"We could have built a desktop model instead," said Oslan, "but to raise the capital required to build industrial-scale equipment, we really needed to show investors something bigger."
That intuition paid off when the company secured $8 million in seed funding, allowing Diamond Age to fund a demonstration project. This project catapulted the company to its Series A round, which was raised not only from VCs but also from its first customer—a huge vote of confidence for the team and their product.
Alice Leung of Brick & Mortar Ventures, a construction-focused VC firm, encourages startups in the construction space to also consider other, nondilutive resources: "We advise founders to look into government grants from agencies like the Department of Energy or the Department of Defense," she said. "Many corporates also provide free resources to startups through innovation labs, for example. While the resources themselves are valuable, winning grants or being associated with a corporate can provide a huge vote of confidence when raising VC funding."
While software companies in the construction tech space generally have lower capital requirements to build out a prototype than their hardware counterparts, fundraising and growth can still be a challenge because many VCs aren’t familiar with the construction tech space.
"It requires extra effort from founders to describe the industry and how your company can scale in a very fragmented market," said Janna Colucci, CEO and co-founder of Bundle, a building materials procurement startup. "For us, it was helpful to have been the client before to really understand the customer's pain points and be able to communicate those to investors."
For VCs considering seed-stage deals, the co-founding team can be as important as the product.
"We look for a good team dynamic and the core skills that include not only construction knowledge but also the ability to build a team, raise capital and find customers," said Suzanne Fletcher, former general partner at Prime Movers Lab and current founder of Zelda Ventures. At the Series A level, what matters most is customer acquisitions: "Nothing speaks louder than getting a paying customer that is happy with your product," she said.
Future of construction tech: Navigating market cycles
In 2022, the macro environment has become more difficult for startups across nearly every industry. The message from VCs has been to batten down the hatches and survive this period of turbulence, but this narrative may not reflect the reality of all investors and startups, especially in the construction tech industry. While VCs may be signaling a slowing of their investment pace, other sources, especially strategic investors and governments, continue to deploy capital through downturns.
Strategic investors—such as corporates—can be an important source of capital for promising startups during market downturns. Oslan of Diamond Age observed that "while VCs today may be slowing investment, strategic investors aren't looking at short-term changes in the economy. Instead, they are continuing to consider startups as a key way to future-proof their businesses."
Despite rising interest rates, Bundle's Colucci noted that "there is still a shortage of housing in many locations, and there is a lot of opportunity to increase efficiency in the homebuilding process."
This provides a sustained opportunity for both hardware and software construction tech companies to make inroads with strategic investors despite the potential downturn.
The government also has an important role to play by maintaining construction spending during downturns to counteract lower private industry spending. Following the global financial crisis, for instance, private construction spending decreased significantly. Spending by the government, however, increased between 2006 and 2009, compensating for part of the decrease in private spending. If the market experienced a prolonged downturn, construction tech companies might benefit from pursuing public projects.
Public and Private Construction Spend, Indexed to 100 in 1995
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