How do you successfully set up a dedicated industry VC in one of the most notoriously low-margin sectors in the world? That’s what the founding trio of Zacua Ventures, the construction tech-focused VC firm established early last year by CVC alumni, has had to figure out.
So far, it is doing well in attracting corporate limited partners to the specialised fund, counting industry heavyweights such as Cemex and GS Group as partners in its first fund.
Unlike other industries where you may have a handful of dominant companies taking most of the market, roughly 2% of the construction industry is taken up by the biggest players, according to Nieto, while the rest is the domain of smaller firms that tend to have headcounts in the low double-digits, making it more difficult to penetrate the market.
This makes overcoming the lack of adoption of new technology one of the biggest problems in the construction sector. The margins are so notoriously thin that companies are reluctant to spend any spare money on new technology or R&D when the existing methods are effective enough.
The vastness of the market itself, however, is a saving grace. Even a small inroad achieved by a startup can translate into a hefty financial boon.
“It’s an industry of pushing risk to someone else,” says Juan Nieto, a founding partner at Zacua Ventures, on the CVC Unplugged podcast. Nieto previously spent several years setting up Cemex Ventures’ Shanghai office and Asia strategy. “So, you’re an owner, you hire someone to consult you, do the design as an architect, do the calculations as an engineer, you basically hire someone else to do the contracting and coordinate all the jobs.”
Each player along this chain has their own margins and appetite for risk, and the tried and true tends to win the day. The contractors and the builders – which would be the ones deploying new technology – take the lion’s share of the capex, but have the lowest margins.
It’s an industry of pushing risk to someone else.
Juan Nieto
Out of the corporate
Both Nieto’s co-founders, Vivin Hegde and Mauricio Weiss, also come from construction CVCs, namely Hilti and Cemex, and have in their first year-and-a-half made 11 investments out of the first fund, which it expects to potentially reach north of $60m by final close.
While it doesn’t operate under a corporate umbrella, the firm still has access to corporate competences through its LP base. The broad set of LPs means the focus is also broad. If Zacua does not have the internal expertise to assess a potential technology, for example, it can draw from the expertise of its LPs and network. The LPs also benefit from more visibility into deals they may have otherwise overlooked.
Of the 20 to 30 companies that Zacua seeks to invest in as part of its first fund, a quarter would be strategically relevant to any single LP; but, it also see itself as a facilitator, making introductions and strengthening the LPs’ bonds with each other and with the rest of the sector.
Building a community
In a corporate VC, you can bring a lot to bear in terms of HR, marketing and internal connections to help portfolio companies. The Zacua team had to build those capabilities from the ground up through a strategy of community and ecosystem building.
It may not be a corporate VC, but it is an industry-specific fund, opening the door to building a community and ecosystem that bridges the gap between a small firm and the resources of a larger one. Community building has, therefore, become a big focus for Zacua, which has an annual meeting of its LPs and other stakeholders, bringing them together with the wider ecosystem to discuss common pain points and solutions.
“That’s something that when I was at Cemex, we weren’t proactively doing, to be honest,” he says.
Productive, urbanised sustainability
With a wider base of LPs, Zacua can take an industry-wide focus and has chosen a three-pronged strategy targeting productivity, sustainability and urbanisation. Buildings and construction make up 40% of the global greenhouse gas emissions – a staggering number for any single sector. Sustainability has consequently become one of the primary focuses for any fund manager in the space.
“Traditionally in construction, when you face a project, you basically look after two main variables – the first one is time and the second one is cost. But now there’s this third variable coming in, which is about sustainability,” says Nieto
Now there’s this third variable… sustainability,
Juan Nieto
Closely related is urbanisation, supercharged by the flow of people out of existing urban areas in the wake of the pandemic, suddenly posing problems of filling emptier buildings that now need to be used and managed more efficiently. This means that any technology that can better manage building use, explore new business models like fractional ownership, or drive down housing costs is an area of interest for Zacua.
Similar levels of effort and investment have been gradually yielding fewer results as productivity in the sector has gone down, and a shortage of skilled labour in the industry has been a problem over the past decade. Both of these can be alleviated with new automation and robotic tools, however, and the market has seemed more keen to adopt these, especially for more repetitive tasks, on both small jobs like residential housing and big infrastructure projects.
