Intro (00:03):
Building materials manufacturers run a complex business, but we are here to help you plan for the future. Whether you are launching a new product, rebuilding a brand, trying to get thoughtful communication strategies in place or everything in between. Here on Constructing Brands we will be talking with leading experts in construction, architecture, engineering, marketing and manufacturing to help make your building materials company stronger and more profitable. With 15 plus years of experience helping building materials companies succeed and grow your host, Eric Lanel.

Eric (00:42):
Good morning Constructing Brands. I’m so excited today to have on Jesse Devitte. Jesse is the cofounder and general partner of Building Ventures. Building Ventures invests in companies that are reshaping the way we design, build, operate and experience our built environment. I couldn’t ask for a better guest to have on. I’m just so incredibly interested, excited and I mean, audience, if you’re listening to this, if you own or you’re responsible for driving a building material company, you’re going to want to hear what Jesse has to say. He’s a general partner in a company that identifies companies that with capital infusion and some help will grow exponentially. And Jesse, thank you so much for being on our show.
Jesse (01:35):
Yeah, great to know you, Eric. I’m happy to help obviously.
Eric (01:39):
Tell me a little bit about yourself, Jesse, what got you involved in in this Building Ventures, building materials space, building product space, world that you’re in.
Jesse (01:50):
I’ll try the short version of the story. Sort of grew up in the world of architecture, engineering, construction grew up on the technology side, if you will. In the nineties I was just part of a group of people that I had an idea to put together a company and there was five of us and we thought, you know what? Let’s start this company. Let’s limit it to about 10 or 12 people. We’ll make some software for civil engineers and structural engineers and we’ll have a nice little company quality of life, and of course that’s not how it ended up. It ended up, that was the birth, it was in the era of the birth of the personal computer. This thing, AutoCAD came out, we added our software to AutoCAD. All of a sudden people started buying it. You know, I remember counting it like slash like one, two, three, four, five slash across the middle. That’s how the company began. How many software packages we sell per week. You know, it’s how these stories go. Sometimes there are many of them are accidental nature of timing, right? The confluence of events as well as, you know just being fortunate overall, we built this company called Soft Desk. We took venture capital in the early nineties. We went public in the mid-nineties and the later nineties, a larger company called Autodesk bought us and created a group there called the Architecture Engineering Construction Group, which, which I led. And as soon as I can find my way out the side door, I escaped because the large company thing wasn’t for me, always entrepreneurial. I remember it’s an accidental journey, so in that point, but I then had spent a solid dozen years around the, if you will, AEC world and selling technology to them specifically and then decided to become an investor, not to become an investor but to frankly build companies because I also felt like I liked building things and I felt like I just had this experience that I had a lot of scar tissue, you know, people from the outside would say, oh so successful the company went public and I would stay up all night thinking if they could see me now, you know, I’m sweating bullets here every single day. So anyway, I felt like that’s what I wanted to do with my life is birth more companies like that and venture capital, since I had experienced taking it was in a time when this was around the early two thousands, they were beginning to burn more, what we call operating partners. People that had come from being in companies that would become investors versus just sort of the blue bread class that came from Ivy league schools, if you will. But it turns out it wasn’t Ivy school, Dartmouth that was near my house and they sort of recruited me. Professor did his name is Phil Ferneau. And, and he and I cofounded what became Borealis Ventures. One of the things I said to Phil was, look, I’m happy to create this venture capital firm because I think I have a view for how to do this from having just experienced it. But one thing I’m not going to do is ever invest in anything to do with architecture, engineering and construction because I am so tired of the industry, it seems so traditional and so backwards and so complicated. I’ve just spent, you know, 12 or 15 years of my life in it and I just kind of like be done with that. So can we not do any of that? He was like, well sure. No, this is about building companies. We’re going to invest in technology companies and you know, you can help figure out how to scale them. I’m like, that’s what I really want to do. So we started the firm and I got a call from a guy who I’d worked with along the way, named Brad Shelly. He had a little product called SketchUp. Brad called me and he’s like, listen, I know you’re a big investor guy now, but you need to help me because I have to figure out what to do with this company and this product. People are really buying this thing. And I was like, are you sure? And he’s like, just, I said, Brad, I’m not investing anything to do with AEC. You know, the industry is just too far behind on technology. And he’s like, no, no, you need to help me. So I went out to Boulder. I spent about three days at the company. I called my cofounder Phil. And I’m like, so, you know, I told you that we shouldn’t invest in anything to do with AEC. This might be one that we do actually. So anyway, we, I stumbled my way back into the industry in some ways. Maybe it took a couple years away from it to sort of, you know, settle some of the wounds and experiences and reflect that a little bit. But if that company Borealis Ventures made an investment in SketchUp, and before you know it, we did an event, which today by the way, is the most widely used 3D drawing tool in the world today that people will use today in the world. It will be number one. You know that by the numbers, they know who uses it every day, right? So you can make the count. So anyway, it started that way and sort of, it was like a steady downhill slide back into AEC at that point. Because really for that period of time, from the early two thousands to 2012 or so, there really wasn’t an interest in the general venture capital investment markets in these spaces. People didn’t know what to make out of construction or engineering the industries or the software was very nichey. And if there’s one thing I’ve learned in my entire career, it’s the most localized industry in the world because what you can build at the end of one block, you might not build across the street what materials you have access to in one town you don’t have in the next town. And so that makes it a very extraordinarily fragmented industry. And so what I felt like I was thinking about in the 2000 to 2015 window was, you know, as more and more technology was changing industries, we what, we witnessed the rise of FinTech, you know, and how mobile devices and the cloud so forth, were basically transforming that industry. I began to think more deeply about, hey, this 20 or so years of sometimes pain around AEC, you know, this industry is going to go through that at some point in a broad sense. And I don’t know, it wasn’t a revelation, but it kept creeping into my thinking as an investor, I felt like I was beginning to see new types of companies that weren’t just the up until this point, the early 2000, 2015 most of the software products were very point solution things. The industry around design, construction and real estate has been challenged so, so much that there were many, many point solutions. It was literally a sea of point solutions. And those are essentially band aids that fixed certain things, right, and very specific. So in what was considered, what was thought of as a nichey industry. The solutions were also very nichey, but to sort of, if you were really going to transform an industry, and that’s the key for venture scale returns as a professional investor. So in my life I sort of have two lives in one, right? I’m a professional venture capital investor. So I learned what to look for there, which is opportunities that can return at scale. And then also, I know this industry really well that I’ve grown up in professionally, which has all these challenges. But essentially I began to realize that with the onset of new technologies, this industry began to undergo its own transformation. As others had, as I just referenced, FinTech was actually during the same period of time. So realizing that would be happening by the way, you know mobile devices, cloud, all the same things, but also AR, VR, drones, all those things. Many of the first use cases for these technologies actually is in our built world. And so one thing I thought about along the way in the 2015 timeframe was what was the terminology for it, because AEC was much more about the process of design and construction. Sort of an inside baseball view of the world and this industry, by the way, tends to be that way, tends to be a very inside baseball industry, but really if its to be transformed. It almost needs to be more mainstream. The good news is that the, some of these things like mobile devices and the transparency from the adoption of technology was beginning to make the industry more transparent. So it’s extraordinarily fragmented, not just by locales. I mentioned how uniquely localized it is, but also the process is very fragmented and it’s a series of business silos, right? There’s the design work that’s done and then it’s thrown over the wall to the construction company that builds it and then they build it and they hand it off to the real estate firm that’s going to own it and run it as an example. But actually that was all beginning to connect more as technology was enabling people to see more. Remember we helped found this company called Newforma, which is in the architecture engineering space for collaborative design. And I’ll never forget, I was at a large architecture firm in the early days of this company when we were defining what the product would become. And one architect said something to me that sort of changed my life and he said basically, you know, designing a building is sort of like driving down the street in a rainstorm in your car with no windshield wipers. Like we have no view, you know, like we have no view of the process. Once we design this thing then it goes into this process which is very fragmented and what we really need is like windshield wipers. So we could see and so that people on the other side, real estate people and owners and operators can also weigh in earlier. And so for me it clicked that essentially a lot of this would be about, you know, enabling more people to participate in decisions earlier. And so this is going to be a way we loop our way back to building materials because this is part of this whole mixture. But at the end of the day we also had to figure out what we called what we were doing. And so we ended up settling on something we think of as the built environment, which ended up as we started to tell people our story of 2016 and 17 about it’s time for a, it’s time for dedicated capital for this industry, which up until now had never been recognized as a legitimate investment category from venture capital. So the technology glitterati of venture capital had always sort of looked at this back to what I said, it’s sort of a nichey thing, kind of nice low companies could be born in there. But once you begin to realize that this industry is actually everything about us, every day we live and we work and we sleep on it and we eat in it and we meet in it and we travel on it. The built world actually is everything about our existence. And so I’ll just make kind of a maybe crazy statement. I do think in a decade or two this will be the primary investment focus of the world because frankly it kind of has to be. So one of the things we realized as we were thinking about the built environment and defining where we would be doing our investment work versus sort of construction or building materials or AEC or real estate, we called it that built environment because it captured our, our physical world. That’s ultimately the opportunity. But also our world has never been under more pressure in many ways. Right? And so usually it sort of, we sort of thought of it that sort of a perfect storm. You know, we have this rapid urbanization happening to us, right? And we have these new technologies and we have this very traditional industry which is just full of friction. And when you go back, even look at the .com days, what those companies were doing early was they were removing friction from things. I mean, obviously we’ve all live in a world now of Amazon and home delivery and so forth, but it wasn’t always that way and it’s not that far ago, interestingly enough. But if you think about those principles, how would those same things that happen there change this world and this world needs a change. And then there was one of the sort of motivating principles, you know, you shared with me your story about the kind of things that drive you. You know, one of the things that I think about is that we’ve managed to physically scale our world to serve the world, but it sure doesn’t seem like we’ve done it sustainably. Right? And so this means that this industry is going to be in the spotlight. It’s going, it has to become the mixture of people and products and materials and approaches that actually can serve the planet better than we have today. I mean, there’s obviously no master plan for the planet. But it all still does actually come together in our physical world. And so we thought about this, defining our work in the built environment focused on the built world and for a better built world. So everything that we do is about identifying the teams that have really intriguing, disruptive ideas along with the capability to execute those for materially improving how we design, build and operate our physical world. That’s our existence. And I will say that in the last several years, there’s been many more people that have joined this world of investing to this end. Right now we actually have construction tech and real estate tech as billion dollar subsector investment categories that people track. But trust me, five years ago they didn’t exist. No one was doing that. So this is actually coming together. And so while it’s exciting, it’s also happening that way cause it’s very real. And I think actually, you know, the places, the things that happen, like where we find ourselves now in time, this national global pause that we’re in the middle of, you know, triggered by the coronavirus. It sure feels like this will just accelerate the importance of everything around us. You know, where we go, where have you been? Or maybe who have you been with, but what are the materials like, what’s your air quality like in your building? So a lot of these things have been developing for a while, but it feels like we’re at a moment here in the next few years where it’ll just accelerate if you will. So hopefully that ties it sort of all back together. It’s been an accidental jury that’s become more intentional in the last few years. Maybe that’s kind of like the age thing, you know, you get your 50 and you’re like, damn, I got to think about this more clearly now. But actually the, the what’s happened in the world is conspired really to bring all this together. I found a great investment partner, who I invested with and a company in 2012 which is one of those experiences where, you know, not all companies go as planned. And in this case, the only people in the file board meetings were two of us, you know. And so we bonded uniquely through that experience and develop this idea of the last few years. Her name is Travis Conard. She’s a will be accomplished 20 year venture capital veterans. So Travis and I had this idea that let’s, let’s give this a work we did at Borealis it’s own birth and that’s how we created Building Ventures. Realizing that there were investors and resources in our network we could possibly create that can almost create a movement to support the investments in this category. And that’s what gave birth to Building Ventures where we’re focused on, you know, finding the identifying and supporting the really great people who actually can help us on this destination to a better built world.
Eric (17:08):
I love so many things you said. Let me, the recap of what you just said, that I just love, one and it speaks to what mom always said to me, which is sometimes you have to keep your eyes and ears open and recognize that maybe the world’s a little bit bigger than you are and pay attention to what’s going on in the moment because the path that you think might be right, be flexible, see what’s happening in the world. And it sounds like from the get your jump into, okay, I’m good with the investing in companies but it can’t be in this space. Two, okay, well maybe this is the right company. Forget about what I said. This is the right place to go. From there, I mean what a great example of being smart enough to have a game plan and intuitive and intelligent enough to recognize that sometimes the plan should be changed a little bit based on opportunity environment and just gosh darn, having the instinct to say this is the right place to be at the right time.
Jesse (18:17):
Yeah, I count myself very fortunate that way. But I think the one thing that I’ve tried to do consciously and professionally, particularly, I’ve been through a number of sales or marketing roles, is to listen to markets, right? We have this analogy that we use. People ask us all the time, well how do you decide what to invest in now? You know, it may seem like voodoo math to people if you use an old term in some ways. And it sort of is, but I think about it really more simply that reflects this sort of market consciousness I think has served me well. And I think serves our company as well, which is, you know, this lens that we sort of have when we first get someone that calls us. I live near the ocean. So while I’m not a surfer, I ride my bike and watch all the surfers and one day I sort of had this idea around how to think about it. And my cofounder, Phil Ferneau at Borealis Ventures and Darby gets credit for this too. We sort of develop this analogy together. But it’s, you know, in this analogy that when we look at a company the entrepreneur is the, and the team or the surfer the product or services, the surfboard and the wave is the marketplace. And you know, you could be the best surfer in the world. You could have the best surfboard in the world, but you could also be in a parking lot. If your market is not there, that’s the size of your market, the timing in your market. You know, we break it down more cleanly into who’s willing to pay for what, what’s the pain in there. But if you just think about that simple analogy, it’s a lens. We really have to have that combination of things that come together. And so while frankly for us, the final decision is on the team because the wave changes and the market can change a lot and it needs a team to be able to adjust to that. Someone heard me share this one time and sent me a video of this guy, Kelly Slater, who was apparently a real champion surfer and he’s surfing on some beach where you know, there’s two foot waves that he’s, you know, just zipping along past everybody, you know. So it sort of reinforces the fact that the team really makes the ultimate difference, but really have to understand the wave in the marketplace and what’s happening within it. It’s why some ideas that it’s partly why some ideas that were good before succeed now, you know, it’s the consciousness of what’s happening in the market around you. I think that this whole building materials space, I mean the end, one of the things that’s happened, I think of this wave analogy is that the end users are in this with people. People are in this wave. That’s the ultimate market. It’s not just the professionals, it’s the people that experienced these things. You care more now about what goes in your home. What are those materials in your home, right? What, what’s in your office? You care more about your, not just your thermal comfort in a commercial building, but what the quality of the air is and now you have the ability with a mobile device to let people know. So that sort of puts a lot of pressure on before was sort of a clunky system. This whole business about how we design things, how we build them and so forth. So, people can weigh in so much more directly now. And I think that’s really the underlying powerful force within this big wave that essentially sets the base for transforming this market in many ways.
Eric (21:30):
You know, it’s so interesting because the other thing that I’ve heard now theming through not only your history but where we just went is it seems as though something that you do and I think it’s incredibly interesting is that you identify and it sounds like your company identifies that there are these fragmented siloed things, you know, these companies and the marketplace and the environment. There’s silos back in the beginning, even in this space before you labeled it built environment. And you were saying, well, everything’s so siloed and there’s localism and there’s all these factors that come into play. But the interesting thing is it sounds as though where you and your partners and your brain goes is recognizing the silos as strengths, but how different pieces of the puzzle can make a bigger opportunity. And it sounds like that might be, am I getting that right? I mean it seems like taking a step back, that you’ve used several examples I believe of kind of, how the siloed approach, which, what was the siloed approach, which, what is this environment? And one of the things I like very much about it, by the way, one of the things I love about the building material space specifically is what you said it was, it’s this kind of old school in many ways. It’s the siloed approach. It’s our target is, you know, the target, the building material companies typically to be to create a great building material company. It’s a product focused individual. It’s very engineer-like, it’s very kind of a pragmatic thinker who’s, by the way, typically not a good marketer and typically is not very, doesn’t have a depth and a width to think about the integration because when you’re solving a challenge or a problem, it requires a certain amount of focus and a certain way of being to really, really deliver and to continue to think about the iterations to drive this real success. Whereas a marketer I think about more of how the pieces of the puzzle work. It sounds as though what you’re looking at is a canvas that involves many different pieces and the integration of those pieces is what makes the puzzle interesting to you. Am I getting that?
Jesse (24:00):
Yeah, really great. I mean better than I could describe it. I would say in many ways it’s this digital transformation of this entire thing you’re describing that begins to stitch all this together into a more synchronized portrait than all these separate steps, which to themselves, by the way, have their own, you know, obviously there’s an inefficiencies there, but by the way, there were business models based upon maintaining the existing system. Right? Architects would design this and get hired by owners to do this work and get paid X. Then the construction company would take that work and go do that. But digitally as this transparency’s been increased and more things naturally connected, people begin to realize there’s much more efficiency if you can actually enhance communication. And that’s enabled by digital transformation and sharing of data across. So there’s this convergence happening across the industry, which you know, if you could make bigger decisions earlier, you end up with better products. So part of the built environment decision for us was to be focused on the ultimate deliverable. The deliverable is actually what we live in our buildings and our highways, our roads, that’s a deliverable versus being stuck in the silos that are the process. So, but if you want the best product at the end of the day, right, you want the one that’s most in tune with the market, that has input from the stakeholders who will use it, who will actually care about it, you know? So it logically is enabled just like it is in FinTech and other sort of industries by digital transformation. And so that I think has just begun to pick up more steam and changes some of this. And you know, just sort of fast forwarding if you will, to even how we think about it today. You know, in two weeks we’re supposed to have the AIA annual architecture conference in Los Angeles. I think, well obviously that’s not happening. I never even got a chance to book anything to go there because it was clear that wasn’t going to happen in a few months. But what happens when you go there is you have a big exhibit area there and people will look at new materials and experience those. So now how are you going to select these materials? So it’s really interesting how you bring it back to building materials. I recall about three or four years ago, one of the things that when we’re doing a due diligence on companies will often go to people in this industry and ask, obviously we’d go to them and beyond our own instincts, we’ll go out actively and ask people what they think about things. And sometimes we’ll ask companies, could be architecture, engineering, construction, other companies actually asked them to pilot things and try things for us and give us their opinion because essentially they trust us enough with some of the work we’ve done to do that. And they’re always curious new things too. So I went to somebody leading one of the country’s largest architecture firms a few years ago and I said, look, we’re looking at this company in building materials space, and it would help your architects select materials much more effectively. You could essentially build your own library of all this information. And he said to me, you know, I would love to be a pilot customer for this, but I have to tell you one thing is I’m still trying to figure out how to keep my young designers off that damn internet because essentially they go out in that magic Google box and find everything on their own anyway. Like we’re trying to basically make sure we build these sophisticated archives of all this intelligent information about building materials and how you apply it and how you select and how it works for us, but they’re going out on their own getting it anyway. So I have, if it will help me, could just bring order to my world, my chaos enabled by Google, you know, then I’m interested, and so to me it kind of captured the moment, right? That’s sort of the animals are out of the barn, you know, when it comes to building material, product and selection process. So that traditional set of, if you will, and I hope you don’t receive any hate mail from this. I’m open to all hate mail of course electronically, as long as it’s that way, you know? But I think that world of, you know, traditional, this is another one of those areas where that traditional world of building materials, products and reps and distributors and you know, trade shows, that whole thing. I could feel right at that moment in time this is changing right here. There’s, you know, one of the things that, you know, we have a chance to see as investors is there’s a, sorry to use the wrong term here. There’s always a fair amount of roadkill when it comes to young companies, right? That sort of have an early idea, maybe oftentimes ahead of their time. And you know, so there’s been a lot of people who’ve tried to introduce digital solutions into this world of building materials and product selection and offering and so forth. And so there’s no shortage of things to see in terms of where there’s been damage done by those young companies. But oftentimes, I think one of the challenges, and this is just a feeling that I have, is that, you know, or instinct that I have is that companies don’t change industries. You know, entrepreneurs, we’re very passionate. So we have this belief like we are going to change this damn world. But realistically, your moment has to come, you know, with a combination of things that you then realize and you then ride, that’s my experience. And so in this world the moment could be here now, it’s already been underway, but 10 years ago people were trying to just pump out CDs so you could slug windows and doors off of CDs. I remember when that was a dilemma and we were just transitioning from physical catalogs to digital catalogs, et cetera. But the reality of it is this is going to accelerate now. I think they going to have to become much more efficient because it kind of has to in some ways. And it’s not just the nature of the current change. You think about the ripple effects of it? How we’re thinking, what the COVID global pause means? We’re still asking questions and gaining insights. Frankly, I think in some ways it’s too early to jump to longer term conclusions, but some things we’re thinking about are, for example, the supply chain. You know, what’s the impact on the supply chain? It’s already complicated. You know, we sort of, because some friction coming down, it’s become almost for granted that you could, you know, grab some certain tile from Italy and have it on your site next week. Right? Maybe not so quick. Maybe it doesn’t quite work that way. Not right now. Construction companies are struggling through that. Right? They literally can’t get things from other states in our own country right now from one site to the next. So there’s an immediacy of the kind of the Klieg lights went on to this industry. I would say it’s kind of like, you know, that sometimes I think industries are awakened by, somebody likes, somebody clicks, a big set of Klieg lights and they come on in the room, lights up and you realize there’s clutter all over this room. Like this is like a mess, this can’t be this way. And they’re kind of like this kind of moment does that it kind of illustrate, you know, kind of highlights that moment. And I think we’re on that in this industry. People are going to look at this and say this is really inefficient. Like it takes some time, somebody to throw the lights on to realize that there might be a dead rat in that corner and a bunch of clutter in the other one. You know, I don’t know. But you know, in a related note, I saw recently Jamie Dimon at JP Morgan made a comment publicly, which was that, you know we’ve now managed in a period of weeks to figure out how to work remotely. When he was sort of saying, I’m not going to paraphrase and delegating trouble here is that he was basically saying if I left this to the IT people, this might’ve been years, you know, people would have told me this is months or years and in a matter of weeks. We figured out by the way, we can actually work remotely because we kind of have to. So the same thing happens in this industry. People have been exposed talking to one large general contractor last week, you know, they said, look, all of our sites are operating, we’re operating across 20 cities, we’re keeping all of these things alive. It’s taken everything we have. But we actually aren’t in our own offices, you know, and our only, because we’re a project oriented business anyway, so we actually are kind of trained for this to be in the field. Right. But we have all these back office and central support people. Our bigger challenge is what do we do with the 50 interns we hired for the summer and the hundred new hires that we’re planning to hire. How do you onboard people when there’s no place to go? You know, like you usually, you know, bringing them into the culture and educate them. So anyway, now you’re figuring out how to do that digitally, remotely, how you use technology to enable that. So I think one of the things that’s happening and more people are experiencing of all ages by the way, are having this moment. Like what is this Zoom thing? I mean everybody’s on Zoom now and people are realizing that and it’s on TV shows and you know, we’re doing music singalongs from Disney on national TV and people are on Zoom. I mean, so who would have you, you would never have created that on your own right. This moment drove that. And I think that experience is going to happen here. This is a monster set of Klieg lights put on an industry that’s been very inefficient. And I think that there’s sort of no turning back. Relationships will still be key. Maybe they’ll be initiated in person, but maintained more remotely or digitally. I mean all these things have a little bit of time to shake out, I think at the end of the day. But I think it’s a little bit like, you know, there’s no putting the genie back in the bottle here when it comes to some things, right? This is not, we’re not going backwards. It’s only a matter of how we’re going forward is sort of the way we see it, right? And as investors we’re trying to develop that frame for how do we now expand our point of view here or fine tune our point of view. You know, there’s this concept of industries that have advanced before, in some cases digitally have lend themselves more to sort of a form of vertical integration, right? Where you get some efficiencies by using a balance sheet to own everything and control everything. But you know, sort of like this is the Apple approach, right? I mean Apple delivers the full product, right? In many ways versus let’s say the world of Microsoft or general computer general PC computers as an example, right? So, which way kind of works more efficiently, you know, well beyond Apple having beautiful products and so forth. Obviously they deliver the full product at the end of the day and they do that by vertically integrating that. So we actually think we’ll see more integration across this industry. Kind of a value based integration. Maybe you don’t put everything together but you, there’s a convergence that will happen here across the space. And in that convergence we’re betting, I guess you can say will be enabled by technology provided by companies. And it won’t really be the legacy companies that drive this, right? Legacy companies don’t enable change because they exist off the current business model and the current customers, right? So our mission is to make sure we find the best people that can help advance this change. And that’s generally going to come from the startup world. Now they may ultimately be acquired a business by a larger company if they don’t achieve enough scale to become their own as a public company. But let those who have who are willing to take the risk have nothing at stake except the upside of driving change and supporting us are going to be startups. And so that’s why it’s exciting to be in the world that we’re in right now because you can sense and you can feel this is that transition from saying, you know, this is what people think of as a problem is really a really big opportunity in some ways. Right? And so that’s why I think it all comes together now. And it’s, you know, to the, to the victor and to the winners will become those who do things in the next three years. Not those who don’t. Right. They’ll naturally be, sometimes when I go into a room and speak, maybe a room of architects or construction company, whatever you can, and you’re talking about disruptive technology, you can almost see half the room turn on or half the room turn off. You know, half the people are thinking, I don’t want to hear this crazy guy. I don’t want to hear about these startups. You know, we’ve got to do what we’re doing now, we’re going to do more if you’re going to do it better. And then some people are thinking, yeah, that’s the way it might be done in the future. This is opening up my eyes to that. So I’m not saying wherever, sort of necessarily right or wrong, but you know, we’re on the side, of disruption and change to improve how things are done and the forces here were already developing to sort of create a perfect storm. Well this COVID thing makes it a perfect storm. Kind of brings the perfect storm analogy all the way around. Right? But the other thing I’ll just say back to your other point about construction companies and this industry has been labor challenged, right? In some ways, but reality of it is, is this industry applies more technology. We see more people getting interested in it. So if you’re a younger person and you’re looking for an industry where they’re applying virtual reality and augmented reality, and you know, we invest in a company built robotics, which is automating excavation equipment. If you want to be involved in technology, you want to be a software engineer. This is actually your space. So it’s very cool that way. But also then how do you integrate building materials and products into this mix? This is why I think, you know, knowing some people I highly respect in building materials who are out looking for startups. They’re not necessarily looking for the next building material startups because that’s their business. They’re looking for someone with a digital point of view on that because they’re trying to figure out how do we add more value to what we’re doing, not have a slightly better product, but how do we really rethink what we’re doing. And so I think this impact, this space is very exciting. You know, it sort of all comes together. And it’s going to be a very exciting next three or five to 10 years of the industry. So I think the other thing I’ll disclose in this is my general rambling thought here is that, you know, this is all meaningful stuff. Actually. That’s the great thing about all this. You know, if you’re at a point in your life where you can actually say, hey, what do I really want to do? Anything around this space is actually meaningful. We’re not making up stuff. You know, that that does meaningless things. And just as feeds into the consumerism or whatever, essentially, you know, the materials used, people live in the context of those materials. They sleep in the context of the materials and if there’s too much formaldehyde in their building, they’ll know that because of the materials in that building. And so, you know, those are the kinds of things we just invested in the company that actually identifies the 16 gases that happened in the building, you know, and actually sorts those out, including CO2. So why is everyone groggy later in the day in the building? Not just because it’s after lunch, it’s because they’re being taken down by all the CO2 of the building, cognitively, if you will. So people now realize that that’s not understood more. So people are going to invest in, how do we take care of that? Do we change our materials, do we put in systems that manage that dynamic. So there’s virtually nothing you can’t, you can do in this world we’re talking about that’s not meaningful now. It really is at that stage, which makes it a really exciting place to plot your career and trying to make a difference. So I think so I appreciate what you’re doing too because it’s along those same lines, right? That the companies that you’re working with to help them become more successful, right. Will become more successful to the extent that they actually help make things better.
Eric (39:18):
Right. And ironically, and here’s a question for you. There’s, as this whole transformative minute has happened where technology has become something that we’ve all been forced to, you know, I FaceTime with my mother every day now used to be a phone call, now a FaceTime. Why? Because it’s just as easy and we have a real experience and that way I know she’s actually seeing and speaking to a person and I love that to her son, you know, it’s great. I get to see my mom. It’s wonderful. But with that said, I’m going to go another direction. We’ve also recognized that manufacturing isn’t really done here as much as it might’ve used to be and when we need to build things like ventilators and we need to produce things, we’re incredibly dependent on other countries. We’re dependent on so much where hunter gatherer age to agricultural age, to industrial age to information age, right? That’s kind of the progressiveness of our world that we’re in. As we went from industrial to information, which we’ve only been in a short time and information one could argue is going from information that’s passive to generative too. And that’s really Jesse, I think where a lot of the companies you’re working with are playing, right? Where it goes from passive to instead of me telling you how to have the robot drill the hole, right? Why don’t we have the robot tell us the best places to drill the hole based on our objective, right. That’s one way. But the other question then is building the robot, right? Being someone who’s looking at the total picture and looking at how the pieces all make the whole and deconstructing the end game. Now based on this minute we just went through, are you and your company looking maybe at companies that are actually producing products and how they might work with technologies and services to drive a bigger, better picture?
Jesse (41:39):
It’s a really great question and it cuts at the heart of something that is sort of the, the fuel or the business models for venture capitalists, which is the sort of, depending on which side of 50% you’re on the margin world, how you feel about it, right? So, you know, Marc Andreessen who is a leading venture capitalist at Andreessen Horowitz. Marc was the creator originally of the first browser Netscape browser that started this whole madness 20 years ago in some ways and then went on to become a highly respected venture capitalists with a guy named Ben Horowitz. And that company, Andreessen Horowitz is mainly viewed as we know, one of the, if not the top, the top of the top five venture firms in the world. Marc wrote a thesis about a decade ago called software’s eating the world which has fueled a lot of presentations, but a lot of industry perspective on how, you know, technology and software were changing, how things were done. Well, interestingly enough, just two weeks ago, he penned a new one. It’s called it’s time to build. And one of the things he calls out in that is that, you know, we need to get on with building stuff actually. Building stuff is really important. Now, I’m really excited by that and people can go check out what he said. And that’s generated a lot of conversation by the way. But in our world, in terms of how we’re thinking about it a little bit is that, you know, in the world of software or purely digital solutions, if you will, product margins can be 85% or so. And now the reality of it is sales and marketing is always higher, but the reality, but you have a very high margin business. Well, the construction business is a relatively speaking, lower margin business in many ways, right? So I’m always impressed by the largest construction companies that are essentially doing, you know, billion dollar projects and their margins might be barely in double digits if that in some ways, I mean that’s like flying a triple seven, you know, a hundred feet above the ground above a major city, if you know what I mean. So I really have learned to respect the business of that they run because they’re working on those types of margins, obviously at a higher volume in terms of scale of revenue. But, the reality of it is where in between is the opportunity, right? So there’s many opportunities where physical product and production and digital come together. And it’s hard to make that work if those are 25% margins, but if those can become 50% margins. It’s more interesting. So there is this debate, by the way, in the venture capital community over, you know, where is the right margin spot where essentially when you deploy other people’s capital to buy equity in a startup, right? If you wanted to achieve a certain size and scale there’s a business model for that return, right? And so margins are very real in terms of enabling a proper return on investment, for the risk people take to go into the asset class that is venture capital, which is generally more risky than other asset classes, right? So capital all comes from somewhere and it has some calculation around it. So our world has obviously leaned mostly into the highest margin activities. Let’s sell the same thing to as many people as possible for as cheap as possible. But the world we’re discussing, it’s not quite that simple, right? The world we’re discussing is physical. And where digital and physical intersect, there is, I believe, ahead of us a generation of opportunities, those items come together. So we invest in a company out of Seattle with the venture capital firm, Vulcan Capital, the cofounder of Microsoft, Paul Allen, who since passed away rest in peace, a great innovator. He created a venture capital firm called Vulcan Capital. And you know, they were thinking through how to solve their affordability of housing issues in Seattle, particularly on the lower end, if you will, the transitional housing and homeless. And so they had an idea for creating a manufactured good for for affordable housing. Essentially they came up with this idea to create something called a block. That’s how the company came in a Blokable, but these smart blocks that are 163 square feet, you stack them together, you stack them, you know, and essentially they’re living blocks and you create your own space. So they had this brilliant idea. We joined them early as a co-investor in that idea. But the journey of the, how the company has grown is instructive in the sense that they realized over time that it wasn’t just a matter of making this thing. And by the way, a lot of building materials in that as you would guess including new ones and make them very efficient. It didn’t just need a tech stack to design that better. They actually needed a business model that would deliver it cost-effectively actually to actually become a home for someone. It turns out in that industry that the world of how we design, whether it’s housing or whether it’s residential or commercial, but especially in residential, the cost of the process is actually the most costly part of it. Not the materials, not even the construction activity. It’s all the other steps that are necessary to actually put a home in place, which is why affordable housing in big cities is so expensive because of the dynamics around the risk around the developer. That building process and the delays that can happen, the zoning to the regulation create a lot of costs in the process, far beyond the physical cost. So Blokable obviously figured out the digital piece of this with the technology stack and they figured out how to make this smart block, but then they had to figure out how do we crack this process thing locally, which is a high cost item that no one really thought about it. So over time they become essentially an affordable housing real estate developer with a full tech stack, right? You sort of combine all three of these things together, right? But now you can actually put affordable housing in its scale and create communities based on that. So I think we’ll see more opportunities like that. That’s kind of the convergence of digital and physical coming together. And those margins are in that and let’s say those margins are in that middle zone and that can still make it work for venture capital. Why they also compliment venture capital with other sources of capital, right? Essentially the capital working sources are not from venture capital. They’re from traditional financing arms, right? So I think you’ll see more of different kinds of capital coming together to support a new generation of companies which are a combination of digital and physical.
Eric (48:14):
My question is, is there M&A activity that’s planned? I always need to know before I build a brand, where are we going to take it? Right? Does the game plan, does the vision come from the person who’s spearheading at the venture capital level? Are they looking at all the pieces of the puzzle? Kind of how we were talking before. They looking at a bigger plan, deconstructing it by pieces, building it back to something that hadn’t been realized before. Like the Apple example where there’s controls and there’s opportunity that gets kind of one plus one equals three because it’s been put back in a nice different puzzle. Does that come from the venture capital in your mind or does it come from another place or is it just an organic, if it happens it happens.
Jesse (49:07):
I think it comes as a result of the strange brew. It gets stirred, right, and so at venture capital I think the best we could hope for is to say we might have it, we might own the stick that sort of stirs it together. You know the money stick. That kind of helps grease this change because there’s something else that happens. If you’re going to have one and one equal three is it actually someone comes out of that. There’s this term that was sort of born of the .com era that sounds almost like a medical term, but the reality of it is called disintermediation. And so somebody’s going to have to come out of that mix too. If you’re going to make it more efficient, right? There’s, it’s not all for free. Something comes out of that. And so I think this industry is beginning to go through that. There’s essentially a quiet but determined battle for the bottom line margin of this industry, right? No longer is it going to be solely in the hands of the people who make the concrete companies who, by the way have very high margin product, as an example, right? It’s others across it, so there’ll be more of a realization of value from enhanced building products, building systems. We can see, for example, the rise of influence of the MEP, the mechanical, electrical, plumbing, subcontractors, you know, have become much more important now than they were a decade ago. Much more valuable. There’s real margin in those systems and that work to put those design and put those in. So those are, there’s different frontiers and changing there. But there is pressure on different players in that process and so someone’s going to have to lose for others to gain. So this industry is going to go through various moments of disintermediation. And I think that’s a, that’s sort of a creative destruction dynamic that sort of every industry has to go through to move itself forward. But we’re kind of going through that now. I think this COVID moment puts some more fuel, within that fire, right? This instant immersion into use of technology by no choice has awakened all kinds of people to say, oh, maybe I should really rethink how we do this. You know, like, I don’t know. To me, I feel like I was traveling at the drop of a hat because it was so important to be in front of people. I guess I realize now that was probably peak travel we just left for a while and you know, I mean, so Jet Blue, and Delta can send me all the offers they want, but I already have a ton of points, in other words, I don’t need more if you know what I need, the world’s changing on us. And so that’s not, there’s no industry that’s going to escape that. But I think industries that were already going through this, right, there’s a potential for this to accelerate as a dynamic. And that’s where frankly our companies can help. And that’s where we can do well. But for us, at the end of the day, we helped successful companies, we win. We don’t try to over calculate the end result because you really can’t do it anyway. All you can really do is really back the winners with as much as you can help them be successful. At the end of the day they determine how the, how the chips fall here. But I think the world is pointing in the right direction. Anytime there’s a disturbance in the force, kind of a dynamic, someone is going to, you’re going to have some winners that come out of that. So maybe a different perspective on this moment.
Eric (52:26):
No, that’s, I appreciate that and I love the way in which you’re looking at opportunity in the moment too, which is, which is awesome. Thank you.
Jesse (52:36):
Really good to know you.
Conclusion (52:37):
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