Dive Brief:

• Investments in construction technology surged 85% between 2020 and 2022 to $50 billion, as the number of deals in the industry grew by 30% to 1,229, according to a report from consultancy McKinsey & Company. AEC stakeholders expect that growth to continue, with 77% of survey respondents anticipating the same or similar levels of investment in 2023.
• While those metrics show the continued potential for digitizing the $12 trillion construction industry globally, hurdles including the fragmentation of industry players, slow technology adoption and roadblocks to scaling products that solve problems for multiple customers continue to stymy more growth in the sector. 
• In a survey of over 100 tech company founders, investors and large software firms that also analyzed 3,000 tech companies in the AEC space, McKinsey identified specific areas of opportunity for contech firms, such as products that can appeal to multiple stakeholders across construction. It also highlighted the constraints holding tech innovation back, including point solutions that only solve one specific problem and payment terms dictated by a sector that is notorious for cutting checks late to its vendors. 

Dive Insight:

The report found that the contech market is maturing, with $11.5 billion of late-stage venture capital entering the space between 2020 and 2022, more than triple the amount from the previous three years. 

Meanwhile, mergers and acquisitions have also taken center stage, representing the largest single source of funding for contech firms, including 48% of all investments and 68% of all exits. As a further sign of contech’s arrival, median deal size and post-investment company valuations have doubled since 2017, the report said. 

But it also noted that a construction site in 2023 still looks much like it would have in 1923, with manual bricklaying, paper blueprints and laborious, hand-built scaffolding towers. That could be primed to change, given the $1.2 trillion surge of infrastructure investment in the U.S. and the 800 billion euro NextGenerationEU fund in Europe, as well as an endemic shortage of labor needed to build new projects. 

The analysis provided fresh insight for contech firms struggling to crack construction’s tech code by putting the blame squarely at the feet of the customers they’re trying to sell to. Namely, the fragmentation of construction projects, where multiple stakeholders must converge to raise a single new structure or infrastructure element out of the ground, has held tech adoption back. 

“The average construction company employs fewer than 10 people,” the report said. “The average project involves more than 100 different suppliers and subcontractors. So achieving scale requires selling to a large number of companies.” 

The result is that sales growth for contech companies is labor intensive and slow in a risk-averse market, though once tech is adopted, it is “extremely sticky,” the report said.