Brick & Mortar Ventures — Q&A with Principal
If there’s a venture capital fund that stands out in the construction technology world, it’s Brick & Mortar Ventures. It was founded by Darren Bechtel in 2015 to help entrepreneurs disrupt the built world industries. It quickly became synonymous with early stage construction tech.
Kaustubh Pandya is a senior member of their investment team and has been instrumental in the fund’s evolution over the past several years. If you’ve ever read an article on the construction industry’s transformation, it likely references some of the groundbreaking framework that Kaustubh and others at McKinsey developed in their oft-cited research articles from the mid-2010s.
Kaustubh currently serves on the boards of SafeAI, Wingtra, Advanced Navigation, and Zerokey. Brick & Mortar has successfully exited early investments in construction tech start-ups like HoloBuilder, FieldWire, Levelset, and PlanGrid.
You were involved with very influential research articles in construction tech. They tell a story of optimism: construction is ripe for disruption and “on the cusp of a new era”. They also tell a story of complexity and nuance and no-easy-wins, which I think is something that many in the construction innovation space recognize. From an industry perspective, what is the difference that sets construction tech apart? What makes it more challenging?
Construction is a big space, but it varies so much across geographies and market sectors. It also has a uniquely challenging field component. We typically talk about construction being data denied or data constrained in a highly dynamic environment that’s supported by temporary supply chains and a project specific workforce.
So a lot of adjectives that make it very hard to innovate — but it’s still massive and has tons of problems that I think technology can help solve. And as massive as the opportunity is, you still have to win and deliver value on a project level basis.
Those challenges also become evident when more generalist investors look at construction tech. A later stage investor might come in and compare a construction tech company’s growth velocity to other industries. At first glance, it will seem somewhat slower and surprising, but the seasoned later-stage investors and industry players realize how exceptional that is.
Essentially, the threshold of escape velocity is much lower in our space because it’s harder to get to. I would go as far as saying it’s one of the primary reasons you see more M&A exits versus IPOs in construction tech, because the veteran players in the industry know this and acquire relatively early. Of course the point above is more focused on field or project-based solutions.
Among those generalist VCs, what are some of the most common comments you hear about construction tech start-ups in later stage funding?
That’s a great question. I’d start by saying that we are in very early innings of later stage capital coming into play in construction tech and I can probably count on two hands the flagship Series B and C’s that have been done in this space.
I’ve seen a couple of approaches from VC firms. One approach is the later stage investor that believes in construction tech. They perhaps made a few early investments and now have a dedicated team or dedicated pod that drives their thesis in this space. They realize how sticky it is and understand the growth and escape velocity piece, so they know that the value is there.
Then there are the other firms that clearly see the writing on the wall, “Yes, this is a new space that’s humongous. It’s hard for me to navigate it so I’m going to have to figure out my threshold of investment.” That’s where their first investment is almost an option play where they’re going to learn about the space and hopefully double down on it.
What’s been very exciting for us to see is the dedication and talent pouring into generalist VC funds that are committed to construction tech.
Having put your recent energy into venture capital but starting as a structural engineer, you’ve seen the industry from a lot of different perspectives. There’s elements and parts of construction that venture capital has difficulty addressing — Katerra’s bankruptcy being a recent example. Based on your experience, what would you say are the limits of VC in the industry’s transformation?
Let’s start with the impact Katerra had on the ecosystem. The fact that everyone was talking about Katerra was a big win for the industry. I don’t think we ever saw as much chatter about prefab and modular as we did after Katerra raised a round — and I think that wake up call to the industry was worth its weight in gold.
The second win, I would say, is around talent. I think there is some exceptional talent that I don’t think would be coming into the construction industry without Katerra. They were able to recruit from many other industries like manufacturing, big tech, and others, which benefited us all in construction.
In terms of how I view the prefab and modular space, let’s draw a short spectrum from simple to complex in construction with single family residential on the left and multi-family residential, light commercial, and finally complex commercial to the right.
I think if you start on the commercial side, or even at multi-family, the risk that you’re undertaking is much larger than single family residential. You’re almost forced to run before you walk given the sheer volume of work you need to win and deliver with new capability. You also risk accepting projects that weren’t originally meant for prefab just to keep the factory busy.
Some of the best companies we’ve seen succeed in the prefabrication space are able to control design from the start by basically saying: “This is what I’m building and this is what I’m not building.” And some of those approaches can be reflected in the verticals they play in or the business models they choose.
One of the lessons learned from early movers in the prefab space was an understanding of how the VC model could work when you’re actually able to learn to walk before you start running. And so that’s where we looked at connect homes, where they’re figuring out how to go from general indoor construction to assembly line production with a control on design.
The more you can control design in prefabrication, the more you’re able to grow into the desired volume and pace in order to keep factory production going.
How do you see those different prefab models playing out?
One way to think about it is the dumbbell model where you can have an asset-light play that suits the check size and valuations that you think are possible with VC funding. On the other side, you have a capital-intensive model that may not necessarily fit the VC model unless you’re careful on how to walk before you run.
On the asset-light model, we’ve seen a few solutions primarily focused on software supported by an ecosystem of partners. I think the U.S. ecosystem requires a little bit of upskilling to serve this model better and it may be more mature in other geographies like Europe where there are enough of an ecosystem on the prefab side to help scale the model faster.
Nate Fuller is Managing Director of Placer Construction Solutions, advising leadership teams to transform their organizations in ways that improve performance and agility at the field level.
He provides construction companies with a field assessment that delivers transformative information about their field operations and is proven to accelerate innovation & technology adoption for Top ENR contractors.
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