The Blackhorn team recently returned from participating in BuiltWorlds”s Venture West, one of the pre-eminent events focused on venture investing in construction and built environment-related emerging technology.  Aside from reconnecting with a number of friends and co-investors at WND Ventures, Zacua Ventures, Cemex Ventures and corporate innovation leads at Owens-Corning, St. Gobain, Vinci and more, the gathering informed five key takeaways that make us even more excited about the growing startup ecosystem in the built environment.

Construction Tech’s Growing Opportunity

• • Despite an increasingly high interest rate environment, construction volume is growing. The AIA’s Consensus Construction Forecast panel—comprising leading economic forecasters—is projecting nonresidential construction spending to grow 5.8 percent 2023.
  • There is $450Bn of opportunity in potential productivity gains through digital transformation.
  • Construction volume is actually increasing in 2023 compared to. 2022 even in the face of steeply higher interest rates

Residential

1. • New single family house construction is off by about 18% nationwide, but volume is growing in Texas, Florida and SoCal.
   • Multifamily housing built to rent is growing quickly.According to a recent Fannie Mae study, the vast majority of metro areas in the United States suffer from a lack of affordable single-family housing for both renters and homeowners, with a cumulative affordable housing shortage estimated at about 4.4 million total units.

Non-Residential

• • Non-residential construction sub-sectors–infrastructure, manufacturing, including data centers, and infrastructure–are growing. Despite macroeconomic headwinds such as inflation, rising interest rates, and weak consumer sentiment scores, the AIA’s Consensus Construction Forecast panel—comprising leading economic forecasters—is projecting nonresidential construction spending to grow 5.8 percent in 2023

Corporate Venture Plays a Critical Role in Real Estate Technology

• • Corporate venture has continued to move earlier and earlier.Between 2010 and 2020, the number of CVCs grew more than six times to over 4,000, and at the height of the cycle these CVCs inked more than 2,000 deals worth $79 billion in the first half of 2021, surpassing all previous annual tallies.  Investment not only derisks potential future M&A, but also provides insights via exposure to trends ahead of the competition.
  • Seed and A rounds are occurring at volumes comparable to previous years
    • CSVs of firms like ProCore, Autodesk and Trimble are making more investments in early stage startups and watching to see whether they can grow, vs. acquiring them early on.
  • There is a trend toward flat Seed and A round extensions, and flat or down B, C and later rounds, vs.successive up-rounds at increasingly higher valuations
  • The hardest round to raise so far in 2023 is the Series B. Although, all the early & mid-stage rounds have fallen to levels not seen for 5-10 years.

• • Q1 volumes by year show broad declines across early-stage venture capital. Seeds peaked at 1500 in Q1 of 2020 falling to 155 in Q1 of 2023.

Capital-Efficient Pre-Fab Solutions are Experiencing Strong Tailwinds

• • Labor shortages persist and are worsening, which is leading to higher wages.
  • High interest rates on construction loans are a tailwind for prefab, which accelerates time to completion and rollover into lower cost mortgage financing
  • Sustainability and Safety concerns are further tailwinds for prefab, which creates 30%-40% less GHG emissions than onsite construction and is safer (McKinsey Study).
  • The prefab panel at BuiltWorlds Venture West generally supported Blackhorn’s prefab investment thesisof capital-light prefab solutions that:
  • automate the work of a single-trade, or
  • design a set of flexible modular components (“kit of parts”) and orchestrate an outsourced supply chain to manufacture, assemble and install the modules.

Data Sharing for a Fragmented Industry

• • While keynote Di-Ann Eisnor, ex-WeWork and Google/Waze and current CEO at Crews by CORE asked the crowd of corporates to refrain from ‘death by pilot’, there is a real need to share results from pilot testing across the industry.
  • Unlike other heavily regulated sectors, the construction industry does not have an industry standard, or peer reviewed journal of record where data gets shared from customer to customer, or from region to region.
  • Entities like BuiltWorlds are natural conveners. They can serve as a data repository and marketplace from their members like DPR and other large engineering and construction companies who are running multiple pilots to help accelerate deployment of startup solutions that are exceeding their corporate sponsor mandates.

 Deeper on Decarbonization

• • Real estate drives approximately 40% of global carbon emissions. If we’re to reach net zero by 2050, and keep temperature rise in line with the targets put in place as part of the Paris Accords, we’ll need to rapidly decarbonize our buildings.
  • Despite increased interest in sustainable real estate and the opportunities it presents to capitalize on and future-proof assets, only a fraction of the teams we met at the show were focused on using novel tools like AI and ML to decarbonize real estate.
  • There is a well-worn cow path for startups working on pre-construction, site analysis and optimization, materials marketplaces, and construction finance.We’ve seen dozens of the same companies pursuing the same opportunities that have little to no potential impact on emissions reduction. Many of these early-stage Founders would be well served drilling into their competitive landscape and getting a better handle on their unique advantages around customer acquisition.
  • Buildings that are heavy emitters are increasingly viewed as at risk of becoming ‘stranded assets’.Our single process automation thesis for pre-fab modular construction implies a significant emissions reduction opportunity.  With recent large funding rounds from BlocPower and Logical Buildings, and funds like Fifth Wall putting real dollars to work, the demand for scalable retrofit solutions are growing, with market pull coming from institutional investors, homeowners, municipalities, and utilities. A Blackhorn portfolio company, Ecoworks, based in Berlin, is a textbook example of a capital-efficient prefabrication business model to upgrade energy efficiency of old, energy-wasting and GHG-emitting apartment buildings.

“The most massive public dollar investment we’ll probably see in our lifetime.”

With this week’s passage of the $369B Inflation Reduction Act, and the passage earlier this month of the $52B CHIPS Act, we’ve been getting inbound questions as to how these new policies impact our investment thesis, and underlying portfolio companies.  With unprecedented investments in industrial capacity, manufacturing, clean energy infrastructure and workforce development, these two pieces of policy are shifting the course of our economy: long term, transparent price signals for renewable energy, and historic investments and tax incentives for the electrification of transportation and housing.

For some perspective on how this legislation will impact Blackhorn portfolio companies, and what it means for how Blackhorn approaches opportunities in resource efficiency and digital infrastructure, we turned to Blackhorn Operating Partner Bill Ritter.  Should you have additional questions on what these new rules mean for your organization or for our investment approach, please reach out.  We look forward to hearing from you!

During his four-year term as Governor of Colorado (2006-2010), Bill Ritter established Colorado as a national and international clean energy leader by building a New Energy Economy. After leaving the Governor’s Office, Ritter founded the Center for the New Energy Economy at Colorado State University, which works with state and federal policymakers to create clean energy policy throughout the country. Governor Ritter has authored a book that was published in 2016 entitled, Powering Forward – What Everyone Should Know About America’s Energy Revolution.  Governor Ritter was formerly the chair of the Board of Directors of the Energy Foundation and currently serves on the board of The Climate Group American and the Board of Trustees of The Nature Conservancy.  The following interview has been edited for brevity.

What does the IRA mean for our core investment thesis as far as industrial decarbonization and resource efficiency?

We look at the sectors that are most in need of decarbonization, and these are the same sectors we’re working in – the power sector, the transportation sector, the built environment and our supply chain. The Inflation Reduction Act actually covers all of those sectors as part of decarbonizing the economy and simultaneously growing the economy and reducing inflation.  So if you look at the act, it has a variety of ways of addressing each of those. Some things it addresses with tax credits, and that’s going to spur investment in those areas. Some things it addresses with formula grants or other kinds of grant programs. The thought is that it will spur investment, by providing federal investments for industries that require a big capital outlay. It will cause us to develop platforms to manage the intersections between our supply chain, the built environment, the transportation sector and the power sector.

Is there one specific policy lever or section of the bill that you think is going to have the largest impact on reducing emissions?

We have seen the use of the investment tax credit and the production tax credits for a significant amount of investment in solar, in storage, and in wind. And we were also seeing those tax credits being tamped down or going away altogether over the next few years. This is going to reinvigorate the clean energy economy. We are going to see significant investments in wind, storage and solar that we might not have seen had the act not passed. It also has a significant ambition toward creating American jobs. It’s fair to say that in particular where solar and batteries are concerned, we lost out to the Chinese over the last decade. This act makes a significant move toward our being able to reclaim a leadership role in the manufacturing sectors that are going to be part of the energy transition economy.

(Credit: Nicole Kelner)

How should Limited Partners be thinking about the tailwinds that this federal policy creates?

Don’t look at the Inflation Reduction Act just in isolation. Look at it also in combination with the Bipartisan Infrastructure Law. Those two taken together are massive investments in the American economy, in places where we badly need those investments. The Infrastructure Act had many parts to it that were favorable for decarbonization, towards clean transportation and things of that nature. And certainly this act does as well. And so limited partners should be looking at this as the most massive public dollar investment we’ll probably see in our lifetime. It is really about trying to spur this transition to a clean energy economy.  And it starts with the public investment, but fits our thesis that this is the place we most need to be to make the impact we need to make regarding decarbonization.

(Image courtesy of Blackhorn Ventures)

Do you see this bill changing Blackhorn’s investment strategy, either for the short or the long term?

I don’t think so. That’s the interesting thing for me – this is the transition that we believed needed to happen. These are the sectors that need to be decarbonized. Our thesis is about the fact that we will have an impact by investing in those companies that are going to manage this energy transition. We are going to invest in companies that say, for example, “This is a massive transition for utilities. How can we do that and do it smoothly?” We have an opportunity to modernize the grid in a way that has both sides of the meter talking to each other, and helping grid managers ensure that they’re living up to all their ambitions with respect to their renewable energy goals and their emissions reduction goals. There’s a great deal of grid modernization that has to go on. We’re investing in companies that are going to facilitate that. And the same goes with the built environment. The built environment is 40% of our emissions, and we really are going to get to the kind of emissions reductions that we promised as part of our participation in the Paris Accords. If we’re going to do that, we have to impact the built environment in a positive way. And so that’s going to be people thinking about building materials, but it’s also going to be people who understand that managing the activities in a building site, or managing the meter inside of a building, or rethinking how you plan to increase the efficiency of the building, is all part of a decarbonized economy .

Is there a particular sector of technology that you think will see a particularly significant uptick thanks to the IRA?

I think we were already at a place where we were going to experience a fairly precipitous change in the electric vehicle market. You can see it building– it felt like we were coming to a tipping point. I think the Inflation Reduction Act provides the tipping point for that. With the level of tax credits that are available both for new and used electric vehicles, I think we’re gonna see something fairly dramatic. And I believe that’s true not just in the light duty vehicle market, but in the medium size and heavy duty as well.

(Image courtesy of Blackhorn Ventures)

What  advice do you have for startups in this space seeking to navigate the IRA and take advantage of the funding coming down the pipe?

Well, startups shouldn’t bend their vision around the Inflation Reduction Act. They should actually ensure that they have a fundamentally sound solution that can be commercialized. It’s not hurtful to have these kinds of public dollars available. But I hope that founders don’t believe that they should try to mold their concept to what the Inflation Reduction Act says, because anytime you have a space like this, you’re using kind of a blunt instrument. I mean, a tax credit is a fairly blunt instrument. And so if I’m a founder, and I have a startup, and I’ve got a new solution, my funding is going to probably start out in a way that’s relatively typical for venture capital funding, and over time, it might be able to take advantage of some byproduct of the Inflation Reduction Act, but probably not in the first instance.

Would you be able to give us a bullish and a bearish scenario for how the IRA affects us?

The bullish side is, I think that because this act covers the sectors that we care about most, because it’s about decarbonization, it fits hand in glove with our narrative. And so, if everything were to go perfectly, this could make just a tremendous difference in our ability to address climate change in the short term, and have a tremendous positive impact on our portfolio companies and the companies we will invest in over the next year or two, because our thesis remains about these sectors. The bearish part of this is that this is all really big. It comes on the heels of the Bipartisan Infrastructure Law, and it requires the federal government to do a great deal that it’s not to date capable of doing. New offices have to be stood up – for the infrastructure act alone, the Department of Energy had to stand up 30 new offices to manage the dollars that are going out the door. And so it’s not to fault the federal government. It’s just that the two came together very quickly. I think it would be fair to say that today, as the Act has just passed, we don’t have either the personnel nor the organizations within federal agencies to get this out the door. Now, we have to build that. the bearish scenario is that we don’t build it right. It takes longer to get out the door. There’s a lag time that impacts investors in a negative way because the returns come later down the road, but it also takes up precious time with addressing environmental issues including climate change. So the most bearish thing, the biggest concern I have about this is whether the federal government is fully equipped to do what’s necessary to make this money as impactful as it needs to be both from an economic perspective in reducing inflation and growing the economy, growing American jobs, but also in a climate/ environmental perspective, and addressing carbon in a timely fashion.

(Credit: Rocky Mountain Institute)

With the recent passage of the CHIPS Act, it seems like America has embraced some bipartisan action regarding industrial policy. Could you speak to the effect of the CHIPS Act, and the importance of good industrial policy in general?

People who feel we lost our leadership role as a manufacturing economy were in part right about that. I think we still manufacture a lot of things in America, our manufacturing economy has played such a significant role in our economic well being. But we’ve also not done as well where things like chips are concerned, in maintaining our lead in high tech manufacturing. Other countries have done well in that – it’s not like we’ve forfeited our position completely, but I think the CHIPS Act is going to allow us to reestablish our leadership position. That’s important for a couple of reasons. Obviously, it helps grow the economy, we’re becoming more and more of a software driven economy. But in addition to that, it would appear that the legislation is going to incentivize jobs to stay on shore. And finally, it hopefully resolves a problem where the supply chain is concerned, because I think there were a lot of different issues around supply chains and chips, and this hopefully will impact our ability to have chips available, and not have to rely on other foreign countries to provide them for us.

(Image courtesy of Blackhorn Ventures)

You’ve been around the block as far as climate legislation is concerned. What is it specifically that makes this time truly historic?

I’d say the first thing is the amount of investment that is involved. When I was Governor of Colorado, we went through the Great Recession, and we had the American Recovery and Reinvestment Act. And the total amount of investment in clean energy was $90 billion. And President Obama was very much a person who believed that we needed to address climate change and clean energy. This time, first of all, it’s 14 years later. The issues that impact us related to climate and the environment are significantly more pronounced than they were 14 years ago. People who are looking at the clock and thinking about the window we have to address this have shortened the timeframe within which we have to act. So there’s far more money, but that money is tied to the urgency that we have to act. It’s also concentrated in places where we’re pretty confident it’s going to cause people to invest at a deeper level on the private side and help us to make that transition from a carbonized economy to a decarbonized one.

I’d like to add that this bill really does more from an environmental justice perspective than any piece of legislation that I can ever remember. The kinds of ways it incentivizes to build out energy efficiency and low income neighborhoods, the things that does to ensure that power delivered to low income neighborhoods is clean power, is remarkable. There are a variety of incentives for transportation to be carbon free, and that transportation be available to low income people and people who live in marginalized communities. This legislation does more than any other thing I’ve ever seen in that regard. And that is also how we should think about our energy economy in transition, that this time, we should leave no one behind.

Is there anything else that you think is important to keep in mind as we’re going forward?

The IRA is being called a climate bill– but there’s nothing in the bill that puts a limit on emissions. There’s nothing that requires a reduction of emissions. Nothing like a clean energy standard, or when there was the Clean Power Plan. Prior legislation had that, this legislation does not. So, you know, we really have to work very hard at ensuring that the incentives work, that American consumers and American workers are fully participating in this and that the parts of this that are about environmental justice also are being fully executed. I think it’s incumbent upon all of us to do that and not just rely on this as legislation that was passed and will now address climate. It actually doesn’t do that without full participation of the American worker, the American consumer.

Blackhorn Ventures is thrilled to announce that AGORUS, an exceptional San Diego-based team working to streamline residential homebuilding through fractional prefabrication, recently emerged from stealth and announced their seed capital raise. We’re proud to invest alongside our friends at Toyota Ventures, Point72 Ventures, Signia Venture Partners, DivCoWest Ventures and Kennedy Wilson. AGORUS provides homeowners with a significantly quicker, more precise, less costly building experience by creating a fully-digitized model of each house, then using prefabricated panels to construct properties in a matter of days.

We’re proud to be partnered with the AGORUS team as they scale a new approach to offsite construction; a central pillar of our resource efficiency and industrial impact in the built environment thesis.

The Problem

While every other industry has been revolutionized by efficiency gains from cutting-edge technology, construction has fallen far behind. 96% of construction data remains uncaptured, and it’s so expensive that the cost of labor has become the #1 problem for developers nationwide. Most importantly, it’s inefficient– not only has it failed to utilize new technology to streamline the construction process, but according to a report from The Economist, there has actually been a 50% drop in productivity since 1970. Even as the capabilities of our modern world have supercharged the efficiency of everything from finance to food, construction has been backsliding into expensive, analog, and inefficient territory. 

As Garrett Moore, co-founder and CEO of AGORUS, puts it: “With a declining labor force and an increasing demand for homes, the construction industry is fighting a losing war on two fronts. It needs 21st century tools to fight both threats, but our nation continues to build homes onsite, by hand, the same way it has done for 120 years.”

It’s also important to note that previous attempts at prefabrication technology have failed to gain traction, and to understand why this is the case. For example, the US Government’s foray into prefabrication, dubbed “Operation Breakthrough”, was a spectacular failure. This turbulence in the prefabrication market has three main sources: the cyclical nature of the housing market’s economics, the high level of customization needed to accommodate differences from place to place, and the fragmented nature of the construction industry as it stands today. If these problems are not addressed, an attempt at prefabrication will struggle mightily to succeed.

The Solution

AGORUS is building a vertically integrated automation system (VIAS) to design, manufacture, and assemble a home through one integrated software platform – starting with framing. ​​Their software solution, called Talós, transforms an architect’s custom design into a detailed digital design file. The file breaks up the build into custom wall, floor and roofing panels which are created on a single automated, just-in-time manufacturing line. These panels are then transported to the jobsite and assembled by their 6-man field assembly and site technology team in days rather than taking weeks as does the traditional approach. Through off-site automation, the AGORUS solution minimizes waste, weather delays, neighborhood impact, labor cost, and onsite errors.

AGORUS embodies the Blackhorn thesis of fractional prefabrication as a solution to cyclicality, fragmentation, and customization. Their system offers customers a high degree of customization while facilitating seamless collaboration across developers, designers, engineers, and module fabricators. The integration between its software and automated production line reduces the cost of customization and enables just-in-time manufacturing for high asset utilization. They are prepared for the inevitable cyclicality of the construction market because AGORUS operates under a capital-light, high-margin, and low waste model through strategic partnerships with established panel fabricators and onsite assembly teams.

The Market Opportunity

While the construction industry comprises approximately 13 percent of global GDP, accounting for $11 trillion of annual value added, according to McKinsey, the modular and prefabricated construction market is predicted to be worth $200 billion by 2027.

More urgently, here in the US, a study by KKR on the post global financial crisis era asserts that “the U.S. housing market was undersupplied by roughly 3 million units. That supply-demand mismatch is now expressing itself in outsized home price and rent inflation. Demographics are aggravating the shortage, as millennials move into prime years for single-family housing demand.“ A report from Freddie Mac contends that the shortage is even more severe, at 3.8 million homes. AGORUS solves this problem by providing access to an affordable and scalable housing solution.

The Impact Opportunity

AGORUS has committed to carbon-neutral construction. Each home pulls 60 tons of CO2 from the atmosphere via sustainable timber harvesting and ensures zero waste from offsite material use. 8,000 pounds of lumber is typically wasted in the production of a 2000 square foot home, but AGORUS reduces lumber material by 15-20% through value engineering.

Additionally, with AGORUS in the market, the housing shortage currently plaguing the country can finally be addressed. With huge CPI inflation and an undersupply of millions of units of housing, an efficient and near-turnkey solution like AGORUS is capable of making a palpable difference in the affordable housing crisis.

The Team

AGORUS is led by Garrett Moore, the company’s founder and CEO. After completing an undergraduate degree at Stanford, Moore went on to a distinguished career as a Lieutenant Commander for the Navy SEALs. During his time with the SEALs, Moore received an Olmsted Scholarship (the military equivalent of a Fulbright scholarship) and completed his masters’ degree in cyber electronics from Tel Aviv University. With a background rich in strategy, leadership, and insights, Moore is poised to serve as a fantastic CEO for AGORUS as they continue to expand. 

Moore is joined by Kyle Tompane, co-founder/CTO and fellow Navy SEAL, who brings extensive building and development experience to the company. Through personal experience building their own homes, Moore and Tompane noticed serious flaws in the residential homebuilding industry, prompting their decision to found AGORUS after their military careers. 

We’re confident this team is well-suited to take AGORUS to the next level thanks to their well-composed mix of leadership and business experience. In the words of Moore, his passion for “competitive, integrated, highly dynamic teams” has never left him, and we believe he’s built just that at AGORUS.

Dan Blank’s passion for designing and building large-scale projects has early roots. He grew up playing with Legos, always aspiring to build the next biggest thing– be it a Monorail, a ship, or even a model city. In the years since, he has charted his own course designing and manufacturing infrastructure. Today, he is the CEO and Co-founder of Toggle Industries where his mission is to make large scale civil and urban infrastructure projects more accessible to the communities that need them most. Toggle develops robotics and digital fabrication for the construction industry – starting with rebar for reinforced concrete – and aspires to reinvent the way we build our world. We caught up with Dan to learn more about his path to rebar and robots, and the challenges of innovating in the construction industry.

What life experiences brought you here today, and specifically when did you decide to become an entrepreneur?

I grew up in Western Massachusetts, I lived there my entire life in a college town. My mother is from the Philippines. My father grew up on Long Island in a New York Jewish community, and they met working in the medical profession.

Growing up, I was always into building things; problem solving with physical context. I was also into design, like graphic design, industrial design, architectural design, fashion. I definitely was attuned to the way things were made, and why they looked a certain way. And the entrepreneurial part… I was one of those kids who grew up selling whatever I could sell:mowing lawns, shoveling driveways, selling lemonade, all of that stuff.

Fast forward 25 years, and I’m at a graphic design agency working with an energy company that built and operated power plants. I got the opportunity to visit their construction sites, and one of them was for a wind farm. I saw workers building foundations for wind turbines out of reinforced concrete. That was really where I first got to see this process of what building with rebar and concrete entails, and how labor intensive this work is. And this is the way it’s always been done. It was a classic, “there’s got to be a better way to do this” type of moment. Seeing steel bars being put in place one at a time by hand 5000 times, over and over again, just for a single wind turbine foundation got my gears spinning.

Why rebar?

It seems like such a random and mundane thing. But it really is the basic building block of the whole built environment because reinforced concrete is by far the most consumed construction material. And it’s the material that all our structures and infrastructure systems depend upon to get built. So it’s the raw material for our whole built world.

Could you describe the problem you’re tackling with your work?

The problem is really simple supply and demand. I would say that the demand for construction is larger than it’s ever been before, and it’s accelerating. Because the world is urbanizing¹, we’re building larger and more complex cities. And so we need infrastructure to support that: power, water, housing, institutional buildings, resiliency on coastlines, etc. We have all of this construction to do, not to mention all of the existing infrastructure that needs to be rehabilitated.

Source

And on the flip side of that, we have a construction industry that has really not adopted a lot of technology or innovation to increase productivity. Certainly not in the way that you see in manufacturing or in really any of the other major industry segments like agriculture or the medical field. And not only has it not kept pace with the productivity gains, you have fewer and fewer people that are actually joining the construction industry.

That creates the problems that we associate with construction all the time: big projects take too long, they go over timeline, they go over budget, they’re fraught with problems and delays and challenges. It’s just getting worse. The last couple of years have exacerbated those problems because COVID has made it more difficult to have a lot of people on a worksite doing their work together. There are labor shortages, supply chain disruptions, and materials cost more. So you need solutions in the construction industry to improve efficiency, to enable us to do more with less.

Source

What is it about the construction industry and specifically reinforced concrete that makes the industry so slow to change?

The reason that the construction industry has difficulty changing is because of the risks involved with changing. If you’re a construction company, and you’re doing a certain number of jobs every year, each one of those jobs is really a make or break financial transaction for your company. There is a very high incentive to stick with what works, what has served you well in the past and not take the risk to try something new, which may or may not work.

There’s also the complexity of the way the construction industry is organized. You have different coordinating and contributing parties and stakeholders, different trades, like, concrete companies and rebar companies and carpenters and plumbers and electricians, and, people doing finishing work, and millwork and, all of these different trades that all have to work together in concert and have to align with each other in terms of space, time, and the sequencing of work.

Is there a specific customer case study you could share about the integration process?

There was a project we did in the Philadelphia Navy Yard where they’re basically adding battery storage to the microgrid there. They have renewable energy generation and storage, they have solar, where they’re generating power and then they have battery storage where they can save that power for use, when the sun’s not shining, essentially. And so, we partnered with the EPC that was responsible for designing and building that system and by pre-assembling all the rebar for them so that they didn’t have to do that work on a jobsite. We’re able to save them a really significant amount of labor and time in the build out of that project. And so it’s a very straightforward type of project where our work just immediately accelerates the whole job from start to finish because you’re just not waiting for that rebar to happen.

On a personal note, could you tell us about your work at the Museum of Chinese in Americas?

I live in Chinatown in New York City, and MOCA is down the block. I started volunteering, getting young professionals involved with the museum and doing events for people interested in different career tracks. At the end of the day, these community institutions are also a form of infrastructure; they are a part of living in a community or a city or a neighborhood, in the same way that the subway system is or the hospital is or the university is. Everyone who lives in these areas, and the people who come to visit these areas, depend on these institutions. It’s exciting to engage and contribute to building this cultural infrastructure, in the same way that it is to help develop our physical infrastructure. It’s personally important because my wife is also Chinese, and my kids are half Chinese. It’s a part of my family’s heritage and part of the heritage of the neighborhood that I live in.

¹ https://www.iied.org/urbanising-world

Prefabrication Case Study: A Potential Solution to the Construction Industry’s Productivity Problem

The following case study provides insight into Blackhorn’s strategy for addressing prefabrication’s sustainability challenges so it can be successfully integrated into the construction industry.

Although construction is the largest industrial sector in emerging market economies and second in size only to the healthcare sector in OECD (The Organization for Economic Co-operation and Development) countries,
its productivity gains have lagged behind other industrial sectors since the 1960s. Modular construction through prefabrication is considered a solution to this productivity challenge, but there are three factors restricting its growth: market cyclicality; demand for customization; and market fragmentation.

Learning from Operation Breakthrough in the 1970s and Katerra’s
recent failure, Blackhorn is backing a new generation of firms in prefabricated or modular construction that take one of two differentiated approaches. The first approach leverages new technology, such as machine intelligence, computer vision, and robotics, to automate part of the work of a single trade using a capital-light and agile business model. The second combines physical and digital technologies, acting as a supply chain orchestrator, to outsource production while using software to generate fully engineered, costed and code-compliant housing schemes in real-time.

Download the complete case study by clicking on this link or on the image above.

(Make sure to click the fullscreen button on the viewer below to have the best experience. It is in the tool panel on the top of the viewer and just to the right of the zoom slider; it looks like a square made of just the corners.)

November Venture Call: VC & Accelerator Relationships With Their Portfolio On BuiltWorlds

BuiltWorlds, a leading community for groups that operate in the Built Environment recently had Dr. Ray Levitt participates in an analyst call regarding how VCs and Accelerators work with their portfolio companies. To hear Ray’s thoughts and learn more, check it out at BuiltWorlds.

Podcast: AOC Show 186 — Investing in Construction’s Digitized Future

Dr. Ray Levitt, Operating Partner at Blackhorn Ventures, joins the Art of Construction team for a podcast. Art of Construction provides marketing, communication and sales strategies to the building industry through the mediums of video, audio, webinars and live events.

In the podcast, learn about what Dr. Levitt looks for in the companies Blackhorn Ventures decide to invests in, where he thinks Blackhorn and the construction industry are headed, and what effects an improved and digitized AEC industry will have on our environment and the world as a whole.

You can listen right here:

Background

The Built Environment (BE) sector is highly cyclical, fluctuating with an amplitude several times the extent of variations in the Gross Domestic Product of the individual metropolitan or regional markets that most firms address. After the 2007-2008 financial market collapse, commercial construction in the San Francisco Bay Area fell by 80%. During the current Coronavirus-triggered recession, demand will certainly fall steeply in the BE and other sectors again. Because of that very nature, Blackhorn Ventures has maintained a highly disciplined approach to selecting companies and opportunities for investment that had common features of downturn resistance.

Blackhorn’s Investment Criteria

Knowing that a recession would likely occur at some point over the life of our funds, Blackhorn developed criteria to select companies in the Built Environment sector whose solutions and marketing focus included the following attributes to make them as resilient as possible against a downturn:

A Solution that Dramatically Enhances Resource Efficiency

First, Blackhorn’s overarching investment thesis, across our target sectors, is to look for companies whose solutions enable their users to generate significant resource efficiency gains. This makes their customers more price-competitive relative to others in both good and bad times. In a recession, this allows them to win business in tight markets where there will be more bidders on each project and more sellers per customer for any products or services.

An example of this capability to generate resource efficiencies is Drawboard, which extracts information from multiple file types and converts the data into a special PDF file format that can be simultaneously edited remotely by multiple people in different colored “virtual ink”. This radically improves the efficiency of preconstruction work where the architects, engineers and contractors are often widely dispersed across cities and even countries. Notably, in the current coronavirus pandemic, Drawboard is already experiencing a 20x spike in inbound requests so that housebound project teams, worldwide, can work remotely to enforce social distance, yet continue to collaborate efficiently and effectively.

Another of Blackhorn’s portfolio companies, Briq, uses its data integration and analytics capability to help companies identify operational efficiencies by applying machine learning to the unified data about their past and present projects, for example identifying subcontractors from across all of their past and ongoing projects that routinely: show up and/or complete their work late, file multiple change orders, have poor safety performance, fail to clean up behind them, causing delays for other crews, etc.

A third Blackhorn company, Dwellsy, helps users find rental apartment listings extremely efficiently and at low cost. This should be extremely valuable to people who have to relocate for job changes or who choose to relocate during this downturn.

A final example, Rhumbix, is improving productivity by helping mitigate the spread of Coronavirus on job sites by digitizing paper-based processes, specifically, time cards and time and materials (T&M) tags. It is estimated that the Coronavirus can remain viable for days on paper. By digitizing these processes customers can reduce person-person and person-paper-person interactions and hopefully reduce the spread of diseases in an industry that has been deemed critical by state and federal governments.

Solution is “Sticky” by Integrating with Core Legacy Systems

If a company in the BE sector produces a point solution addressing a specific workflow, its product roadmap should include integrating that data with its customers’ back-office systems. For example, Rhumbix, gathers timecard information on mobile phones and integrates the timecard data with the contractor’s ERP system to generate payroll runs and to create needed cost and financial accounting reports. It takes time to develop integrations with all of the legacy ERP and PM systems that contractors use, and which typically lack APIs for easy data sharing. However, once the integrations are ready and the portfolio firm’s software has been installed and integrated, their solution becomes extremely “sticky” –i.e., very difficult for a customer to abandon even in a deep downturn. So, Rhumbix has had virtually zero customer churn for its core timecard app, compared to typical SaaS app customer churn rates of 10% or higher. Additionally, Briq is experiencing similar “stickiness” during these uncertain times.

Solution Supports Significantly Enhanced Revenue Capture

A third criterion we use in selecting companies to invest in is to look for companies whose solutions can help customers generate additional revenue. For example, Pype uses AI Natural Language Processing (NLP) methods to automate the extraction of project requirements for submissions, approvals, inspections, etc. from thousands of pages of PDF files that lay out the specifications for a project. They do this in minutes instead of person-weeks, and with an accuracy comparable or better than human estimators. This capability allows Pype’s customers to bid on projects significantly faster and the enhanced accuracy Pype provides, in understanding and capturing project requirements, means that they can reduce the magnitude of their contingencies for missed requirements and can thus bid more competitively. Similarly, Briq integrates the data from the multiple point solutions and legacy applications that a customer uses into a unified data pool. Then, the Briq solution applies Machine Learning (ML) analytics to identify the most attractive projects for the customer to bid on from among all of the available bid opportunities in the customer’s unified data pool and lays them out on a map of the region in which the company operates.

Solution is Cloud-Based with Licenses Priced by Number of Users

Most of our portfolio software companies have a cloud-based SaaS subscription-based solution and generally have a per-user pricing model that allows users to scale their usage and cost up and down as needed. This makes their solutions easy to adopt, avoids the barrier and cost of installing on-premises, behind-the-firewall software, and makes it easier to update the software for users. It also allows users to scale their subscription license costs downwards if they reduce the number of users so they do not need to drop their subscription if it is time for a renewal during an industry slowdown, thereby reducing churn.

Customer Base is Diversified Across Countercyclical Industry Sub-Sectors

When we invest in companies in this sector, we remind them that the demand for some types of construction tends to move counter-cyclically to overall economic trends. First, interest rates typically fall during economic recessions, spurring demand for housing, such that economists have referred to the industry as the “balance wheel of the economy”¹. Second, governments will often try to launch infrastructure projects during recessions to generate jobs and demand for materials. Several of our portfolio companies had started diversifying across sectors of the built environment well before the current recession and are now aggressively marketing their solutions to companies that build housing and especially infrastructure, with some initial success almost immediately.

The Bottom Line

The companies in our Built Environment portfolio all possess one or more of these solution attributes, and are thus positioned to weather even severe downturns relatively well and to emerge from recessions very strongly positioned for rapid growth.

¹ Lange, J. E., & Mills, D. Q. (Eds.). (1979). The construction industry: Balance wheel of the economy. Free press.

By Ray Levitt, Operating Partner at Blackhorn Ventures

Technological Advancements Bend Construction’s Productivity Curve Upward

Moving Away from Pen and Paper

The construction industry has been a pen and paper industry for over 5,000 years. While technology has advanced sectors like health, energy, and transportation, construction has remained notoriously behind. Technology has been slow to penetrate the industry for logistical reasons: field workers can’t carry a desktop computer to work with them. Architects and engineers were able to take advantage of new technologies in the second half of the twentieth century, but a disconnect remained between those behind desks and those on site.

Only since 2012 have we seen significant changes in construction technology with advancements that are making job sites safer, more efficient, and yielding large returns for investors. Four primary trends enabling digitization in the built environment sector have converged to drive this growing market:

• Cellular Broadband Internet
• Smart Mobile Devices
• Affordable Wireless Sensors
• Cloud-Based Subscription Software

Broadband Internet

The advancement of 3G, 4G, LTE and now 5G cellular broadband have powered faster and greater access to the Internet from anywhere. Broadband allows workers to be online even in remote areas or inside buildings. Having the ability to access fast, seamless Internet means jobsite construction workers can utilize cloud-based digital tools, stay connected to their teams, access and upload real-time data, and become more efficient, more cost-effective, and safer.

Smart Mobile Devices

Today, every contractor, developer, project manager, and foreman has a mobile device more powerful than a 1960s mainframe computer in his or her pocket. Only within the last few years have phones become so powerful and matched with a more intuitive user interface, higher resolution cameras, a GPS locator, and integrated touch and voice commands. An example of this advancement started in 2012 with digital blueprints. Internet connectivity via Wi-Fi or cellular networks on projects allowed for the mobile delivery of high-resolution blueprint files, as well as daily updates to workers on job sites in lieu of paper blueprints, which are costly to print and distribute, and that quickly become obsolete when new versions of drawings are released. This new technology has saved an incredible amount of time and money for foremen, architects, developers, and engineers.

Affordable Wireless Sensors

Wireless sensors are now giving contractors and engineers the opportunity to track progress, safety, cost, efficiency, and more on-site in real-time. The companies that noticed the wireless sensor wave in construction early on are now in a position to lead the industry. Leaders include companies such as SafeSite, a platform of real-time safety analysis and site-management tracking, or Rhumbix, the leader for digitized project field data. Using mobile phones or tablets, stakeholders can gather detailed analytics with sensors for acoustics, motion, inertia, gas sniffers, and others. Both on and off the jobsite, people can gather real-time data and apply better analytics in order to more accurately predict timelines and costs, while also maintaining safe work environments.

Cloud-Based Subscription Software

Construction is a massive industry, but firms in the industry are mostly small, specialized, regional providers that face severe cyclical fluctuations in demand for their services. Because of this, construction firms must be flexible when it comes to their payroll and other costs. The ability to purchase software-as-a-subscription (SaaS) applications on a per-user basis allows contractors, engineers, and architects to stay flexible in terms of committed software license costs. For example, Pype provides a platform of automated tools to increase efficiency and accuracy in project bidding, execution and closeout, and Briq is a cloud-based solution that captures, automates, and learns from all of a company’s construction data to give them the information needed to make optimized decisions.

With the combination of these trends, the long-stagnant built environment sector is now seeing impressive gains in productivity. This is not only moving the industry forward but it will increase firms’ resilience in an economic downturn. The construction companies that have adopted these efficient, flexible digital technologies will be best able to survive and thrive through whatever the future holds.

By Ray Levitt, Operating Partner at Blackhorn Ventures

Construction cloud-based versions of project management and enterprise resource planning (ERP) apps are rapidly disrupting the outdated paper-based processes. Functions like project drawing distribution and review now have simple digital point solutions. New reports cited by Visual Capitalist show that 52 percent of industry leaders say that machine learning and AI will be common technology in the construction sector within five years. In addition, “70 percent of construction companies believe those who do not adopt digital ways of working will go out of business.”

With these new advanced tools, general and specialty contractors and their clients now have the potential to access and analyze vast new sets of generated data such as:

• Extraction of meaning from text and images in digital building models and/or the PDF documents in which they are often distributed
• Terabytes of data from low-cost sensors, including cameras, lidar, radar, microphones, accelerometers, chemical and biological air quality sensors, etc.
• “Ground-truth” daily field data on labor-hours and production, uploaded to the cloud by field workers and foremen via mobile apps

The next generation of emerging AI apps for construction can analyze these expansive new data pools to generate high-value, actionable insights that enable contractors to optimize their marketing, sales, field operations, and prefabrication operations. However, as the Visual Capitalist findings show, only a few early adopters have begun to use these advanced machine learning apps effectively. As a result, these emerging technologies have barely penetrated the industry at this point. The report cites: “While building information modeling and data analytics are widespread among the most innovative construction companies, a host of emerging technologies are starting to have an impact on the sector, and it is the early adopters who are racing ahead of the competition.”

Of those surveyed, 89% believe that digitization in the construction industry will “transform the way they work.” Many manual processes will have their productivity improved by the adoption of emerging, automated machine learning powered solutions. With the technology being relatively new, and adoption still low, it thus validates the large, ongoing market opportunity that exists for Blackhorn portfolio companies like Pype, Rhumbix, SafeSite, and Humatics. These companies and their technologies will be able to generate digitized, reliable, real-time project data for the construction and built environment industries. Other companies like BR.IQ, Manufacton, and ALICE will be able to pool and analyze these and other rich data-sets to generate new, high-value, actionable insights that have the ability to help to enhance resource efficiency and save money for their users.

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Blackhorn Ventures invests in companies that redefine industrial resource efficiency. Built upon scientific breakthroughs, the ICT revolution, and creative thinking, our portfolio companies are rapidly transforming industrial sectors, while also achieving outsized environmental and sustainability impacts. Founded by experienced operators and investors, Blackhorn maintains a founder-friendly ethos, while providing maximum support with minimum interference.