CAPVEE Equity Crowdfunding Pick: DigiBuild
Blockchain-enabled construction tech can revolutionize the industry, but only if the industry gets out of its own way.
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Summary:
Company: DigiBuild
Sector: SaaS; Construction Tech
Platform: Republic
Minimum Investment: $150
Investment Structure: SAFE (capped at $7.5 million with 20% discount)
Funding Status: >$0.4 million ($1.0 million target)
CAPVEE Call: Buy (>25x Return Potential, Very High Risk)
DigiBuild is a SaaS business which develops construction management software solutions for the $10 trillion U.S. construction sector. It is the first U.S. company to utilize blockchain technology (also called distributed ledger technology, or DLT) to increase efficiency and lower risk for various construction processes. It currently has three subscription-based software solutions on the market, for procurement, project management and payment processing.
The company is backed by Shadow Ventures, a leading incubator. Its founder & CEO, Rob Salvador, appeared on the TV show Meet the Drapers, where he secured an investment from legendary VC investor Tim Draper.
DigiBuild has an early lead in the race to become the blockchain standard-bearer of the U.S. construction industry. The company is running the largest blockchain pilot project in the industry with ten national construction companies participating, and it is the only blockchain technology company admitted to a U.S. construction standards body to set industry best-practices.
The company’s software solutions align well with some of construction industry’s biggest challenges. If you are not familiar with the basics of blockchain technology, watch this video by Simply Explained.
The Problem DigiBuild Solves
Construction is a complex industry involving many stakeholders, such as developers, architects, engineers, general contractors, subcontractors and municipal agencies, as well as a myriad of building codes and regulations.
This inevitably leads to inefficiencies as each party uses a different system and process to input, store and retrieve information. The results are frequent miscommunication, unnecessary redundancies, delayed timelines, and a lot of frustrated people.
Blockchain fixes this! The blockchain is basically a system of recording information in a way that makes it immutable (SAT word!). The key advantage of using blockchain technology in the construction industry is that it creates a single source of truth that all parties must agree on. For example, a subcontractor may finish a project, which is independently verified, the rest of the subs and general contractors are notified, and payment is released to the subcontractor all in quick sequence.
The technology is likely to have a profound impact on the sector, as stakeholders often disagree on the root causes of project delays and budget-overruns. Just look at the dispute over the Purple Line light rail outside of Washington D.C. According to the Washington Post, the project derailed (yeah, we said it) when a judge ordered contractors to keep working after they threatened to walk off the job due to a disagreement about cost-overruns. Had a blockchain-enabled project management tool been used, the parties would not have been able to blame each other.
Just imagine - construction sites and back offices working harmoniously, with smiling faces and happy hearts...anyway.
The Team
Rob Salvador, Founder & CEO: Rob is the driving force behind DigiBuild. He is a serial entrepreneur who grew up in the construction industry, where he witnessed first-hand his dad’s struggle with the many intricacies of running a construction business. In 2017, Rob realized that blockchain technology could ameliorate (SAT word!) some of the biggest challenges in the construction industry.
Rob has managed more than $500 million-worth of hotel and apartment development projects over the last 20 years. He was also early to the crypto scene and has worked as a consultant for blockchain technology investors.
Robert holds a bachelor’s degree in Business Administration from Governors State University.
April Moss, VP Operations: April has over 20 years of strategy and sales & marketing experience with multi-national companies, including Procter & Gamble and Starbucks.
Ivan Franco, VP Engineering: Ivan is a full stack developer in the crypto space with more than 5 years of experience working for IOTA and Coinbase.
We believe that the team has a good mix of construction industry and blockchain-related experience. We like that the team has a strong sales focus, which will be a challenge here as the construction industry is notoriously resistant to change. However, it’s unclear how strong DigiBuild’s team is today and how management will attract the necessary talent going forward. A few key hires in operations and development would go a long way here.
What We Like
- DigiBuild is addressing a huge and growing market. The U.S. construction industry is worth $10 trillion, and the market is expected to grow at a 5% CAGR until 2025 due to low interest rates, limited existing inventory, and COVID-related government protection against forbearance and foreclosure on mortgage payments.
- The U.S. construction industry is ripe for innovation. The industry is fragmented and comprises many small and medium-sized family-owned businesses, which are typically slow to digitize systems and processes. As a result, construction is ranked as the second-lowest industry (only beating agriculture and hunting) in McKinsey’s Industry Digitalization Index.
- Blockchain technology presents a good fit with the challenges of the construction industry. According to an article by Harvard Business Review “using blockchain to automate the contractual processes and paperwork underpinning these complex projects could save money, free up valuable resources, and speed up project delivery”.
- DigiBuild has an early lead in the race to become the U.S. construction industry’s blockchain standard-bearer. The company is running the largest blockchain pilot project, and it is the only blockchain technology company admitted to set industry best-practices.
- After launching beta versions of its software solutions in 2020, the company has already generated some sales. According to Rob, DigiBuild is on track to hit its $1.3 million sales target in 2021.
- The team is backed by Shadow Ventures, a leading incubator program and by legendary VC investor Tim Draper. This suggests that the team and the business model have been properly vetted and is a notable vote of confidence.
What Makes Us Nervous
- The construction sector is inherently risk-averse and conservative, which prolongs the adoption of new technologies. The company will have a significant sales challenge, especially early on.
- The bet on DigiBuild is not for the faint of heart. Network effects , economies of scale and scope are dominant forces in SaaS businesses. As a result, the company will either emerge as an industry leader (a stepping stone to IPO or acquisition) or the company may find itself the target of an acqui-hire or, worse yet, shuttered. There isn’t much room in between given the significant capital investment required.
- While the company has a head start in the U.S., there are several large foreign competitors that might have a leg up on DigiBuild. For example, Probuild is a $1+ billion sales construction company in Australia. The company partnered with Brickschain in the U.S. to develop an enterprise blockchain technology solution tailored towards the construction and facilities management industries. As the addressable market is very large, it is also likely that established SaaS players will enter this space in the near future.
The Investment
The investment is structured as a SAFE at a valuation cap of $7.5 million with a 20% discount. For those new to private market investing, a SAFE gives you the right to buy common stock in the company at the next financing round, in this case at a 20% discount. Unlike a convertible note, a SAFE is not a loan. As such, it does not accrue interest, have a maturity date, or have a legal obligation to be paid back. You should therefore only invest if you believe that the company can and will raise financing in the future, as there is no time-limit which forces the company to convert the future equity into common stock.
DigiBuild’s $7.5 million valuation cap with a 20% discount is the number to focus on. You are essentially betting that the company will be worth more than $6 million ($7.5 million less 20% discount) in the future.
We arrive at a max valuation of $8.4 million, so the company is reasonably valued at this financing round. Assuming that DigiBuild reaches $59 million in sales (-3% CAGR vs. management estimates; equates to a 20% market share of SAM) and an EBITDA margin of 27% (-10%-points vs. SaaS industry average), a return potential of >25x is achievable.
Please refer to our valuation model for a more in-depth explanation.
The CAPVEE Call
DigiBuild has the potential to become an early leader in construction blockchain technology. We believe that this technology is well-suited to address the challenges of the construction industry, even if it's at an early stage. The company’s ability to shore up support in the sector and early sales traction is promising; however, there remains plenty of hurdles to overcome before we see proof of product-market fit.
We view DigiBuild as a buy with >25x Return Potential, but we are concerned that established SaaS players will enter this space and we are not sure that DigiBuild will be able to scale its team quickly enough (and with the right people) to compete. We therefore also view this as a very high risk investment, which means that there is a significant risk that this investment could be worth zero if the strategy doesn’t pan out.
Further Reading:
Useful articles:
Harvard Business Review (July 2019): How Blockchain Will Change Construction
Construction Dive (September 2020): Blockchain's benefits for construction
Disclosure: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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