Net-Profitability in Constru-Tech

September 23, 2023

013 | Net-profitability in Constru-Tech startups - Achievable and desirable | Why and how founders in AEC get net-profitability done | Net-profitable venture examples in AEC

This week:

Net-profitability for founders in Constru-Tech
Why profitability is desirable
How it is achievable and doable
Examples in Con-Tech who have done it
Definitions, and why the NET in net-profitability matters

Net profitability is achievable in construction tech

"More than 10% of the founder teams we have partnered with are net profitable or have been net profitable before," shares Patric Hellermann of Foundamental. This surprises many investors and demonstrates that net profitability is attainable for early stage construction tech companies, despite the perception that the VC industry is known for heavy fundraising and burning capital. Construction tech founders should know it is possible to build profitable, capital-efficient companies in this industry, especially by monetizing services and transactions valued by customers. With the right business model focused on delivering tangible value to construction companies, net profitability can be achieved even at early stages of a startup's journey.

Transition from profitable services to software

"There is a bunch of examples in our space and in other markets when you actually have the chance to monetize onboarding fees, one-off training fees, infrastructure setup fees on top of your SaaS contract," explains Patric. It's not uncommon in construction tech to begin with a successful service offering that provides outcomes and value to customers. Once the service business is profitable, Patric and Shub have seen companies then able to transition it into a software platform over time. Starting with a profitable service can be a pathway to eventually building SaaS products in construction tech. Construction is an industry that highly values services and outcomes, so beginning there allows startups to establish a profitable customer base before layering on software and subscriptions.

Net profitability gives founders control

"If your inherent behavior is to spend money and not be net profitable and you give or you receive more money, that's the behavior you're amplifying," warns Shubhankar Bhattacharya. When a construction tech company reaches net profitability in the early stages, before significant outside fundraising, it puts the founders in the driver's seat for dictating future fundraising terms. This allows founders to maintain control through small dilution rounds, cheaper financing, and better leverage with investors. Remaining net profitable means construction tech founders don't have to rely heavily on external capital, allowing them to grow the business on their own terms without unnecessary dilution or investor pressure. GitHub is a prime example - they raised $100M in their first round because they were already profitable. Founders should aim to prove profitability early on to maintain leverage.

Monetizing transactions drives profitability

"Within a sector like construction and the construction supply chains, the value and what's being appreciated by the market and the customer is the outcome," explains Patric. Unlike pure software models, construction tech can generate net profits in a capital efficient way by monetizing services, deliverables, and transactions. Customers in the industry are willing to pay for these tangible outcomes. Leveraging transactional revenue is a viable path to profitability. The construction industry values concrete deliverables and outcomes, so startups can build profitable unit economics by monetizing each transaction and service provided rather than relying solely on recurring SaaS revenue.

Focus on capital efficiency, not fundraising

"The best source of cash are your customers. The only reason why you raise cash from investors and lenders is to access more cash from your customers," Patric emphasizes. Instead of chasing fundraising rounds, construction tech founders should adopt a mindset focused on capital efficiency and yields from their customers. By being scrappy and net profitable on the capital already deployed, founders open up new opportunities. The mindset should be on efficient capital use, not more fundraising. Rather than getting caught up in fundraising rounds, construction startups need to keep customer cash flow front and center. Maximizing capital efficiency unlocks opportunities and reduces reliance on outside investors.

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Keywords: construction tech startups, saas for construction, construction software, capital efficiency for startups, profitability for startups, fundraising for startups, transition from services to saas, construction industry trends