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It’s no secret that contech startups are flush with cash — cumulative venture investment eclipsed $30 billion in the space this year. A wave of excitement around artificial intelligence is fueling new possibilities in the space, and fresh-faced construction technology upstarts are reaping the rewards.
But not everything is rosy.
Despite seeing record funding on the contech startup side, 2023 has also marked an inflection point for established incumbents in the space, which are struggling to further grow their customer base, and are seeing a decrease in billings. While a wealth of opportunity awaits smaller contech companies, established firms have struggled to maintain new customer growth rates.
For instance, large technology firms pointed to broader macroeconomic pressures in their most recent earnings calls. Contech giant Autodesk’s CFO Debbie Clifford spoke plainly about its challenges on the firm’s Q3 earnings call Nov. 21.
“The new normal is that there is no normal,” Clifford said.
Autodesk reported an 11% decline in billings, and a 6% increase in deferred revenue to $4 billion, a result of its shift to an annual billings model from its prior multi-year contract method. The company downplayed any contraction, but nevertheless acknowledged challenges in the current market.
“While we continue to see a general caution from customers in this tough macro environment, overall market conditions and momentum in the business were similar to what we saw last few quarters,” said Jim Lynch, senior vice president of Autodesk Construction Solutions, in an email to Construction Dive.
Dan Laboe, the director of venture and investment research at BuiltWorlds, a consortium dedicated to building industry advancement and technology, pointed to Procore as an example of this apparent deceleration in contech adoption growth — despite a 33% revenue surge in the third quarter, it broadcast its apprehension about the future.
“To close, it is clear that we are operating in a demand environment that has become more challenging,” said Procore’s CEO, Tooey Courtemanche, on its Q3 earnings call Nov. 1. Pressed by analysts, Courtemanche elaborated and said that the trend began “long before” Q3 started.
“We think, coming into Q4, that it’s going to be much the same. We don’t see any real improvement on that front,” Courtemanche said.
A contech ceiling?
Laboe traced the billings pullback to customers spending less on tech in the second half of 2023.
“Our data indicates that despite its continued secular strength, many construction firms are tightening their purse strings, cutting tech-stack vendors that don’t provide immediate correlation to value [or] revenue and being much more selective with new vendors,” Laboe said in an email to Construction Dive.
This bifurcation in the contech market — where startups are swimming in investment cash, but incumbents have seen contractor spending slow — illustrates how it can sometimes be easier to launch a company and gain initial traction than maintain customer growth once a firm becomes established.
“I do not believe that this is a signal that tech adoption has ended, but rather a period of tech stack reevaluation has begun,” Laboe said.
Decelerating growth
In a recent blog post, Laboe said that Procore’s numbers present a new hypothesis — that there may be a cap on the total number of potential contech customers in the broader construction space.
“Procore’s decelerating growth after breaching 16,000 customers this past quarter (86% of which are U.S.-based) could be a signal to the AEC venture market that a serviceable addressable market for construction SaaS may soon be quantifiable — the total number of real potential customers for construction SaaS,” Laboe wrote in his article.
When asked if Procore was running into an adoption hurdle, the company said that it was simply focusing on its existing customer base.
“As the largest and fastest-growing contech leader, much of our business is expansion within existing customers — which isn’t reflected in customer count,” said Howard Fu, Procore’s CFO, in an email to Construction Dive. Fu said that he was confident the industry would weather the storm, and cited the historical ebb and flow of the building industry.
“Once the economic cycle turns upward, we expect customers to return to raising their volume commitments back on the platform,” Fu said.
As a potential silver lining, Laboe told Construction Dive that he will be monitoring channels for expansion and acquisition news, particularly of smaller startups by larger companies.
“With valuations down, and investment capital more difficult to attain, smaller tech companies with niche customer bases may prove attractive acquisition targets for larger companies looking to secure more customers,” Laboe said.
