Investors seeking opportunities in the construction tech space might want to look at two potentially under-the-radar segments: payments and data analytics. That’s according to a new report from consulting giant McKinsey & Co.
In the payments category, the report notes that the “vast majority” of payments made in the construction industry are done via paper.
“Offerings that increase technology penetration in the payments space, particularly with small to midsize businesses, will become increasingly critical to enable the full digitization of the construction industry value chain,” the report says.
McKinsey & Co. highlights the need for tools in the construction industry that improve the quote-to-cash process, which encompasses the entire sales cycle, and the procure-to-pay process, which involves buying goods and services. These tools “enable broader data visibility,” according to the report, and free up working capital for contractors, suppliers and owners.
The report also focuses on the potential for investment in data analytics.
“The construction industry has few, if any, truly predictive analytics solutions at the project or industry scale,” according to McKinsey & Co.
The analytics tools that are available are limited primarily to trade association surveys or dashboards built from insufficient data mined from companies, the report says.
“Both investors and the industry overall can create significant value by developing analytics and insights platforms that leverage the growing pool of inter- and intra-company data. These platforms will enable more proactive, data-driven management of both individual projects and companies overall,” the report says.
McKinsey & Co. says that while construction tech players have suffered a “painful shakeout” amid the pandemic recession, leading to a possible rise in bankruptcies among smaller companies and further industry consolidation, the coronavirus pandemic will drive a net increase in the construction sector’s use of technology.
The report indicates that considerable growth in construction tech will come through multipurpose platforms rather than single-purpose software. Twenty percent of companies offer construction tech platforms that combine at least five uses, compared with 13 percent in 2017. This presents opportunities for strategic or financial investors to execute roll-ups and other integrations, McKinsey & Co. says.
“Construction technology is still a heavily fragmented, point-solutions-driven market with ample opportunity for integration plays that create either new platforms or attractive component acquisition targets for growing incumbent platforms,” according to the report.
Before the pandemic, VC investment in construction tech — such as 3D modeling, 3D printing, project scheduling, contract management and design simulation — was soaring, according to the report. From 2009 through 2013, VC investment in construction tech totaled $8 billion. But from 2014 through 2019, that total had skyrocketed to $25 million. However, more than half ($13 billion) of the VC haul from 2014 through 2019 went toward M&A, the report says.
“VC investment in construction tech outpaced the overall VC industry 15-fold through 2019, with clear indicators for continued momentum,” McKinsey & Co. says.
One of those intrigued venture investors is Michelle Killoran, a principal at OMERS Ventures, the venture arm of OMERS, a Canadian pension plan with over $80 billion in net assets. In this interview with FinLedger, she shared what has her so intrigued about construction technology, and why.