Resilience in an Economic Downturn: Opportunities to Generate Value for the Built Environment Sector
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.