Looking Back and Looking Forward
Looking Back on Venture Capital and PropTech
I celebrated my one-year anniversary at Mosaic this past September, and have been reflecting on how much has happened since I left my investing role at a venture capital firm in New York City for an operating role at a seed stage construction technology company in Phoenix, Arizona: growing from 10 to 130 people; raising a Series A from Andreessen Horowitz; the rise of a global pandemic; the protracted presidential election…it has been a lot.
“PropTech” as an investment thesis had evolved from something nascent — often grouped with “cleantech” in 2012 when I started investing in the category — to something more differentiated and worthy of its own vertical: Airbnb, Uber, WeWork, Flexport, Compass, and others all had validated technology’s role in transforming how we interacted with the physical world. SoftBank was still ascending and making huge bets within real estate tech. New vertically focused real estate tech funds such as Fifth Wall were approaching nearly $1B AUM with LPs from Lennar to CBRE to Macerich piling on.
The Search for Construction Technology Solutions
As more and larger VC firms focused on property technology, I started looking for opportunities outside of it and found myself spending a lot of time in the construction industry — a massive $1.3 trillion market in the United States. The lack of technology and the challenges it faces are staggering relative to most other industries. In the United States, productivity in manufacturing, retail, and agriculture have grown by as much as 1,500% since 1945. Yet construction productivity has barely increased in 80 years, and in fact, has decreased since the late 1960s.
Mosaic’s mission is to make places people love, and to make them widely available. Making places people love requires creating a diversity of homes that suit the individual families living within them. Making them widely available requires them to be affordable. Prevailing construction methodologies for production housing offer neither. As a consequence, homes are too expensive, and our suburban landscape is filled with houses that look the same.
A number of construction technology point solutions over the years have tried, as Nine Four Ventures recently covered, to solve very specific workflows in project management, bidding, planning, invoicing, and subcontractor IT solutions. No one, however, has built end-to-end software platforms for construction that convincingly work at scale.
The Search for a New Construction Paradigm
The root of the problem is this: construction today uses an industrial model that focuses on standardization of product and division of labor. This model is particularly true in Mosaic’s focus area of residential single-family construction. Homes are designed to be similar (standardization of product), and trades are hyper-specialized (division of labor). To be more specific, in order to build a single house: first the underground utility crews come, then a concrete crew, then a framing crew, then a rough mechanical crew, then a rough plumbing crew, then a rough electrical crew, etc. In order to build a single house today, homebuilders typically engage with between 20-23 different subcontractors, and an average of over 120 people come onto the site, each performing their own specialized function. It is, effectively, an assembly line.
The problem with this model is that assembly lines are notoriously bad for varied products. Or to put it more generally, hyper-specialization is not resilient to change. This structure makes it not only difficult to create unique homes in diverse neighborhoods, but it also makes it difficult to adapt to changing markets. It makes it difficult to adapt to change orders in the field, and it makes it difficult to innovate on process. This effect is even more pronounced in residential construction as compared to a typical factory model. In residential construction, each crew works for a different subcontractor, and as a result, no individual subcontractor is incented to innovate on the overall process.
Mosaic’s Solution: Process over Product
I first came across Sep, Salman, and Mosaic as a prospective investor during their seed round in 2018. Their strategy was radically different when compared to any other company in the market.
The key idea underpinning Mosaic’s construction philosophy is that construction should be more like software and less like line manufacturing. To make any kind of progress from the current unsustainable state of construction, we need to build wholly new construction practices whose guiding metaphors and norms are not based on the assembly line, but rather based on software. Rather than gaining efficiencies through standardization of product and division of labor, we can gain efficiencies through software scripting and automating the coordination process.
This is precisely what Sep and Salman were building at Mosaic, and what we are now building together. We are not building factories and we are not buying land, nor are we taking on building ownership. In general, we also avoid real estate transaction dynamics, fiduciary responsibilities, and investment management.
Instead, we are a construction technology company that builds software that makes homebuilding more scalable. We use our software ourselves to manage construction on behalf of homebuilders as a general contractor, enabling them to build more places that people love, and to make them widely available.
As a result of standardizing the process, we no longer need to standardize the product, allowing us to build a neighborhood of diverse homes at the same cost as it would cost us to build a neighborhood of similar-looking production homes.
In other words, by scripting and automating the coordination infrastructure (by automating the GC), we are able to build in a way that is more dynamic (so that we can build places that meet individual needs and desires, allowing us to build places people love), and we are able to build in a way that is more efficient and scalable (so that we can make those places widely available).
A benefit of standardizing processes rather than products is that we can make diverse, unique homes rather than monocultures. We are already starting to do this with our 35-home design-build community in Flagstaff, and this is something that we are seeing a lot of demand for from our customers.
The benefits to Mosaic’s approach of scripting the construction process and issuing dynamic instructions directly to the field is even more clear when compared to other existing solutions to the industry’s productivity problem. Unlike existing and proposed solutions in prefab and modular companies — which primarily standardize on product and require that customers significantly alter their existing design, engineering documents and workflows — Mosaic’s solution requires few, if any, meaningful changes in how our customers execute their business or train their teams. No changes to construction drawings. No changes to municipal inspections. No expensive or exotic machinery or equipment. With technology that is immediately adaptable to design changes and site conditions, Mosaic can deliver work with minimal notice and offer fast turnaround times.
Large generalist platform funds like Founders Fund, Thrive, A16Z, Greylock, 8VC, and others were also excited about the opportunity, and as a small seed firm I wasn’t able to get an allocation in a round that was oversubscribed by 5X. But over the next year, I couldn’t stop thinking about the approach Sep and Salman were taking, and we stayed in touch.
In the year since I made a very concentrated investment in Mosaic (i.e. left my VC firm and joined as an employee), the world has changed in ways that would have been almost impossible to predict.
Construction Meets COVID
Counterintuitively, this has been a good time for our business in Arizona. The ever-increasing in-migration to Arizona caused by the outflow of buyers from high tax metros, the relative affordability of our major metropolitan area and surrounding areas, and the 22 million workers earning more than $50K per year that are now working from home — compared with 5 million in this segment pre-Covid — is driving the significant demand fueling the booming residential real estate market. What is noteworthy in analyzing whether this boom is sustainable or not is the fact that Arizona is still trending at less than 50% of the peak new home permits pulled in the early-to-mid 2000s.
Allison Xu at Bain Capital Ventures recently shared some observations about the industry that have resonated with our experiences building Mosaic in Arizona:
“Since COVID-19 took hold in the United States this spring, it reinforced the pressure for construction companies to improve productivity. Mandated shutdowns cut nearly one million construction jobs in April 2020, and while many have returned to work, BLS data shows that September 2020 construction employment is still lower than February 2020 levels by 394,000 jobs. Nearly five years of construction job gains were wiped out in one month, and if the industry behaves anything like prior recessions, it will take many years to fully recover. To remain competitive, improving productivity is a necessity for construction firm’s long-term survival, and adoption of construction technology solutions is one of the ways to do so. Much like how COVID accelerated tech adoption in industries like retail and banking, we expect to see construction companies accelerate adoption of software that helps them turn manual processes into digital, cloud-based workflows.”
Even before COVID-19, this was the core hypothesis and problem statement behind Mosaic and the technology we have developed: there are many problems in the construction industry, but the most intractable problem that is widely acknowledged — but not directly solved by anyone — is an acute shortage in skilled construction labor. A 2017 McKinsey study published by the Economist reported the construction industry as the only global industry to have the same efficiency level in 2010 as in 1947 (i.e. long lead and build times, high inflation adjusted costs, ever increasing governmental regulations, etc).
As a result, the jobs of general contractors have actually become more challenging as the amount of regulation and number of subcontractors, suppliers, and vendors continues to increase and the shortage of willing and skilled labor drives costs up. Homebuilders are struggling to deliver homes fast enough to keep up with demand. In Phoenix homebuilding specifically, labor costs have gone up 10% in a single year and the average time to build a home has increased almost 80% since 2008.
Solving the labor crunch is incredibly hard to do at scale, but this is exactly what our technology is designed to do: incorporating people as part of the technology process.
In one of our first meetings about Mosaic, Sep shared an observation with me that has continued to resonate. There is a wonderful quote by Frank Lloyd Wright where he writes: “I never design a single house without envisioning the destruction of the current social order.” And while this quote is hyperbolic, there is an important truth to it, which is that it is useful to have a vision for the world even when designing something as small as a house, because that house will become part of the world.
As I think about where the industry is going and where Mosaic ends, the word I keep coming back to is “convergence.” Real estate will increasingly be viewed as hardware that we inhabit, with software layered on top of this hardware that enables the delivery of goods and services to increase the value of the investment, and to increase the quality of everyday life.
As a result, concepts such as “core” real estate will make increasingly little sense; everything is a box that has to serve multiple uses and has to be improved through technology. As an example, “PropTech” has finally unlocked that ability for commercial office property managers and allowed them — in a short period of time relative to the industry — to compete as hospitality operators for consumers and tenants that now expect more. In the same way, “ConTech”, led by Mosaic, will one day unlock the ability for any real estate developer or architect or aspiring homeowner to become builders of tomorrow’s world.