Andreas Munk-Holm, host of the popular and informed EU.VC podcast, sat us down for a deep and long chat about Foundamental in April 2024.

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Foundamental: In love with the real-world

Since we founded Foundamental, we've been drawn to the tangible, the real. We knew we wanted to focus on a sector that was as real as it gets: construction and its adjacent intersecting markets that drives it productivity, in particular, 3D/design, supply chains, logistics, blue-collar workforce, robotics and renovation. No fluff, just honest-to-goodness work and real outcomes. We're in love with the real world, and our sectors are about as real as it gets.

Why? Because the real-world is a sector that literally builds the world around us. It's the foundation of modern society, the backbone of our cities and infrastructure. And yet, despite its immense importance, it's been largely overlooked by the tech industry. While other sectors like finance, mobility, and consumer tech have been transformed by digital innovation, the real-world has been at the back-end of venture capital allocation. That spells opportunity to us.

We believe that the real-world is on the cusp of a digital revolution. And we want to be at the forefront of that revolution, backing the entrepreneurs and technologies that will drag this industry kicking and screaming into the 21st century. It won't be obvious to many, but that's PRECISELY why we're excited about it.

AECS: Navigating the generational quirks of a unique sector

But let's be real. Construction and the adjacent markets - the real-world - are not your typical tech sector. It's got its own quirks and idiosyncrasies that you need to understand if you want to succeed. That's why we don't just talk about "construction tech". We talk about AECS - Architecture, Engineering, Construction, and Supply Chain.

These are the four pillars that make up the construction ecosystem. And each one has its own unique challenges and opportunities. In architecture, it's all about design and aesthetics. How do you create buildings that are both functional and beautiful? In engineering, it's about precision and functionality. How do you ensure that a structure is safe, stable, and efficient? In construction, it's about project management and execution. How do you coordinate the thousands of moving parts that go into a construction project, from labor to materials to equipment? And in supply chain, it's about logistics and materials. How do you get the right stuff to the right place at the right time, all while minimizing waste and maximizing efficiency?

To navigate this complex landscape, you need deep domain expertise. You need to understand the lingo, the stakeholders, the business models. You can't just waltz in with a generic SaaS playbook and expect to win. You need to get your hands dirty, spend time on job sites, talk to contractors and engineers and architects. You need to learn the ins and outs of this industry, the pain points and the opportunities.

That's what we've done at Foundamental. We've spent years immersing ourselves in the world of AECS, building relationships with industry leaders, and developing a deep understanding of how this sector works. We know the quirks, we know the challenges, and we know where the opportunities lie.

The AECS opportunity: Data infrastructure before AI disruption

So what are those opportunities? We believe that the biggest one is around data infrastructure before deeply embedded AI.

Construction, for example, is a sector that generates a massive amount of data. Every project, every job site, every piece of equipment is constantly generating data points. But that data is often siloed, unstructured, and hard to access. It's trapped in legacy systems, paper documents, and proprietary formats. As a result, the industry is sitting on a goldmine of untapped insights and optimization potential.

That's where data infrastructure comes in. We're looking for companies that can help connect the dots, break down the silos, and unlock the value of that data. Companies that can create common data standards, build API layers, and integrate disparate systems. Companies that can turn the chaos of construction data into clean, structured, actionable insights.

Data infrastructure is that foundation. It builds the tissue that connects workflows end to end. On top of which, we believe, artificial intelligence can then unfold its end to end potential. AI has thenthe potential to transform every aspect of the construction process, from design to project management to supply chain optimization. Imagine AI-powered design tools that can automatically generate optimized building plans based on a set of parameters. Imagine AI-driven project management platforms that can predict and prevent delays and cost overruns. Imagine intelligent supply chain systems that can dynamically adjust to changing conditions on the ground.

As more and more construction data comes online, and as AI technologies continue to advance, we expect to see an explosion of innovation in this space. And we want to be there to fuel that innovation.

Capturing S-Curves: A true global footprint

Another thing that sets us apart is our true global focus. Our team comes from each continent, is embedded in each continent, focuses on each continent, and thus has repetition of empathy in each continent.

That's because we believe that the AECS opportunity is not limited to any one geography. That's why we've invested in companies across North America, Europe, Asia-Pacific - in a tech market that has raked in over 30 billion in cumulative VC funding, more than 80% of which in the last five years.

Each region has its own unique characteristics. There will be continental generational winners before global winners, and eventually global category dominance can emerge from there. Construction in the US is different from construction in Europe, which is different from construction in Japan. Regulations vary, business practices vary, cultural norms vary. But at the end of the day, the fundamental challenges and opportunities are the same. The need for better data, better collaboration, better automation is universal.

Moreover, we believe that the most successful AECS companies will be those that can scale globally. Construction is an increasingly globalized industry, with large projects often spanning multiple countries and continents. To really move the needle, you need solutions that can work across borders and cultures.

We've taken our global approach from day one. We have team members on the ground in key markets around the world, building local relationships and expertise. We've backed companies that are targeting global markets from the start, with the ambition and the capabilities to scale internationally.

Zooming out, we see a clear inflection point - an S-Curve of growth and maturation happening in the AECS space as a whole. And the exciting thing from an allocator perspective is that each continent is operating on its own unique S-curve, driving resilience in the portfolio of an investor that does not have to rely on DPI from one dominant market.

The industry is ripe for disruption, with old ways of doing things reaching their limits and new technologies emerging to take their place. But this disruption won't happen overnight. It will play out over years and decades, as innovation diffuses through the complex web of stakeholders and processes that make up the construction ecosystem.

Our job, as early stage investors, is to identify and back the companies that will catalyze and capture this S-Curve. The startups that are planting the seeds for the future of construction, even if the impact may not be felt for years to come. It takes vision, conviction, and patience. But that's what we signed up for.

Convictions: Investing in hidden opportunities before they become obvious

Of course, investing early and globally also requires a certain contrarian streak. When we first started investing in AECS in January 2019, it was still a niche and overlooked category. People looked at us funny when we said we were construction tech investors. Shub famously said that in Asia in 2019, his VC friends had never heard of the category. Many wondered if the sector was even big enough to support a dedicated fund.

But that's exactly the kind of hidden opportunity we like - sectors that are not yet overrun with tourist investors chasing the latest hype cycle. We'd rather uncover the non-obvious insights through first-principles thinking and on-the-ground research.

So when we find those insights - whether it's the importance of maximizing human touchpoints in B2B construction marketplaces, or the power of an asset-light business model - we have the conviction to bet big and early, even when others remain skeptical. We know that the best opportunities are often hiding in plain sight, overlooked by the crowds chasing shiny objects.

This conviction comes from a combination of deep sector expertise and a willingness to challenge conventional wisdom. We're not afraid to go against the grain, to zig where others zag. In fact, we relish it. Some of our best investments have come from backing founders who were told their ideas would never work, that construction was too old-fashioned, too set in its ways to change.

We know better. We know that change is not only possible, but inevitable. And we know that the biggest rewards go to those who see it coming before everyone else.

Insights: Repetition in the AECS context uncovers deep learning

That conviction doesn't come overnight though. It's honed through countless hours, weeks, and years of immersing ourselves in the nuances of this sector. Every conversation with an industry expert, every site visit to a construction project, every deep dive into a specific technology or business model - they all add up to form our unique perspective and edge as specialized investors.

We've looked at sub-segments like SMB contractor software and marketplaces dozens of times. Each pass uncovers new insights that only come from repetition within a specific domain. We'll notice patterns around customer acquisition, retention, monetization. We'll spot recurring pain points and unmet needs. We'll identify the key players, the competitive dynamics, the regulatory hurdles.

This deep, focused learning can't be replicated by generalist investors who only make one construction tech investment every few years. It requires a dedicated team, a singular focus, and a willingness to go deep on the details. It's not always glamorous work, but it's the foundation of our investment approach.

And it's not just about accumulating knowledge. It's about connecting the dots, synthesizing insights, and applying them in real-time to our investment decisions. Every new data point we collect helps us refine our mental models, sharpen our intuition, and make better picks.

Strategy for liquidity: Discipline for outsized returns

But generating insights is not enough. To deliver outsized returns to our LPs, we also need the right fund strategy and structure.

One key element is fund size discipline. We've purposely kept our funds small and focused, capping out around the $80-90M range recently, so that we can concentrate our capital and attention on a curated set of high-conviction bets. We're not trying to build an index of the AECS market. We're trying to back the outliers, the category definers, the companies that will reshape this industry before they become obvious to generic investors. That's hard to do if you're managing a multi-billion dollar fund that needs to put hundreds of millions to work in every deal.

Instead, we'd rather make fewer, bigger bets on the companies we really believe in. We'd rather own 20-25% of a company than 5-10%. We'd rather be the first call for our founders, the most valuable partner in the boardroom. That's how we believe we can maximize our impact, both on our portfolio companies and on our returns.

Another key aspect of our strategy is our portfolio approach. We take a hands-on "surrogate founder" approach, often taking board seats and always engaging deeply with our portfolio companies. We're not here to meddle, but to be the most helpful and trusted partner to support the journey.

That means rolling up our sleeves and getting involved in the nitty gritty. Helping with hiring, business development, strategic planning. Making key introductions, sharing best practices from across our portfolio. Being a sounding board and a sparring partner for our founders as they navigate the ups and downs of startup life.

It also means being willing to follow on and double down on our winners. We're not spraying and praying, then passively waiting for exit events. We're actively looking for opportunities to preempt or lead follow-on rounds in our breakout companies, even at the later stages.

This is where our convictions really get tested. It's easy to write the first check when the valuation is low and the company is just getting started. It's much harder to step up to the plate and write a big follow-on check when the valuation has risen and new investors are circling. But that's precisely when we believe the real money gets made.

Our LPs are paying us to have an edge on identifying and backing outliers early. If we've done our job right, doubling down should be a no-brainer with massive upside. Of course, not every bet will work out. But we believe a concentrated portfolio of high-conviction, well-supported companies is the path to outsized returns.

Focus, relationships, and a passion for AECS

What about the humans behind Foundamental? Well, if there are a few things you should know about us, it's that we're sticklers for focus, we believe in the power of relationships, and we have an unabashed passion for all things AECS.

On the focus front - we're militant about protecting our time and cognitive bandwidth for the things that matter most. That means very few meetings, lots of time for reading and deep thinking, and clear prioritization of what moves the needle. We say no to a lot of things, so we can say yes to the few that really count.

This focus starts with our founding team. When we started Foundamental, we made an explicit decision not to build a large, multi-sector firm. We knew that would dilute our focus and our edge. Instead, we decided to go deep on one sector, and build the best team in the world for AECS investing. That meant bringing together a mix of backgrounds and perspectives - from construction industry veterans to seasoned tech investors to entrepreneurs and operators. But all united by a common passion and mission.

On the relationship front - we believe that the best outcomes in business and in life come from genuine, long-term, mutually beneficial partnerships. We try to be the first call for our founders whenever they need help, the most impactful board members we can be, and true friends to our fellow investors and LPs in the ecosystem. It's no coincidence that a huge portion of our deal flow comes from warm referrals, often from people we've known for years.

Building those relationships takes time and effort. It means showing up, being present, listening more than talking. It means always looking for ways to give before you get, to add value before you extract it. But it's worth it. Because in the end, this is a people business. And the strength of your network is the strength of your firm.

Finally, on the passion front - what can we say, we're nerds for this stuff. When we're not working, we're probably still reading about modular construction startups, or geeking out on the latest 3D printing technology. To us, AECS is not just a job or an asset class, it's a calling. It's a chance to make a real dent in one of the biggest, most important industries on the planet. And we feel incredibly fortunate to be able to focus on it as a profession.

Thanks to Andreas and his wonderful platform over at EU.VC, we were able to dive deep and share about several of these core conviction that define Foundamental today. Hopefully the episode gives you a flavor of who we are, what we believe in, and why we come to work everyday. If any of this resonates, give us a shout. We're always happy to jam on all things AECS. Just don't expect any tourist investor behavior or hustling us along a FOMO fundraise. We like to keep it real around here. Because that's the only way to build something truly foundational.