ConTech: From Niche to The Place To Be
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Less than a decade ago, “construction tech” was considered just a niche within the much larger PropTech universe. Today, ConTech has evolved into its own category — with distinct market dynamics, investment flows, and solution clusters. This article is the first in a series of blog posts exploring the evolution of this space from my (inevitably biased) perspective. Let’s go!
Investment landscape
According to Foundamental (one of the most respected venture investors in the space), roughly $37 billion has flowed into ConTech so far. That’s about $3b per year since 2020 and amounting to about 1% of global venture capital over recent years. And whereas a decade ago only a handful of investors even recognized ConTech as a category. Today, hundreds of professionals comb through the landscape looking for winners focusing exclusively on this category.
Given that construction represents roughly 13% of the world GDP and its profitability margins fall somewhere within the 3–5% range (compared to other industries reporting 10-12% on average), this acceleration is only the beginning. But lets dive more into the details of this industry’s evolution over the past 5 years, which I would split into 2 periods:
Clueless past (2015 – 2021)
Around 2020, talking about ConTech with mainstream investors was tough. “Domain experts” were mostly asset managers who had only seen construction from a distance. The prevailing narrative (also amongst entrepreneurs) was still the McKinsey chart comparing construction productivity to that of fishing, and how it stagnated over the last decades while all other industries went through the roof (thanks to technology). I vividly remember that every pitch deck I saw around this time would mention how the proposed solution is “revolutionizing” this industry, “democratizing” a part of it and “bringing construction into the 21st century”.
Some of you might be surprised to learn that this lingo borrowed from other spaces does not resonate with industry professionals, only with investors learning themselves about the space (where such claims are required to land a deal).
We came a long way since then – today entrepreneurs understand that unlike in other industries, construction people usually are not looking for “magic pills” in new solutions, but for something that will make their work easier, faster, or of better quality – not completely change the way they do things. In a high-risk and low-margin environment, no one wants to gamble, just improve the odds of success.
Another distinction to the general venture-backed companies should be highlighted, as I believe the trend was already pretty clear around that time. Public exits like Procore or Bentley Systems (and let’s count the Matterport SPAC as part of such examples) are rather the exception, than the norm in this category. Instead, M&A has been the dominant exit strategy for most tech solutions (examples are abundant: PlanGrid, BuildingConnected, Spacemaker; Esticom). Objectively, the number of IPOs is much more pronounced in other industries. This might come as a surprise, because many finance professionals are familiar with studies showing that M&A often destroys value. But surprisingly, though I couldn’t find corresponding studies that would confirm this analysis specifically in a ConTech context (even though there is some great analysis around the topic of M&A in construction, e.g. by Zacua Ventures), M&A seems to be a significant value creator in ConTech. We might argue about the reasons, but it seems that “programmatic M&A” in this industry is actually working and can expand coverage across the value chain and add tangible growth (and Autodesk is a good example of how this can be done).
The VC Winter and the Reset (2022 – 2024)
Like all venture segments, ConTech endured the 2022–2023 downturn. Valuations fell, rounds froze, exits dried up. Even the M&A slowed — apart from a few deals (The Wild, B2W Software, Ryvit).
Dedicated ConTech funds were cautious (being mostly smaller, many froze all talks and rounds to “hibernate and see what happens”), so naturally, many founders sought out more generalist B2B software investors. This is for me the first time that I really felt a clash of the worlds when talking to those investors, many of whom didn’t understand construction at all it seemed. Their valuations were based on reference to mainstream Software (like Microsoft), requiring Saas metrics not applicable to the project-based construction world. Even less did they appreciate the “double Chasm” that a ConTech supplier would need to cross (first landing a project with a customer, then expanding to other projects of the client, which in many cases is close in effort to onboarding a completely new customer since every project has a high level of autonomy and usually a different constellation of decision makers and budget holders). Not even to speak about the cash conversion cycle.
By 2024, early-stage ConTech bounced back, and most specialised investors were again leading the deals. Like in most markets, Seed and Series A rounds found themselves at pre-“VC winter” levels, while later stages (C/D) saw downward adjustments. This isn’t surprising: early-stage rounds are usually about proving a product and go-to-market concept rather than showing scaling efficiency. Valuations in this space are more gut-driven, circumstantial and focus rather on “how much money is needed to get to the next stage” than actual perfromance metrics of the business. Later-stage investors on the other hand look for repeatability and margins. Many assumptions undelying the free cash flow projections needed to be revised versus the perhaps too rosy estimates in the pre-COVID, pre-war in Europe, and pre-tariff-fluctuation era.
What matters and where we are at today?
Some outsiders still view construction as antiquated, change-resistant, and closed to innovation. Not the ideal industry to target as an entrepreneur. I would argue that these are also the very qualities that protected it from storms of “fancy new trends” in the last years and made it a no BS environment. Over the past years, many new technologies actually made it on site: Reality capture, robotics, augmented reality and some AI doc management solutions. But since it is harder to get the professionals’ approval, only solutions that deliver tangible value to practitioners survive — funding alone and shiny demos are insufficient.
And now, that ConTech as a market has matured into a full-fledged category of its own, it’s worthwhile to take a closer look at the individual sectors shaping its future. So what is actually part of this “ConTech” today? Let’s dive into this in the next article!