F1V report: Construction tech industry in 2024

By Mykhailo Perevoznyk, investment analyst at F1V

Construction tech startups have been drawing more investors’ interest over the past decade. While it may not be the sexiest industry, there’s a good reason for the attention it’s receiving.

The construction industry is one of the largest globally. McKinsey estimates its global market at $12 trillion and expects it to grow by 7% annually; the industry contributes 10-13% to the world's GDP.

This industry has historically been slow to innovate, but tech startups are starting to fix this.

Construction is an operational sphere with many routine tasks. Beyond physical work, it includes project and financial management, material procurement, hiring, logistics, contracting, invoicing, and reporting.

At the moment, many of these processes are yet to be automated. According to McKinsey, the construction industry ranks second to last in digitization.

Сompanies face multiple difficulties, including inefficient business processes that consume extra time and resources. Excessive spending leads to project budgets increasing, often causing construction delays. A recent study found that 75% of construction projects exceed their budget, and 77% are behind schedule.

A few other factors add to the industry's challenges. Prices for construction materials in the U.S. have risen by 45% since 2019. Also, while 88% of U.S. companies report it’s hard for them to find and hire skilled people, wages of construction workers are steadily increasing. It’s similar in Europe.

According to a recent study, China, the U.S., India, Germany, the U.K., France, and Italy are among the largest players in the global construction industry.

China, the largest market, accounts for 29.3% of the global share. The country’s economy is heavily dependent on construction and real estate, which generate about 25% of its GDP. Right now, this market is in crisis: as of 2023, more than half of China’s key 50 developers have defaulted.

The U.S., the second-largest market, accounts for 18.2%. It’s worth up to $1.8 trillion, making up 4% of the country’s GDP; it employs over eight million people.

In Europe, four major players dominate, collectively accounting for 12.6% of the global market: Germany (5.3%), the U.K. (3%), France (2.2%), and Italy (2.1%). The entire European construction market comprises 25.6% and is worth up to $2.5 trillion. Construction in the EU generates 5.7% of its GDP, employing around 14.4 million people in 2023.

India takes 6.1% of the cake. In the coming years, the most populous country’s construction market is expected to grow even faster than the U.S. market.

Investors believe tech startups can improve operations in construction, as they did in other industries such as healthcare, finance, and retail.

The market favors startups. The global construction tech software market is valued at $12 billion annually and is projected to grow at a CAGR of 14%, reaching $20 billion by 2025.

To succeed in this industry, companies must have a wide network, know the pains of construction firms, and be able to secure big contracts. Startups have to deal with multiple challenges, including the following five suggested by McKinsey.

Customer fragmentation. Building a house requires an average of 24 subcontractors, while large commercial projects can involve more than 100 different suppliers and subcontractors. Thus, to scale, startups must sell to a large number of companies.

Multiple customer personas. Founders in this industry often lack a clear understanding of buyer personas. Depending on the project, a customer could be project, IT, procurement managers or CEOs.

Also, purchase decisions are often made at the project level. As a result, startups have to sell their product multiple times — to different projects, even within the same company. This lowers net retention and raises acquisition costs.

Limited investment capacity. The industry has low margins of 20-25% and faces rising economic headwinds, such as material cost inflation. Consequently, AEC (architecture, engineering, and construction) companies invest only 1-2% of their revenue in IT, whereas other industries typically allocate 3-5%.

Adoption and scaling challenges. Construction companies often switch tech products from project to project. Sometimes, they need to adopt specific tools depending on client preferences.

Uniqueness of each project. Each construction project typically has its specific requirements. It may be difficult or unnecessary to use the same tech tool across multiple projects, even within one company.

We at F1V have examined over 500 construction tech companies and identified the most popular niches in this field.

Research company Tracxn lists around 1,050 construction tech software companies that have raised funding, along with over 4,330 companies that haven’t. In the last nine years, 18 companies achieved unicorn status (currently, there are eight). Most of them are marketplaces.

Construction tech is a young field. It has gained traction in the last 10 years, with investors and startups entering and becoming the first in particular niches or markets.

In 2020–2022, about $50 billion was invested in AEC tech, an 85% increase compared to the previous three years, 2017–2019. Over the same period, the number of deals in the industry increased by 30% — to 1,229.

In 2023, the industry surpassed $30 billion in total venture funding (excluding Katerra). Even with the overall VC funding shrinking, construction tech's growth has accelerated since 2022. The share of construction tech in total venture funding has tripled.

According to Tracxn’s March 2024 data, roughly 77% of investments are made in U.S. startups ($26 billion). The U.K. leads in Europe with the highest investments at $790 million, followed by France ($770 million), and the Netherlands ($710 million).

Funding in construction tech is concentrated among a handful of companies within their niches.

According to the F1V research, Built Technologies attracted nearly 42% of all the funding in financial management, Veev attracted 53% among tech homebuilders, and Procore attracted 33% in project management software.

We found that 60% of construction tech investments were allocated to software companies and marketplaces. Another 40% went to hardware, tech-enabled homebuilders, 3D printing, and prefabricated and modular construction.

The largest global investor in construction tech is Foundamental. Other funds include Brick & Mortar Ventures, Dynamo Ventures, CEMEX Ventures, Building Ventures, Zacua Ventures, GroundBreak Ventures, Pi Labs, Blackhorn Ventures, and Leonard, the venture arm of construction company VINCI. Here’s a database of VCs investing in AEC and construction tech.

Flyer One Ventures also invests in this industry. If you have a construction tech startup and are looking for funding, email your pitch at go@flyerone.vc or talk directly to F1V partner Elena Mazhuha, at olena.mazhuha@flyerone.vc.

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