Macrotrends Driving Investment Opportunities in Construction Tech

Several macrotrends in society, the economy, geopolitics and technology have recently converged to create exciting new opportunities for investment by early-stage venture capital firms like ours in construction tech startups. This article highlights key macrotrends and explores how they have created new VC investment opportunities in Construction tech startups, with examples of Blackhorn portfolio companies.

Macrotrends Impacting Construction Tech Opportunities

1.Growing global awareness and concern about climate change

The COP 21 treaty committed 196 countries to reduce emissions, aiming to limit global warming to 1.5 degrees Celsius. However, following the 2019-2022 Covid pandemic and the Ukraine war, multiple countries, including Germany, have actually increased their consumption of coal and gas since then, resulting in increased GHG emissions. Unprecedented heat, windstorms, resulting wildfires and floods have since made it clear to most people worldwide that climate change, whether human-caused or not, is real and getting worse.

2.The highest inflation and interest rates in decades

Massive US investments in Covid relief and green infrastructure, along with supply chain disruptions and energy shortages due to global instability, have triggered the highest inflation in five decades, raising prices and interest rates, including on construction loans. Shortening current project durations has become a key goal of developers and owners to reduce the cost and accelerate the start of revenue operations for their facilities.

3.Increased fossil fuel costs, amid declining costs of renewables + Regulations and subsidies

The above trends have driven up the cost of fossil fuels, while the costs of delivering renewables have decreased dramatically with increasing scale. This has made investments in renewables for homeowners, companies and electric power providers much more attractive, amplified by governmental regulations, incentives and subsidies. Still, financing these investments can still be challenging in an environment of high interest rates and tightened lending criteria.

4.Rapid advances in telecom and IT technologies

Mobile workers in construction, services and other industries were unable to use computers at work until recently. Several technologies have evolved over the last decade to make high-power, real-time computing available to mobile workers. These include smart phones and tablets, cellular broadband and cloud storage and computing services.

a) Ubiquitous and ever-faster broadband capacity for data transmission has solved the data connectivity problem.

b) Massive cloud-based capacity for storage and computing has made powerful, data-intensive computing solutions available to mobile workers with smart mobile devices serving as clients and sensors. 

c) At the same time low-cost wireless devices to sense stress, strain, pH, temperature, humidity, CO2 levels, image interpretation, equipment, or plant status, etc., have become quick and inexpensive to install, and can access the Internet to share real time status information.

d) General purpose robots can now be customized with software and task-specific end-effectors to automate a variety of tasks in offsite and onsite construction and maintenance.

e) Current AI and machine learning tools, evolving from rule-based AI systems in the 1980s, now offer startups foundational capabilities like image interpretation and speech recognition through open source and cloud providers for startups. Developers can now leverage cost-effective AI LLMs for rapid generation of realistic plans, designs, images, and videos.

f) Extended reality (XR) hardware and software have evolved to increase their fidelity and power, with form factors rapidly approaching those of eyeglasses. This is enabling solutions to be deployed that “upskill” new cohorts of workers to augment the skilled labor supply, and to provide tele-assistance by remote experts for more challenging tasks.

5. An aging and declining skilled construction workforce

Construction often involves one-of-a-kind projects, so the required skills of the craft labor workforce are among some of the highest of all blue-collar workers. Workers in the skilled trades have required four-year apprenticeships to reach journeyman status. As aging workers are retiring, Millennials and Gen X workers have become less inclined to work on construction sites, creating a drastic shortage of these high-skilled workers, estimated to be above 500,000 workers in late 2023.

Resulting Startup and Investment Opportunities

These converging macrotrends are creating strong tailwinds for construction tech deployment, making them attractive startup and early-stage investment opportunities:

a. Multispectral cameras and AI computer vision can be used to identify, diagnose, and remediate grid failures, which can lead to devastating wildfires. (Buzz Technologies)

b. Using cleaner electrical power often leads to lower utility bills, but the split incentives between owners and tenants stifles investment in upgrading/retrofiting buildings. Given that buildings are responsible for 40% of GHG emissions, fintech solutions can be effective at addressing misaligned incentives (Ex. King Energy)

c. Since the 2010s, construction firms have adopted a growing number of point solutions to digitize various workflows enabled by the kinds of technologies listed in 4.1 above. Multiple point solutions, each with their own walled-off databases, limited their value to speeding up the old paper-based workflows one at a time. Solutions with APIs and robotic process automation (RPA) bots for legacy software tools without APIs enable the creation of a unified solutions data pool in the cloud. AI algorithms can then access the data pool to generate high-value business insights. (Ex. Briq)

d. Growing climate change awareness, declining costs of renewable power, government investments and subsidies have converged to drive a growing transition from fossil fuel-powered vehicles to electric cars, vans and trucks. This has created a massive unmet global demand for electric vehicle charging facilities. 

The current electrical grid often provides insufficient power at locations like apartments, gas stations or convenience stores to fast-charge multiple vehicles simultaneously. Upgrading the electrical service can take years. But, installing batteries, power electronics and control software at a site can enable simultaneous fast charging, even with inadequate existing electrical service at a site. (Ex. Electric Era)

e. The surge in utility-scale wind and solar energy installations strains current grids. Leveraging IoT and ML on grid sensor data enables real-time power generation optimization, fostering efficient energy sharing and offering diagnostic insights for repairs. (Ex. Rhythmos)

f.Higher interest rates for land purchases and construction loans underscore the importance of minimizing project durations.. At the same time, increasingly severe labor shortages delay construction starts for some projects and extend the durations of others. This has made offsite prefabrication of 2-D or 3-D components of buildings and other facilities increasingly attractive to speed up the construction process while addressing its skilled labor shortage. 

The challenge of offsite construction has historically been that it is capital-intensive and often requires significant amounts of debt. The demand for construction tends to be unpredictable and very “lumpy” making it challenging to operate these facilities at a high enough rate of utilization to pay off their capital costs and cover the costs of transporting finished modules to site. This has resulted in multiple failures of prefabrication companies since the 1970s, and more recently in the failure of capital-intensive prefabrication firms like Katerra, Entekra, and others.

Blackhorn’s thesis for its VC investing in construction prefabrication is to seek tightly-focused robotic solutions that require so little CapEx that they can be amortized in months not years. They typically focus on a single trade, or even part of the value chain of a single trade. The declining cost of standard manufacturing robots that can be customized with software and custom end-effectors enables these low-cost robotic prefabrication solutions. Startups can develop and refine their technology stack of software and robotics, and outsource or license their robotic manufacturing tech stacks to third parties, creating attractive VC investment opportunities. (Exs.: Toggle, Hyperframe, Agorus, Ecoworks).

a. Adoption of CAD tools for designers and constructors to create 3D Spatial building information models (BIMs) allows use of these “digital twins,” of the as-built or future facilities to be used for visualization, walk-throughs, comparison to as-built facilities, etc. However, the BIMs typically only represent the spatial/geometric attributes of the project, not the functions of all the active systems in the facility like its heating, cooling, occupancy and safety status. Incorporating data from wireless IOT sensors in the facility allows for the creation of a digital twin that is not just geometric, but also functional. The IOT-enhanced BIM can be used to track the current operation of the facility, to support enhanced energy management, space utilization, and safety of maintenance workers. (Ex. Veerum)

Conclusion

This discussion of the recent convergence of several macrotrends and the kinds of attractive startup solutions and investment opportunities they have spawned is clearly not intended to be exhaustive. Its goal has been to encourage construction tech founders and early-stage VC investors to make startup and investment decisions that “wind-surf” the tailwinds and waves spawned by current macrotrends, rather than trying to launch startups or make investments that aim to generate new macrotrends.