What Construction Software Consolidation Means For Customers

Will acquired software products receive ongoing investment, or will customers be adrift as their software is de-prioritized?

When construction software products are acquired, their users may find themselves adrift as the product they rely on is de-emphasized or targeted for replacement by other products in the portfolio.

The last nine to 10 years have seen, if not heavy by other industries’ standards, increased investment in enterprise software for construction. Between 2020 and 2022 alone, VC firms invested about $50 billion in construction software and technology.

This means many construction software companies have been building not to scale into the future, but for some type of liquidity event to make VC firms’ investments viable.

In good times, VC firms can bank on growth in their portfolio companies, and invest accordingly. In down times, VC owners focus on profitability rather than growth, and when we see VC firms exit in down times, the nature of the deals may differ.

These are not companies that scale up to the point where they are likely initial public offering (IPO) candidates. The largest construction software vendor, Procore, is public, but most other vendors cannot expect to reach the network effect of this early market leader. Most other construction software offerings from public companies are often part of an overarching software portfolio that spans multiple industries.  

SHOULD YOU BUY CONSTRUCTION SOFTWARE FROM A STARTUP?

(IRONPROS INTERVIEW WITH RAFFI HOLZER)

Vertically-focused software startups have a few more likely liquidity outcomes:

• Acquisition by another construction software company as part of a portfolio of products

• As a replacement for an existing product

• As an effort to grab install base and migrate these users onto a different product

• Acquisition by a multi-industry software company to shore up their functionality and install base in the industry

• Acquisition by a private equity firm, either in a strategic deal that adds value or as part of a broad roll-up of often competing software products focused on multiple arbitrage

Avoiding Acquisition-Related Disruption

So what happens to customers of a software startup post-acquisition? As is the case with so many things, it depends.

Will the acquiring company continue to invest in the product, or will it be de-emphasized in favor of competing products in the portfolio? When an acquiring company throws multiple, competing software products into a basket, there will be winners and losers. The most modern cloud-first software will often win. In other cases, broad multi-product rollups can result in software products with increased technical debt as product investment is slowed.

If purchased by a company with construction software solutions in other categories (i.e., a construction ERP vendor purchasing an estimating product), the integration strategy is critical. The best outcomes result when a software product is acquired by a vendor with which they already have a proven integration and business relationship. Buyers should exercise caution when an acquiring company talks about an integration that is not yet released to market, particularly when the integration includes older software designed before the rise of application programming interfaces (APIs).

Contracts ought to include provisions for acquisition, and executives should study the duration of protections for support, product roadmap, pricing and product availability, and the nature of and reputation of the acquiring company, as they decide whether to stay with the product in its new home or consider migrating to a different product.

Once part of a suite of applications built through acquisition, will true efficiencies result from cross-product integration? Will the acquiring software company stop marketing the acquired product outside of its install base? Or will the focus be less on the product as something that is sold on its own merits, and more on using it to complement other functionality in the suite to check off boxes in prospects; list of requirements?

In each situation, executive teams need to look at the acquisition from the acquiring company’s point of view. What course of action is most profitable for that acquiring company? What is their overall roadmap? How have they handled past acquisitions, and how successful was their acquisition rationalization strategy?

Recent Construction Software M&A Activity--Representative Deals