The construction industry has been slow to adopt digital technology, while productivity levels in the construction industry have remained consistently below the UK average. In this article, Sebastian Peck, partner at KOMPAS, explores how tech companies can advance in the sector
Many construction practices have not fundamentally changed for centuries. The sector’s persistently low productivity can also be attributed, at least in part, to stringent regulation, high dependence on public sector demand, corruption, industry fragmentation, and mismatches in risk allocations and rewards.
As venture capital investors, we back the builders of tomorrow by investing in tech companies’ innovations to accelerate the digital transformation and decarbonisation of the construction sector.
The structural challenges of the sector notwithstanding, we believe there is huge potential to build breakout companies in this space. The built environment accounts for 40% of global CO2 emissions.
It is also the largest asset class outside of financial services. Homeownership is an important aspiration for most people, and the lack of sustainable, affordable accommodation strains society.
Introducing new legislations: Challenging a conservative culture
The construction industry is very cost-conscious and conservative and tends to follow rather than lead – although notable exceptions exist. This means that large-scale adoption of new technology often relies on introducing new, more stringent regulations and corresponding financial incentives to improve, for example, the energy performance of homes.
In Europe, many new regulations are being introduced to ensure new and existing buildings become more sustainable. Examples include the impending ban on oil and gas heating systems and increasing the share of reclaimed and recycled materials that new buildings need to incorporate.
We believe that levels of embodied and operational carbon – the CO2 footprint of the materials used in construction and the CO2 emissions generated when operating a building – will ultimately be reflected in the way buildings are taxed in many places around the world.
Many tech companies have recognised the need to renovate existing housing stock and introduce solar panels and heat pumps to improve the environmental performance of buildings. By taking a different approach and scaling aggressively, companies like Enpal and 1Komma5 address some of the bottlenecks – a lack of trained personnel, high levels of industry fragmentation, and a shortfall of attractive financing options – to drive adoption.
For startups, it is critical to be familiar with existing and incoming regulations as they can have a dramatic effect on demand and supply – in both directions. But they should also resist the temptation to become too reliant on specific regulations when developing their business model, as public policies can change quickly.
The sector is ripe for disruption by emerging tech
Some of the biggest opportunities for start-ups to deliver impact are in construction project management and procurement. Existing construction procurement processes are a mess that cost time and money for all stakeholders. Entering data manually, agreements via text and email, and legacy accounting systems all result in inefficiencies. Solutions such as end-to-end procurement and materials management software purposely built for contractors is now becoming available in the market. Single digital platforms for jobs such as procurement promise to simplify workflows, reduce waste and drive efficiency.
Offsite construction – where building components or entire buildings are produced in factories – is also a fast-growing sector. It is a much more efficient delivery mechanism for new buildings than traditional onsite construction, as it requires less manual labour and produces less waste. While not suitable for every building type, offsite construction will take a significantly higher market share than has traditionally been the case.
I’ve also seen a lot of innovation in the operation of buildings, and I’m particularly excited about the automation of building management, controlling and optimising the indoor climate and energy performance of a building with artificial intelligence. As far as the build phase is concerned, market adoption for digital solutions is still not quite where I would like to see it, but digital companies like Structshare, which support the procurement of construction materials, and Planradar, which supports various project management tasks, are showing good traction.
Finally, there are a lot of exciting developments in alternative materials that are helping to reduce the carbon footprint of buildings, displacing heavily emitting materials such as Portland cement.
Regarding sustainability, the construction industry has been behind the curve compared to many other industries. With emissions from construction accounting for almost 40% of total global emissions, it goes without saying that if we solve the industry’s carbon problem then we will be saving the world from climate change.
Untapped potential for digital solutions
Given the persistent productivity issues the construction industry faces, there is still a lot of untapped potential for digital solutions to deliver real impact. The challenging macroeconomic environment notwithstanding, construction technology is a highly dynamic vertical, and in venture capital, we continue to see a very strong deal flow.
The construction industry is very distinct, and product-founder fit is critical. If founders can demonstrate a deep understanding of the sector, indicate how they will unlock value and can combine it with strong technical capabilities to deliver a compelling solution, they will be in a good position to raise capital.
Scaling a company in construction is demanding. Tech companies should also remember that money and investment is not the only route to success. Finding strategic partners and leveraging the network of investors is key to growing a business and should not be underestimated. There are many legacy players and structural challenges in the construction industry that might slow the breakthrough of new companies.
Still, emerging technologies, smart people and innovative companies are making great strides to bring the construction sector into the digital world we’re already living in.
