.
Perhaps the most fascinating example of a material supplier vSaaS in the making is TOOLBX. Like Nickel, they have overlap with another aspect of the industry transformation and I’ll leave them for the section on marketplaces.
The last group is comprised of the construction lenders. Lenders need streamlined workflows to track various outstanding loans and the projects associated with them and software to manage the actual financing process. It’s looking like this will all go fully online this decade. The two really important players here are Rabbet and Built Technologies. It’s not worth discussing the nuanced differences between the two, but just like Nickel, both are toeing the line between software solutions and fintechs.
This list isn’t exhaustive but I think it will get us most of the way there with software-centric workflows. The key thing is that while these players might have overlapping areas of priority, their workflows are all unique and demand unique vSaaS companies working to help them digitize.
Another critical part of the emerging construction ecosystem is the propagation of digitally native ordering of key materials, equipment, and supplies. There’s essentially two varieties of these marketplaces.
On the one hand you have RenoRun which is essentially a construction focused Amazon. RenoRun essentially aggregates building materials and supplies (all residential construction focused) on to its platform and then performs jobsite delivery. It garnered 142m in its last round in February from folks like Tiger Global. The benefit of working with a RenoRun is felt especially at the end of material supplies that are highly interchangeable. For longer procurement cycles? Less handy. I mention RenoRun only to set the stage for a far more interesting company that feels more in line with the companies that I care about.
That company is none other than TOOLBX, who has taken an approach more akin to Shopify than to Amazon. Suppliers can build their own storefront through the platform while still tapping into TOOLBX jobsite delivery. The benefit is of course that suppliers are able to own their customer experience and TOOLBX is able to bring procurement data online. I expect this to become incredibly valuable over time as TOOLBX builds additional workflows out for their suppliers and starts to dig into the data. Like for Nickel, this opportunity is quite massive.
Adjacent to marketplaces for material suppliers are other e-commerce like experiences. A personal favorite is Soil Connect, which is a marketplace for “dirt and aggregates”5
And then there are others such as Equipment Share. Equipment Share is a bit of a weird one. They operate a rental service for construction equipment which is definitely more tech-forward than what I imagine an equipment procurement process would look like. The reason I mention them here is because they have managed to turn this rental facilitation network into a vertical platform: T3. T3 is a SaaS management tool for construction fleets. It’s a pretty great business: build a highly cost-intensive but highly effective moat around equipment and then switch over into SaaS for margins and to capitalize off of the dirty work. And it also shows how these different types of companies across the construction value chain are all beginning to think about how they can help construction companies solve unique workflows.
That about sums it up for the digitization of procurement and e-commerce tools in construction. What should become clear from this is how tied up building great tooling and workflows is with building a great digital marketplace.
Fintech Comes to Construction
Lastly, the most significant change coming into the construction ecosystem involves digitizing financial data, payments, and financing.
There’s so many players down the stack but it might be helpful to set the stage: lots can go really wrong in construction payments and financing. A project can go over budget leading to a massive delays until new financing is finalized. Since most payments happen on net 30, 60, 90, or even 120 terms, cash flow can be a huge issue across the stack. And then there is the whole notion of progress payments, where payment for work happens alongside project milestones.
All of these have rippling effects across the whole chain. It’s no surprise that something like 35% of contractors have to halt work due to delays in payments.
There’s a whole host of players emerging to fix different aspects of the problem. First, you have companies like Miter that are emerging to handle construction payroll. Others like Constrafor are focused on offering a whole suite of financial products to contractors and subcontractors with the goal of speeding up payments across the industry. Then there are financial control platforms like Briq and Toolbox that are designed to tighten up spending and help with forecasting.
Perhaps most interesting to me are the companies who are not explicitly fintechs yet whom are operating with workflows that house important financial data. Take change order management for instance, which is a super esoteric process that Extracker is focused on.
In construction, things change a lot which means projects and contracts are constantly renegotiated. Change orders are how these changes get requested and approved. In practice, this looks like a contractor figuring out that some aspect of the project is going to run over cost and requesting a change to the billed price.
Typically, a back and forth ensues over the change order. It can take weeks for the change to be actually approved (even if the work itself is performed).6 This leads to heavy cash flow pressures for contractors whom often have their own workers to pay.
But if you are Extracker and can track the success rate of certain change order requests across project types, contractors, or other data points, you can effectively underwrite the risk involved in a change in pricing. In theory, you can effectively build an invoice factoring business. Contractor will get paid faster (minus a percentage) and work is able to be performed far more effectively. It's the transformation of workflows that involve financial data to better facilitate faster payments that will lead to higher efficiencies throughout the industry.
The construction fintech revolution is still in the first inning and it will begin to explode across the whole value chain. Even Procore has recently signaled that they see this as a massive need for the industry and are looking to play a part in things like subcontractor financing, materials procurement liens, and more.7
This is indicative of how the intermeshed fintech will become with every construction tech company. The ecosystem will be more and more characterized by a race amongst different vertical providers to revolutionize the aspects of financing and payments that they touch in order to bring greater efficiencies to the industry.
Finally, one of the most interesting developments in construction tech right now is the emergence of scaffolding APIs. I have in mind Agave. I’m a firm believer that one of the core characteristics of vertical ecosystems will be their interoperability. It simply makes no sense for data silos to reoccur in the cloud once an industry goes online. But given how software development plays out on the ground, this can quickly become the case.
The thing about developers and industries is that they love to challenge each other’s assumptions about how industry-specific software should operate. What this means is that you end up with an emergent network of data standards, workflows, and API objects. And then industry consultants and businesses challenge how the software should actually work and you end up with even more custom workflows and objects. And then startups emerge who want to focus on particular workflows in different ways, and we end up with even more schemas.
This is actually a good thing! I typically think standards are kinda bad and that the best software should always have a slightly anarchist quality. Don’t like how Procore treats some aspect of financials? Fine! Create a better way to capture it! It’s this slight anarchism that also enables simultaneous evolution of products. Imagine having to attend a conference for the creation of Construction Data Standards before you build a new API or workflow. Right then and there you forfeit your ability to move quickly.
The downside is that as the digital construction layer emerges, it can quickly end up with a huge mess and incredibly difficult to integrate into. Instead of building these integrations into disparate systems and confusing the hell out of your engineers, instead Agave is building the scaffolding for the industry.
Now if you are a company wishing to participate in the ecosystem, you simply use Agave’s APIs to get plugged in seamlessly to all of the core software providers.
You can imagine Agave over time developing more and more integrations across the value chain until every single player has the opportunity to become interoperable with every other player at a heavily reduced cost. Perhaps this means that certain project data from Procore will be exposed to commercial lenders through Rabbet’s platform or that quotes for materials move seamlessly between Procore and Nickel’s systems.
Interoperability in vertical ecosystems is destiny. And while it’s hard to conceive of exactly how interoperable the ecosystem will become, it is possible to conceive of Agave playing a large role in that reality.
So there you have it, a brief reflection on the ways that the construction vertical ecosystem will develop over the next decade. And while, it’s too early to to pick winners, I am confident that the ecosystem will form.
Next week will examine vertical ecosystems in a bit more detail and start to pinpoint their essential qualities. As always, thanks for reading and being a part of this newsletter. It’s been a blast seeing it grow.
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Astute readers will notice this is another way to describe vertical SaaS companies, vertical marketplaces, and vertical fintechs. Yes, you're right. But I think it’s helpful to dwell on these within construction without the preconceptions of what they look like. And so I’m mostly avoiding the terminology right now.
If I am missing something an aspect here that is critical, I would love to know. Drop me a note.
There are of course other solutions for these folks and different workflow optimizations that can matter here. I’ll mostly leave these for the fintech section.
According to them, dirt and aggregates is a 40B market. I have no idea how to verify this, but it does appear that the entire global aggregate market is huge. Like 600B huge.