This week:
(02:16) Smart burn strategies for construction-tech startups
(14:10) AEC sector's unique advantage for early startup profitability
(19:15) Looking beyond P&L in construction-tech investment decisions
(23:25) Capital efficiency and treating burn as strategic investment
(29:02) Achieving rapid growth while maintaining profitability in AEC startups
Burn is NOT a first-principle: The AEC sector favors early net profitability
One of the fascinating things about the architecture, engineering, construction and supply chains (AECS) sector is how it favors becoming net profitable relatively early. This often comes as a surprise to investors and founders new to our space.
As Patric puts it: "They come into the sector oftentimes with a prejudice, it's so old school, and it's so inefficient, etc. Well, your inefficiency is my margin."
Why is this the case? It's because you can build outcome-as-a-service type businesses and tap into buy-ready markets with established processes that have relatively high margins. Selling outcomes wrapped in services enabled by technology into buy-ready P&L line items of construction projects, for example, works exceptionally well with high margins. We have seen a bunch of companies becoming net profitable fast because of this reason.
This characteristic of the AECS sector creates opportunities for founders to build profitable businesses while still achieving strong growth. It's a different paradigm compared to some other tech sectors where burning cash for years is seen as the norm.
Maximize burn AFTER product-market fit
A key realization is that companies - especially in construction, AE and supply chains - should maximize their burn rate after achieving product-market fit, not before. This goes against the common practice of many startups that raise large sums early and start burning heavily right out of the gates.
Shub highlights this point: "The alignment of burn with product market fit isn't spoken of enough. Where you maximize burn when you have found product market fit, which for some reason is completely backwards with most conversations I have where the belief is you immediately off the get-go need to keep burning a ton of money. And then magically the expectation is that product market fit, the burn will go down." We believe this is a common mistake disguised as a common wisdom.
This approach of burning heavily pre-product-market fit is risky for several reasons:
- It puts immense pressure on the company to deliver outsized results quickly to justify the burn.
- It reduces runway and flexibility if the initial product/strategy doesn't work out.
- It can lead to inefficient spending as there's less clarity on what drives results.
Instead, the true wisdom for founders in AEC and Supply Chains is to keep burn low while searching for product-market fit. Once you've found it, that's when it makes sense to step on the gas and increase burn to rapidly scale what's working. If this sounds trivial to you: Great, that means your mind has not been poisoned by bad generic VC "wisdoms" (or you learnt from it) and your intrinsic are to build an actual business, not a narrative.
Do not look at burn monolithically and in your P&L only
As companies grow, they often add new products, services, or expand into new geographies. Another common mistake - we would even say a rookie mistake - is to look at burn only as a singular bottom line item in the P&L. This can disguise important insights from you, and as a result lead to inefficient resource allocation decisions.
Patric advises: "You should look at the burn of your P&L, not only in that monolithic way, but actually in a division or product or service or geography kind of way. And what you will find is that ideally your core business should be profitable."
Additionally, consider your cash flows and working capital from your CF and BS as a separate type of burn. Yes, working capital (minus bad debt or value loss on inventory) does come back, so it's recoverable burn - but your business goes out of business on lack of cash, not lack of profit.
Which means, the best founders in AECS break down burn across P&L and CF/BS by product line, geography, or business unit. This allows you to allocate resources where they belong, and cut resources where they hurt your business:
- Identify which parts of the business are profitable vs. still requiring investment
- Make more informed decisions about resource allocation
- Ensure new initiatives aren't masking declining performance in core business
What it would look like, for example in marketplace businesses, is that your management information system (MIS) splits out a P&L, CF, and BS for your core business in your core geography (eg. your first category), and separately for businesses that you are currently testing or geographies you are expanding into. Again, this requires no exceptional intelligence, just hard work and discipline. The result of which is that you can tell whether your core business is profitable without cross subsidization, and which of your experiments and new growth initiatives are deserving of more or less burn. Which brings us to the topic of ROI on burn.
Treat burn as an investment that needs high ROI
A critical mindset shift for the venture community is to view burn not as an expense, but as an investment that needs to generate high returns. This means constantly evaluating whether your burn is creating valuable assets for the business.
Patric emphasizes this point: "Whatever you do to your point, burn it because you earn an ROI on it." This ROI can come in various forms, but most often either in building leverageable assets (e.g. technology, brand, IP) or in reinforcing distribution channels.
By viewing burn through this ROI lens, it becomes easier for founders to make tough decisions about where to allocate capital and where to cut out burn. You're not just spending money, you're investing it with the expectation of returns.
An illustrative example Patric gives is comparing two enterprise SaaS companies serving general contractors, and both burnt $10 million in their entire lifetime:
Company A: $400,000 ARR per FTE
Company B: $70,000 ARR per FTE
In this case, Company A's burn might be entirely justified because they might have used the $10M to build hyper-efficient distribution that they can now leverage and their burn going forward might quite likely be entirely on product investments. For Company B, on the other hand, this serves as a strong signal that it is probably still burning too much on inefficient distribution AND unfocused product development.
We are not saying it is this simple, our message is exactly the opposite. The key is to look at burn in context with other metrics that indicate efficiency and return on investment.
Marketplaces and supply chains: There is an optimal burn strategy
For marketplace and supply chain solution startups, finding the right burn strategy is extra crucial, as often times they carry working capital and trade working capital for margin. These business models also require upfront investment to reach critical mass, but they tend to deliver outcomes more instantly to construction or logistics customers, and therefore burning too much too early can be dangerous and a very early signal for a lack of achievable product-market fit.
Shub suggests by our experience that for pre-launch companies in these spaces, a burn of around $1 million for the first year or two is often sufficient. However, he's seen cases where founders want to raise and burn $4-6 million right out of the gate.
This creates several potential issues:
- It sets a very high bar for what needs to be achieved to justify the next round.
- It can lead to inefficient spending and a "comfort zone" mentality.
- It reduces flexibility if the initial strategy doesn't work out.
Instead, a more measured approach allows for:
- Iterating and finding product-market fit with less pressure
- Preserving equity and optionality for future rounds
- Forcing creativity and capital efficiency
Once the core model is proven, that's when it makes sense to raise larger amounts and accelerate burn to capture market share.
Growth and profitability can co-exist - it's not either/or
Finally, one of the most important takeaways from our discussion is that growth and profitability are not mutually exclusive, even for venture-backed startups. Shub highlights this point:
"We actually have eight or nine portfolio companies in Foundamental, which already are or recently have been net profitable, which for context is about 12-15% of the number of companies we have invested in already. And obviously our ambition is many more companies become more profitable faster."
What's particularly noteworthy is that these profitable companies are often among their best performers: "In fact, there's actually a high correlation that our best companies and fastest growing companies are or have been net profitable." Read this statement again, because it is really counter-intuitive to what the generic VC industry is touting.
It challenges the common narrative in tech that you have to choose between growth and profitability. In reality, being profitable (or at least having a clear path to profitability) can provide significant advantages, and AECS rewards this especially quickly:
- More control over your destiny and less reliance on external capital
- Ability to use debt financing to scale, preserving equity
- Stronger negotiating position for future funding rounds
- Flexibility to weather market downturns or competitive pressures
The key is finding creative, capital-efficient ways to drive growth. This might involve focusing on high-ROI marketing channels, building viral/network effects into the product, leveraging partnerships for distribution, or using outcome-based pricing models,
By combining strong unit economics with scalable growth drivers, it's possible to build businesses that are both fast-growing and profitable.
We know that many founders in AE, construction and supply chains fear getting negative feedback from generic VC's who equate burn with growth. Ignore that wrong sentiment, and build a business in our sectors. We love founders who prove net profitability and differentiate their resource allocation between a profitable core business and treating burn as high-ROI investments in experiments and growth initiatives. Reach out if that's you !
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Keywords: #ConstructionTech #VentureCapital #Startups #ProductMarketFit #CapitalEfficiency #Profitability #Growth #Entrepreneurship #practicalnerds #aec #founders #startup