Michael Brown of Bowery Capital and Kelli Fontaine of Cendana Capital discuss trends and themes using Cendana Capital manager data.
At Bowery Capital, we spend a lot of time thinking about the future of the software ecosystem and in particular the impact of software on specific industries. We released the 2016 edition of Opportunities In Vertical Software last week which laid out our point of view on ten specific verticals and the potential for various software solutions to dominate each of these ten verticals in the coming years. For the next ten weeks, we will release content focused around the impact of software on these ten industries. For our inaugural week, we start with the Construction vertical. Our first post discusses construction software and in particular the market history and dynamics of software on the vertical.
History Of Construction Industry Software
The software market focused on the Construction industry shares many facets and precedents with one other market in our report: Manufacturing. Tools used for planning, accounting, and collaboration for the Construction industry began to take hold in the 1980’s and grew as the broader software market expanded and improved in kind. Unique to the Construction industry, however, was the development of BIM (Building Information Modeling) software. The computing concepts that would one day lead to the existence of BIM date back to the 1960’s with the first true graphical interface arising from Sage Software. In the 1980’s, there was a wave of innovation around modeling that led to the development of several key methods for reducing cost of design and tracking in construction projects. Recording of shape information began to develop in the form of CSG and BREP. The development and use of the Building Description Systems (BDS) added to this by allowing individual elements of building construction to be broken down and added to graphic models. Using similar technology to BDS, CAD programs enabling virtual design arose, with the first available on a personal computer “ArchiCAD” debuting in 1984. ArchiCAD remains a major player in the BIM/CAD markets today for small residential projects. Shortly after this in 1988, two engineers from Parametric Technology Corporation (PTC) developed a platform intended to handle more complex functions than ArchiCAD called “Revit.” Revit was acquired in 2002 by CAD leader Autodesk, which had been selling its own virtual modeling software “AutoCAD” since 1982. Through use of time modeling, and visual programming environments, Revit set a new standard in the world of BIM. AutoCAD and Revit continue to lead the BIM market today as iterations and revisions power continued improvements within the space. Autodesk sees more than $2 billion in revenue from the products it sells today and remains the market leader in the category. PTC, Siemens, and Dassault also have risen as comparable industry leaders in the Construction software space with more than $1 billion in revenue. These companies have set the foundation that modern-day technology startups are building upon to drive the industry forward. As we progress to today the world is seeing an explosion of start-up companies in and around the space which we detail in our report.
Market Dynamics Of Construction Industry Software
Beyond the history and the past coverage of the space, opportunities in the Construction software industry software space look promising in the upcoming years. The industry has seen not only an expansion in software management platforms and PLM (Product Lifecycle Management) solutions, but also cost reduction through deeper forms of human computer interaction, augmented reality, cloud computing, generative design, and virtual design. Despite this, construction companies traditionally have very slim IT budgets, sometimes even smaller than 1% of total operating costs. Therefore, many companies who have succeeded in the space are able to provide a clear return on investment (ROI) from the purchase of new software solutions. Standardization of design and management practices can lead to cost savings and higher quality of service, helping to offset costs from offerings such as AutoCAD that are generally sold on a subscription basis with prices upwards of $1,000 for an individual user. One area that is exploding from a funding standpoint is Construction design technology. The funding market has increased by nearly 30% year over year to $524.2MM in invested capital in 2016. This represents a large increase when compared to a 5-year horizon where funding has grown greatly from sub-$200MM in 2012. Overall, we believe this is likely a positive sign as investment dollars flow toward a plethora of new innovation industry-wide. Construction software seems to be a blooming sector, ripe for disruption as companies find new ways to cut costs and bolster success through emerging technology.
Make sure to check out the 2016 edition of Opportunities In Vertical Software for the full report and we will be back tomorrow with some more information on the Construction industry and the software that powers it.
The Bowery Capital Team discusses early stage go-to-market strategy with the Revenue Council
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