Practical Nerds Patric Hellermann

This episode is better enjoyed with the video experience!



In this episode, Patric and Shub delve into Foundamental's updated mission for the next five years by streaming the VC firm's new community letter, focusing on backing vertical singularities in the construction-tech sector. They discuss the tremendous potential for disruption and growth in these unique, sector-specific opportunities and how Foundamental aims to drive innovation within the architecture, engineering, and construction (AEC) industry.

The construction-tech sector is experiencing a notable funding inflection, with its share of venture capital increasing from 0.1% to 0.45% in recent years. Despite this growth, the industry still holds massive potential for further expansion and investment. Patric and Shub explore how Foundamental's early recognition of this trend positions the firm to identify and support the most promising startups in the space.

Patric and Shub also discuss the key to success in construction-tech, which lies in founders who pursue unobvious opportunities that are apparent to industry insiders. They emphasize the importance of developing innovative solutions that address critical pain points and drive meaningful change within the sector.

The episode also covers Foundamental's recognition of outcome-as-a-service business models as particularly well-suited for the construction industry, despite the prevailing herd mentality among venture capitalists. They discuss how construction companies are accustomed to purchasing services, transactions, and outcomes rather than just tools or software, and how embracing outcome-as-a-service models can unlock significant value and drive adoption more effectively.

Lastly, Patric and Shub delve into Foundamental's investment philosophy in construction-tech, which is centered on seeking out category creators rather than backing category clones. They discuss how true innovation and disruption in the sector will come from startups that forge new paths and define entirely new categories, and how Foundamental's deep sector expertise and willingness to think outside the box enable them to spot the immense potential in these unconventional opportunities.



Chapters

(00:00) Fallacies in B2B Capital Allocation and Category Creation; what generic VC's are getting wrong (about AEC)

(35:56) Uncovering Vertical Singularities: The Core of Early-Stage Investing

(43:42) Earning Nuanced Knowledge and Strong Signals in Venture Capital

(01:04:00) The Future of Early-Stage Investing in Construction Tech

This week:



- Construction demand exploding globally, creating multi-decade tailwinds

- Productivity paradox: construction worker output decreased 20% over 35 years

- Aging workforce crisis: 20-25% of US construction workers nearing retirement

- Global skills shortage: severe lack of skilled workers worldwide

- Industry vulnerabilities exposed, creating perfect storm for construction-tech adoption



In this episode, Shub and Patric dive deep into the factors driving the explosive demand for construction globally, including population growth, aging infrastructure, migration, and rising middle classes. They discuss the alarming productivity paradox in the industry, with construction worker output decreasing by 20% over the past 35 years, contributing to over 60% of inflation in Western markets. The aging workforce crisis is also explored, as 20-25% of the US construction workforce is nearing retirement, taking with them decades of experience and wisdom.



The conversation then shifts to the severe global skills shortage, with a lack of skilled workers in both developed and emerging markets. This shortage exposes the vulnerabilities of the construction industry, which relies heavily on a per-diem, project-based business model. With demand surging and qualified labor fleeing, the industry finds itself in a precarious position, creating a perfect storm for construction-tech adoption.



Shub and Patric explore the potential for AI and construction-tech to compensate for the fleeing qualified labor and boost stagnating productivity. They believe that the industry is at an inflection point, with technology emerging as a critical solution to the challenges faced. The episode concludes with a discussion on the generational opportunity for the AEC tech sector, as the construction industry stands at the dawn of a technological revolution that will reshape its future.



Chapters



(00:00) Introduction and Small Talk

(04:45) Chapter 1: Exploding Demand in the Construction Industry

(13:53) Chapter 2: Shrinking Productivity in Construction

(24:57) Chapter 3: Opportunities for Technology and Innovation in Construction

(36:14) The Potential of AI in the Construction Industry

(43:23) AEC Tech: Addressing Challenges and Capturing Demand

This week:



- The trillion-dollar opportunity in AEC services

- AI assistants revolutionizing architecture and engineering firms

- Challenging SaaS orthodoxy in the construction industry

- ERP migration: the untapped market in construction

- Data lakes and the future of AEC service providers



In this episode, Shub and Patric dive deep into the vast potential of service-oriented business models in the architecture, engineering, and construction (AEC) industry. They discuss how companies that focus on delivering services, rather than just software, can tap into a trillion-dollar market opportunity. The conversation explores how AI-powered assistants can help architecture and engineering firms overcome resource limitations, improve efficiency, and boost profitability.



Shub and Patric also challenge the conventional wisdom surrounding software-as-a-service (SaaS) models in the AEC sector, arguing that the industry's unique characteristics demand a different approach. They highlight the massive untapped market for enterprise resource planning (ERP) migration services, as many AEC firms struggle with outdated and inefficient software systems.



The discussion then turns to the concept of a "Palantir of Construction," a company that could revolutionize decision-making in the industry by leveraging AI to interpret complex, unstructured data. Finally, Shub and Patric explore the potential for service-as-a-product companies to become custodians of valuable industry data, creating comprehensive data lakes that can drive innovation and provide insights for the entire AEC sector.



Throughout the episode, Shub and Patric offer counterintuitive insights and fresh perspectives on the future of technology in the construction industry, making this a must-listen for anyone interested in the intersection of AI, services, and AEC innovation.



Chapters



(00:00) Introduction and Small Talk

(01:00) The Convergence of Ideas: Venture-Backed Startups and Integration Services

(06:22) Exploring Opportunities in the AEC Industry

(09:06) ERP Migration and Data Lakes

(14:19) Debating the Choice: Large Firms vs. Small One-Person Shops

(25:03) Choosing the Right Business Model

(27:30) Unlocking Larger Value Pools

(29:26) Faster Sales Cycles and Net Profitability

(30:46) Building a Distribution Channel

(34:09) Accelerating Transformation in the Industry

(38:33) Net Profitability from Day One

(43:09) The Role of Data Lakes

(46:32) Driving Expertise and Specialization

(49:58) The Importance of Service Provision

(51:37) Challenging Conventional Wisdom

In this episode, Patric and Shub discuss the potential of Europe as a breeding ground for category creators in the construction technology (ConstruTech) space. They explore the unique characteristics of different European countries and how they contribute to the development of innovative startups. They highlight the importance of understanding the market context and the specific needs of customers in each country. The conversation also touches on the growth trajectories of Germany and France, and how their economies and construction industries differ. Overall, the episode provides insights into the opportunities and challenges of building ConstruTech companies in Europe. The conversation explores the characteristics of French founders and the fundraising dynamics in the French venture ecosystem. It highlights the natural inclination of French founders to be close to their customers and develop strong relationships. The French VC ecosystem has matured slower than the British and German ecosystems but has solidified itself from within, with successful French founders reinvesting in other French founders. The market conditions in Europe, particularly in compliance, AI safety, energetic renovations, and construction robotics, make it a prime breeding ground for category creators. Europe is not a poor version of Silicon Valley but has its own unique strengths and opportunities.



Chapters



(00:00) Europe: A Breeding Ground for ConstruTech Category Creators

(11:16) France's Optimism and Structural Changes

(25:57) Opportunities and Challenges in European ConstruTech

(32:40) The Maturation of the French VC Ecosystem

(49:39) Europe: Not a Poor Version of Silicon Valley

This week:



(01:17) - CAD wars: The untapped potential for contractor-focused solutions

- Schneider Electric's acquisition of Bentley Systems and industry implications

(16:19) - Opportunities and challenges in building "CAD for Contractors"

- Incumbent CAD players' struggles to adapt to contractor needs

(28:26) - The future of BIM: Integration, collaboration, and progressive UX



In this episode, Patric and Shub dive deep into the world of CAD solutions tailored specifically for contractors in the construction industry. They discuss the untapped potential of contractor-centric CAD tools and the limitations of existing solutions in meeting the unique needs of contractors, particularly in the estimation and bidding process. The conversation also touches on the recent acquisition discussions between Schneider Electric and Bentley Systems, signaling the growing interest of industry giants in construction-tech for energy infrastructure.



Patric and Shub explore the opportunities and challenges in building "CAD for Contractors" solutions, which enable easy 3D BIM model enrichment and detailing for accurate quantity take-offs. They highlight the need for user-friendly tools that allow contractors to enrich models with minimal training and effort. The discussion also delves into the struggles of incumbent CAD players to adapt to the specific requirements of contractors, such as browser-based accessibility, mobile compatibility, and intuitive user experiences.



Looking to the future, the hosts share their insights on the evolution of Building Information Modeling (BIM) in construction. They emphasize the importance of integrating as-built models, collaborative estimation, and progressive user experiences tailored for untrained users. The episode concludes with a discussion on the perspectives of construction-tech investors, who recognize the significant potential in the market while acknowledging the challenges in developing and scaling contractor-focused CAD solutions.

This week:



- Vertiv - the "shovel seller" powering the AI data center boom

- Looking beyond the obvious for construction's hidden opportunities

- The power of "tooling" to enable the broader AEC industry

- Uncovering the "hidden champions" in the construction tech space

- Constructing relevant advice for founders in this industry



This episode dives deep into the overlooked yet compelling opportunities in the construction technology landscape. The conversation explores Vertiv, a traditional industrial company that has quietly emerged as a critical provider of power, cooling, and infrastructure solutions for the booming AI and data center industry.



The panel highlights the importance of looking beyond the obvious, first-order problems and trends, and instead identifying the "second" and "third order" solutions that can create durable competitive advantages. The concept of "tooling" - building technology products and services that empower and enable the broader AEC ecosystem - is discussed as a powerful business model.



The discussion also shines a light on the prevalence of "hidden champions" - niche, specialized construction technology companies that have achieved dominant market positions but remain under the radar. Uncovering these gems requires dedicated focus and industry expertise, which is often lacking in the generic advice given to founders by VCs.



Ultimately, this episode offers a fresh perspective on the vast potential within the construction technology space, emphasizing the value in taking a more holistic, systems-level view to uncover promising avenues for innovative, defensible companies.