A few weeks ago, Suffolk Construction, by way of Suffolk Technologies, announced a new $110M venture fund devoted to the built environment.
It’s the first of its kind – a venture fund established by a construction firm – in the history of the business.
The fund is also unique in that it’s comprised of significant outside capital, which distinguishes it from other pure-play CVCs in the space (i.e. Saint Gobain, JLL, or CRH).
This strategy, in theory, allows Suffolk to operate a bit more independently from the corporate mothership. It’s also of course still distinct from other traditional venture funds in the space (Shadow, Building Ventures, Brick and Mortar, etc.) because there’s still a strong strategic tie-in to the core Suffolk business. They are leveraging their name, influence, and infrastructure to support their investments.
Here’s the most interesting aspect of the news from our perspective: it’s a harbinger for leveraging emerging technology as a core strategy for large construction firms.
“How are you leveraging emerging technology?” was previously a cute board-level conversation for construction firms with no real consequences if inaction followed.
Now, if you’re an ENR Top 100 contractor, and you witness a close competitor put hundreds of millions to work in early stage venture in your sector, with the first mover advantage and the asymmetric upside of technology at play, you stand to be at a noticeable competitive disadvantage if you do nothing.
That’s because success for Suffolk doesn’t necessarily mean pure cash on cash returns. Success can still be ultimately measured by the traditional strategic investor metric: what value was accrued to its core business?
This value could be delivered in the form of access to the best startups/emerging technology themes, data, acquisition priority, or simply, applied technology knowledge. These variables are potentially worth many multiples more than the capital they invested.
What strategic dominoes follow next?
Not every AEC firm can pull together a $110M fund to match them, but many can pursue a similar strategy by investing their balance sheet capital in traditional venture funds, direct into startups (without any real structure), or through standing up their own small CVC.
The right question for these firms to ask is: which venture strategy gives you the most upside for the least amount of risk?
CVC for instance, can be risk-laden due to the significant infrastructure required (the cost of building and sustaining a team). Returns are also historically bad, as they are too narrowly focused on the core business with poor incentive alignment/little accountability on returns, and access to the best startups is more challenging.
The downside to direct investing (without a formal structure) is the AEC executives who are tasked with this endeavor are not VCs. They haven’t thought through their stage strategy, portfolio construction, diversification, and a lot of other critical details. In other words, direct investing without a real strategy is a great way to lose your shirt while learning nothing.
Our prediction is more traditional fund investments will follow for the above reasons.
Lastly, congratulations to Suffolk’s team are in order. $110M is a meaningful amount of capital for our industry.
Yet, there is much work to do…
By our calculation, the built environment was responsible for roughly 20% of GDP in 2022, yet received less than 1.5% of all venture capital deployed in the same year. The data gets worse in prior years.
To get to merely HALF of our proportionate share of GDP (10%), the built environment needs to attract an additional $20BN of capital annually.
So, we need 200x more Suffolks.
The incentive to follow is in plain sight. Value is mostly captured by the first movers.