Watch Episode 4: Convictions
Proudly produced alongside Bricks and Bytes.
Singularities
Chasing unique market opportunities others overlook.
Foundamental looks for vertical singularities - these quirky unique idiosyncracies in the architecture, engineering, construction and supply chain (AECS) markets that are easy to overlook and uncoverable with lots of routine and repetition in our sectors. These aren't obvious plays, but hidden gems that can become category creators.
We've developed a conviction that the next 100+ generational companies will be built in niche verticals like AECS and its sub-sectors. Our job is to find the quirks and nuances in these markets that allow founders to build companies with unique ingredients.
Take Infra.Market, one of our earliest investments. We spotted a vertical singularity in India's building materials space. There was a long tail of underutilized, under-branded building materials plants that had no access to the booming infrastructure projects market. Infra.Market built a model to acquire capacity from these plants without acquiring the assets themselves. This controversial move allowed them to match underutilized supply with massive infrastructure demand.
As our GP Patric Hellermann explains:
"The vertical singularity in this case was that you had a manufacturing base of specific building materials categories - aggregates, ready mix concrete - where you would have a very long tail of plants that were under-utilized and under-branded. They needed more revenue and had more capacity to generate revenue, but they had no seat at the table with infrastructure projects that were inflecting in India."
This insight wasn't obvious to most investors. It required deep domain knowledge to spot. But it allowed Infra.Market to build a defensible moat and become a category creator.
The key is looking for opportunities that violate conventional wisdom. As Patric notes: "Generational companies do not repeat. It's the job of the investor to find companies that become in their own right uniquely a legendary firm."
We're not particularly interested in category clones or following social signal trends. We want to find the weird occurrences and market quirks that can become the foundation for a generational company. It's a contrarian approach, but one that's led to some of our biggest successes.
Knowledge
Leveraging hard-earned domain expertise to spot opportunities.
At Foundamental, we believe that having deep, nuanced knowledge of our focus sectors is critical to identifying these vertical singularities that others miss and before they become obvious to the crowd. For that, we cannot just rely on surface-level metrics or popular trends. Instead, we must leverage a hard-earned domain expertise from repetition, repetition, repetition across our global verticals to spot these 'hidden in spite of obvious' (what we call them) opportunities.
An example is our investment in Enter, a company revolutionizing energy audits for building renovations in Germany and across Europe. When we first looked at Enter in early 2022, we recognized that they were going after a critical but often overlooked type of data.
As Patric explains:
"There's three types of data for designing energy renovation measures for buildings. The first is pure energy consumption data, which everyone has but has little value. The second is load curve data from technical equipment, which is better but still limited. The third type, which nobody had, is data about the physical substance of the building - what's in the walls, window specifications, insulation details. You can't Google this or assess it remotely with existing technology."
Enter developed technology to capture this elusive third type of data about a building's physical characteristics. Many investors passed because it required on-site surveying and didn't fit the typical SaaS model. But our background in both construction and energy allowed us to see the immense value.
"We had that nuanced knowledge because we cover the renovation space with Foundamental, and we have energy backgrounds," says Patric. "The intersection of having those two backgrounds made us move on that company very swiftly."
This combination of sector expertise allowed us to spot a massive opportunity that others missed. We understood that detailed data on a building's physical makeup was the key to optimizing energy renovations at scale.
Our approach isn't about chasing popular trends or relying solely on metrics like ARR growth. It's about developing deep domain knowledge that allows us to see value where others don't. As Shubhankar notes: "You had to have nuanced knowledge in order to know that the physical substance is actually going to allow you to build a moat and to design the merit order of the renovation measures."
This focus on earned knowledge and sector expertise is core to how we operate. We're not looking to be generalists or to spread ourselves thin across many industries. We go deep in our focus areas so we can identify those hidden gems that have the potential to become category-defining companies.
Truths
Fostering transparency and embracing discomfort with founders.
Here at Foundamental, we believe that truth and transparency are essential for building strong partnerships with founders. We've made it a core principle to embrace difficult conversations and share honest feedback, even when it's uncomfortable. This approach sets us apart from many traditional VC firms.
Truth + Transparency = Trust
Shubhankar explains our philosophy: "Truth plus transparency breeds trust. The best founder relationships we have, when they hear someone like us say that, they say 'exactly'. It's the immature founders who feel anxious, who feel like 'Oh my god, this discussion is too intense.'"
We've seen how many VCs fall into the trap of always pushing positivity and avoiding tough conversations. There's pressure, especially for younger investors, to always report good news up the chain. But we believe this does a disservice to founders and ultimately leads to worse outcomes.
"Unfortunately, that is founder life," Patric notes. "Most founders rationally know what they're getting themselves into before they found. They know that they're signing up for that journey, but living it is a different ordeal."
Our approach is to be a true partner through the ups and downs. We don't shy away from difficult discussions or sugar-coat feedback. Instead, we aim to be a sounding board and source of honest insight for founders as they navigate critical decisions.
This extends to how we engage during fundraising processes as well. While many VCs constantly ping founders for updates to report internally, we take a different tack. As Patric describes: "We don't care how the fundraise works out or not while the process is ongoing. We release all of our help into it. We will make our own evaluation whether to preempt the round, but we don't look left and right at what conclusions other people come to."
We've found that the most successful founders appreciate and seek out this level of candor. They want investors who will engage substantively on the challenges they're facing, not just cheerlead from the sidelines.
"The mature founders and luckily I meet mostly mature founders, they absolutely love it," says Patric. "They send feedback like 'Exactly that. Because usually when you talk to a VC investor, what do you get? You're getting generic emails, short paragraphs. Sorry, see you next time, next round.' Why? Because it's seen as better for the VC not to close doors. We believe that's actually NOT better for us, and definitely not for the founders. It's not how we operate."
By fostering an environment of radical candor and embracing discomfort, we aim to build deeper, more productive relationships with founders. It's not always easy, but we believe it's essential for achieving exceptional outcomes.
Substance
Valuing fundamental business quality over growth.
We've developed a conviction that substance and quality matter far more than growth alone when it comes to building enduring, valuable companies. This goes against the prevailing wisdom in much of the VC world, which often prioritizes growth above all else.
Patric shares a key realization from his journey as an investor:
"When I started as an investor, the common wisdom that other investors would tell me is 'Patric, the most important currency in VC is growth.' That was a sentence that was said to me multiple times. And I never believed it to be an axiom. Something felt off about that."
We've come to see the flaws in this mentality. Chasing growth without underlying substance often leads to unsustainable businesses that ultimately destroy value. As Patric explains: "Actually, the most important currency in VC that I realized is just substance. If you're building substance, it doesn't matter as much if you're building it over one year, four years, or ten years."
This focus on substance manifests in how we evaluate potential investments. We look beyond vanity metrics and dig deep into the fundamental economics and value creation of a business. For example, Shubhankar notes how in 2022, many VCs became overly focused on contribution margins relative to working capital for marketplace businesses. But this missed the bigger picture for some of our portfolio companies that were generating strong returns on their working capital.
"We were like, you're not getting it. You have to cram as much working capital into this business as possible because it's a cash flow engine and a cash generation engine," Shubhankar explains. "But because the parrots were talking to each other, they were like 'No no no, I don't back working capital businesses right now.'"
Our willingness to think independently and focus on underlying business quality rather than following the herd has been key to our success. We're not afraid to back companies that may not fit the typical VC pattern recognition but have strong fundamentals.
This extends to how we work with founders post-investment as well. We push for robust financial reporting and accountability from day one, even for early-stage startups. As Shubhankar notes: "If you're a founder, you better get used to reporting a lot because I think in what I've seen, it's an early and leading indicator of success."
This mindset has allowed us to partner with a sizeable number of ventures in AECS that early in their journeys unlocked net profitability. Infra.Market chief among them, but only one of many in our portfolio. When we share these facts with other VC investors, and moreso highly sophisticated LPs, it does often take time to settle in as a realization that this possible - and desirable ! - because they have been bred in other ways.
By prioritizing substance over growth alone, we aim to build a portfolio of companies with staying power - businesses that can weather storms and compound value over the long term. It's a contrarian approach in today's VC landscape, but one we believe will drive superior returns.
Autonomy
Maintaining independent thinking to drive contrarian insights. Avoiding social signals.
It is very easy in venture to fall prey to social signals. Mindblowingly so.
At Foundamental, we've learned that maintaining intellectual autonomy is crucial for identifying truly exceptional investment opportunities. This means being willing to form independent opinions, even when they go against the prevailing wisdom in the VC community. That is the key to finding 'hidden in spite of obvious' opportunities.
Shubhankar shares a key insight from analyzing his past investments:
"I have done an analysis for myself two or so years ago, just to do an inventory of all the misses I regret and all the hits I'm proud of. What I realized is all the biggest misses, there was like a very consistent pattern where I was initially excited but then someone talked me out of it."
This highlights the danger of relying too heavily on the opinions of other investors or following the herd. While networking and information sharing are important, we've found that there's a point of diminishing returns - and even negative returns - when it comes to soliciting opinions on deals.
Patric explains how he's shifted his approach over time: "When you start in VC, even angel investing which is where I came from, one of the things you learn very early in order to make a name and in order to find deal flow is networking and talking to as many investors as you can. I unlearned that."
Instead, we now focus much more of our time on deep, independent research and spending time directly with founders, customers, and other stakeholders in a business. This allows us to form unique, convicted views that aren't swayed by groupthink.
"Today when I compare how I spend my time to a lot of the friends that I have in other firms, I probably spend three if not four times less on speaking to other investors about deals than they do," Patric notes. "That's a muscle that you need to unlearn."
This commitment to independent thinking extends to how we structure our firm as well. Unlike many VCs that separate dealmaking from portfolio support, our founding partners stay deeply involved across the entire investment lifecycle. This ensures that the most experienced team members, with the deepest domain expertise, are driving decisions.
We've also kept our team intentionally small and aligned through shared equity. This allows for seamless information flow and decision-making, without the misaligned incentives that can creep in at larger firms.
Ultimately, we believe this focus on autonomy and independent thinking is essential for identifying those rare, non-consensus opportunities that can deliver outsized returns. As Shubhankar concludes: "You have to allow yourself autonomy to form your own opinions... If you learn to respect and place yourself and your own team and your setup at a higher level than the wider market, you'll generally do well."
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Ep. 4: Convictions
tl;dr
Singularities: Foundamental chases unique market opportunities in niche verticals that most investors overlook. These hidden gems can become category creators and generational companies. Our deep domain expertise allows us to spot these non-obvious plays.
Knowledge: We leverage hard-earned sector expertise to identify promising investments others miss. Our nuanced understanding of industries like construction and energy renovation lets us see value where others don't. This focus on earned knowledge is core to our strategy.
Truths: We foster radical transparency with founders, embracing difficult conversations other VCs avoid. By being willing to share honest feedback and engage substantively on challenges, we build deeper, more productive founder relationships. This candor sets us apart from many traditional VCs.
Substance: We prioritize fundamental business quality over growth at all costs. While many VCs chase vanity metrics, we dig deep into unit economics and sustainable value creation. This contrarian approach helps us build a portfolio of companies with true staying power.
Autonomy: Maintaining independent thinking is crucial for identifying exceptional opportunities. We limit time spent networking with other VCs to avoid groupthink. Instead, we focus on deep, independent research to form unique, convicted views that drive contrarian insights.
Crafted Proudly In Partnership With Bricks & Bytes
This video and associated content was produced alongside Bricks and Bytes. Please support the amazing work they are doing for the AEC founder community by visiting their full Super Series page here.