A CFO's Musings

March, Edition 1

Dear Entrepreneur,

The spirit of entrepreneurship is in full swing, as we enter March, which is the final month of the current financial year (FY 23-24). With the end of the year, come discussions on new beginnings, new action plans, deliberations to changes in strategy or pivoting according to market changes.

We believe that the coming year will bring transformative changes across all industries in India, but the Indian SaaS industry, which is among one of the largest in the world, will continue to thrive through the technological transformations. Continuous efforts in R&D, increasing demand and a large talent pool is all driving growth in the Indian SaaS industry, across various verticals.

Over the course of the next 12 weeks, we will look at individual verticals within SaaS and analyze how they have evolved over time and how their growth will progress over time. This week, we look into the impact SaaS has had on the construction industry (through construction-tech).

Construction-tech: Brief overview and market trends

The term "construction technology" refers to a variety of specialized technologies utilized in the building sector. Artificial Intelligence, BIM software, 3D printing homes, and LiDAR are a few examples. In addition to providing many additional advantages, these technologies also improve working conditions, increase efficiency, and strengthen health and safety protocols.

Despite what the general population may think, the construction sector is very inventive, particularly when dealing with problems like the COVID-19 pandemic. Effective and efficient solutions are now a benefit of construction projects, enabling duties like creating, designing, and building structures to be completed with astonishing precision. The sector has embraced technology quickly to keep up with the trends, making investments in digitalization, supply chain management, and safety technologies.

It is crucial to identify the appropriate jobs and processes that can be automated in order to carry out effective change management. AI is among the newest technologies that provides a tactical solution. AI has three main uses in the course of a building project. The first is planning using AI; this involves using production and design models to get ready for building. AI tracks development during the build phase of a project and anticipates risk before it materializes. Lastly, AI is used by operations to map cross-functional processes in real time and generate insights for strategic decision making. 

Planning and design: The use of advanced AI and data analytics dramatically reduces costly delays on site and within the supply chain. With two-thirds of general contractors carrying added costs due to schedule slippage and overtime, ownership recognizes that contracting with conventional suppliers bears too much risk. Embracing technology from the onset is mandated and sets the standard for the rest of the project.

Construction: When machine learning and GPS are combined, spatial mapping is aligned with design elevations, allowing equipment to navigate itself. With these autonomous capabilities, there can be less human labor on the job site and more precision, less rework, and safer working conditions. Automated document-intelligence solutions are used to improve the quality and speed of each review while lowering the time needed and human error risk.

Operations and Maintenance: IoT sensors are integrated into the building and its components to monitor performance in real-time. The data they collect is sent into AI-enabled systems that mimic building functions. Deeper analytics are made possible by this method, which makes it possible to consistently look for and seize optimization possibilities, especially those involving preventative maintenance.

The global construction technology market grew steadily between 2018 and 2022 as a result of the construction industry's increased use of technology. The possible advantages of technology in terms of increasing output and efficiency as well as the rise in demand for building technology solutions. Furthermore, there have been swift developments in technology, resulting in the introduction of novel technologies like augmented reality, drones, and the Internet of Things (IoT). The construction tech business was stimulated by these state-of-the-art inventions that found use in the building sector.

Businesses are expediting a number of building processes with the help of construction technology solutions. The productivity of tasks that were formerly completed by hand, like material management, progress tracking, and project planning and scheduling, is being increased by digital tools and automation technology. In order to ensure that labor, resources, and equipment are distributed effectively, businesses will also move towards real-time data analysis and predictive analytics to make smart resource allocation decisions. Industry drivers propelling the demand of construction tech include adoption of Building Information Modeling (BIM), demand for real-time collaboration and communication, increasing infrastructure investments, availability of cloud computing and mobile technology and enhancing AR for communication and training to reduce mistakes and costs. 

The possibilities for AI's benefits are virtually endless because of its vast and varied nature. This momentum has been fueled by concurrent developments in other technologies, most notably cloud computing and IoT-enabled gadgets, which have an inexpensive and positive outlook on emerging change. The construction industry is already seeing changes as a result of the integrated technology driven by artificial intelligence (AI) that is expanding quickly and about to enter a really disruptive space.

Analysts’ note: Best practices in construction-tech

Having analyzed the global construction-tech industry, we find that there are certain trends and practices that successful companies have adopted to stay ahead of the curve. 

1. Increased focus on sales and marketing efforts: A bullish nature initially towards sales and marketing efforts, although may leak more money than make, will help in building a strong baseline of loyal customers. For example, for Bentley Systems, a software development company that develops, manufactures, licenses, sells and supports computer software and services for the design, construction, and operation of infrastructure, they saw 97% of their business (ex. China) experience the highest growth in ARR on an yearly basis. 

2. Less reliance on customer stickiness and loyalty: Customer stickiness and loyalty cannot be solely relied on due to the high percentage of backlogs and delays accounted for in the industry. The recent backlogs have come due to an overall slowdown in construction activity, due to macro headwinds. Bentley Systems saw a chunk of their growth coming from new customers which were small and medium sized businesses.  

3. Building connections and loyalty through pilots: The connect and expand strategy is very good at building stickiness in the construction-tech industry. In their Q3 2023 earnings call, the CEO of Trimble, a construction-tech company, with various verticals stated that their software offering has grown significantly over the last financial year with the existing customer base as their customers are looking at broader bundles of solutions.

4. Making R&D the core driver of growth:  Given that the industry is still in its nascent stage and solutions that are being offered are hi-tech, companies in construction-tech spend a significant portion of their revenue on R&D expenses, and this is crucial for acquiring new customers as well as for customer retention. While R&D expenses dropped between 2020 and 2022, due to suppressed demand, companies that maintained a heightened focus on R&D expenses like Procore and Bentley Systems saw significant increases in their overall revenue growth.  

In conclusion, the construction industry's cyclical nature emphasizes the importance of demand management and prediction for tech companies. Prioritizing customer acquisition through robust relationship-building and communication channels is crucial for fast growth in Annual Recurring Revenue (ARR). Loyalty and stickiness serve as protective measures in this cyclical environment but don't drive growth. Research and development (R&D) also play a pivotal role in attracting more customers as general contractors (GCs) are increasingly seeking innovative solutions to enhance efficiency, driving the integration of technology into their operations.

Vertical SaaS companies need to understand investors' perspectives to pitch their growth. Investors need data to assess the business's potential, including industry landscape, customer pain points, and scalability. Companies should demonstrate industry expertise, early customer success stories, and testimonials to secure funding and capture attention for their growth journeys.

How can vertical SaaS companies pitch their growth to prospective investors

Vertical SaaS companies catering to specific industry needs are booming. However, a lot of these companies are struggling to convince prospective investors of their potential for explosive growth. To understand how to pitch their growth to prospective investors, companies need to understand the investor's perspective. 

Investors need data to assess the potential of the business. While core SaaS metrics such as Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLTV) remain crucial, investors would like to delve deeper into vertical SaaS companies.

Before diving into the metrics, they would like to understand the landscape of the industry vertical and see if the industry has a sizable addressable market. Even a large yet fragmented market with numerous small players indicates potential for high customer acquisition. They would also want the companies to demonstrate a deep understanding of the industry and customer pain points and showcase how their solution is going to solve that problem.

While metrics such as CAC, LTV, and ARPU showcase the effectiveness of the business in its current stage, investors would also like to assess if the vertical SaaS is truly scalable. Metrics that showcase the value added to industry verticals become key for assessment. Taking construction vertical SaaS as an example, metrics such as reduction in project completion time, percentage reduction in project costs, reduction in safety incident rates, and reduction in rework rates showcase the potential of the product in the vertical.

Beyond the numbers, companies need to showcase the team’s industry expertise and their ability to understand the specific needs of the target market. They can also present early customer success stories and testimonials to demonstrate the tangible impact of the solution.

Effectively addressing these elements and weaving them into a compelling narrative will help vertical SaaS companies capture the attention of investors and secure the funding needed to fuel their growth journeys.

Startup resources

Our startup resources page aims to provide entrepreneurs with the appropriate tools, resources, templates. These resources can be used readily if you are interested to incorporate in your respective companies.

This week, we show you what a typical NDA looks like for a M&A transaction. The template covers all the terms that the two parties in a transaction must adhere to. We find that companies tend to struggle with drawing up terms for their NDAs so we have included some basic terms in this template. It must be noted that the terms in the contract are generic and need to be tailor made to fit your business' needs.

Startup resource

Compliance Calendar

Our monthly compliance calendar captures all the key dates that any organization must be aware of to be in compliance with applicable regulatory frameworks.

Closing Note

We hope that the content from our newsletter will continue to assist you in staying on top of all the developments in the Indian startup ecosystem and will act as a catalyst for your startup’s development.

Thank you, and see you again next week with more insights.