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KP Unpacked
KP Unpacked explores the biggest ideas in AEC, AI, and innovation, unpacking the trends, technology, discussions, and strategies shaping the built environment and beyond.
KP Unpacked
If AI Makes Everyone Efficient, Why Are Buildings Still Expensive?
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What happens when every silo optimizes itself but nobody optimizes the whole system?
In this episode of KP Unpacked, KP Reddy and Nick unpack the central paradox of construction AI: if 500 AI estimating tools, AI scheduling tools, and AI design tools are all saving contractors 20-30% in their respective silos, why aren't buildings getting cheaper? The answer: all the waste lives in the interoperability, not the individual workflows. Walmart didn't get cheap by optimizing their suppliers in isolation. They engineered the entire supply chain to comply with their rules. Until someone does that in construction, everyone just gets more profitable in their own lane.
The conversation covers DroneDeploy's $800M acquisition by Procore (good outcome for the industry, bad news for customers who loved the product), why reality capture might actually kill BIM by creating a historical archive of actual buildings that AI can train on to design new ones, and why the SaaS pricing model is quietly breaking apart at the feature level. KP is currently negotiating enterprise software, named the AI-native competitor, and the incumbent offered practically free. The switching costs that kept SaaS sticky for a decade are gone. AI agents migrate your data now. No Deloitte implementation required.
Key questions answered:
- If AI makes everyone more efficient, why aren't buildings getting cheaper?
- Why does all the waste in construction live in interoperability, not individual workflows?
- Who will be the first contractor to defect from the prisoner's dilemma and price 20% lower?
- What does the DroneDeploy acquisition mean for Procore's hardware ambitions?
- Could reality capture kill BIM by training AI on 20,000 actual scanned buildings?
- Why is the SaaS pie shrinking for the first time in tech history?
- How do AI-native companies use incumbent software against itself in pricing negotiations?
- Why did the AI-native competitor quote five years of service for what the incumbent charges in one year?
- Why are switching costs gone when AI agents migrate your data in minutes?
- Are public companies structurally incapable of innovating anymore?
- What happens to Procore and Autodesk now that they've both made major acquisitions?
- Why does Microsoft keep trying and failing to enter the AEC market?
If you're a construction company wondering whether AI savings will ever show up in project costs, a founder trying to understand the exit landscape after DroneDeploy, or negotiating a software renewal and wondering whether to name drop an AI competitor, this episode will show you exactly where the leverage is and why the pricing power that built SaaS is gone.
Listen now.
Okay. We'll be back to our regular scheduled programming the next Thursday. Yeah, Thursday. Thursday. It's undermined.
SPEAKER_01Uh kind of a lot besides some of the obvious things we'll talk about. Um, I think it's really um interesting how many inbound messages I get from I have a small construction company, I have a home building company,
Why Traditional Firms Should Go AI First
SPEAKER_01I have an idea for software, and I've built a prototype. Um and my standard answer is it's really funny that you're trying to build a tech business and spin it out of your traditional business, and the rest of venture capital is trying to buy your traditional business. You know, it's like there's this weird paradox where VCs are now buying MEP firms and everything else and AI fying them, and the people in those companies are somehow trying to like not, you know, trying to spin out software or something. And so it's like, you know, how about you just 10x your core business using these tools and not worry about selling it to you to other people? And so I think it's just like the whole software, software layer, like the crud of technology. I think, you know, I think there is a reckoning happening. I don't think it's a joke. I don't think it in a SaaSpocalypse, you know, things happen slowly until they happen quickly. And I think you're seeing some of these emotions at Salesforce. I think I said something the other day. I think most software companies, if their customer loves their product, they're probably fine. If their customer finds it as a necessary evil, and I'm not sure, you know, the company bought this, so I have to use it, they're probably not going to exist. And I think it's gonna be harder and harder to stay a public company. I mean, I think it's interesting when you look at the stripes of the world not going public and this idea of like, why do you go public? You go public to get personal liquidity as a founder, for your investors to get liquidity, and for your employees that get liquidity. And usually the answer is cheaper access to capital. Right. But it doesn't seem like that's a problem with private equity and VCs, you know, hold periods. So I I really think these public companies, you know, for them to stay public, they inherently cannot innovate. It's just not realistic. I mean, how do you innovate when you have to issue dividends, right? When you have to be profitable, you can't make big leaps in the RD space to really build anything. You've got to kind of milk what you can, optimize, use AI to optimize your sales process, right? You can't really create anything that's net new game-changing. It's it's near impossible. That that maturity is behind you.
SPEAKER_00Yeah. The the analogy or the the paradox you mentioned of industry company and services companies wanting to be tech companies reminds me of the old the old parable of musicians always want to be ball players, and ball players always want to be musicians. Yeah.
SPEAKER_01Like how's that worked out for Shaq?
SPEAKER_00It's just funny how the the heart desires something that it can't it can't have.
SPEAKER_03Yeah.
SPEAKER_00And we all end up kind of chasing the same things even when we accomplish a great amount. But the I think the it is an interesting dynamic. And I think um if uh the way I the way I would think about it, if someone asks me that question that they're posing you, it's what's your goal? Is your goal to sell the company to potentially a you know a venture-backed, private equity backed roll roll-up play? Those opportunities will come if you have a good business. And it and if that's your goal, I actually think the like the the anti-AI route is going to be the most attractive for for them because they they don't want you to do the work for them. No, so that's what I was about to say. It's unattractive actually if your margins are great.
SPEAKER_01No, you're you're not leaving space for quote unquote value creation. Yes, right.
SPEAKER_00So if your business is too good, you're not interested.
SPEAKER_01No, you're not at all, right?
SPEAKER_00Because what can they do to improve it?
SPEAKER_01Yeah. I was talking to an investor the other day, fairly famous investor, and it was how we were talking about like the AI roll-ups and you know, which we're doing, and and just kind of his thought process. And he said, Look, I think these business, these strategies are fairly low risk. Your worst case scenarios, you look like a probably like it's like I have a hard time believing that these really smart technical people cannot outperform smart in a different way, PE people, right? It's the MBAs versus the engineers. And you should bring a different game, you know, again, a different game to how they think of stuff. But you know, the point was like, I mean, you're not gonna make it worse than how you found it, right? You'll probably drive some change in behavior that takes these traditional businesses and makes them more profitable. But his his point was that was pretty interesting. He's like, there's like an arbitrage here around kind of early venture ideas, right? Multiples of revenue to multiples of EBITDA in the future. And that, you know, essentially if you don't get in early on these deals, if you don't get in early, double down, triple down, it's a lot harder to have the right outcome. That the the outlier outcomes are for PE firms to think a little bit more like venture people, um, which I th I I thought was kind of a fascinating take from his perspective. He's like, yeah, if you come in on the B's and the C's on these things, like it's not gonna be venture. It looks more like private equity. Yeah. And all the upsides probably taken away. Like it's just classic, you know, good growth in a PE play. So I thought that was fascinating, but I I think the dynamic of like public companies versus private companies, I just don't know. Like I think public companies still serve a great purpose when you need to raise lots of capital to do various things, right? Whether it's to build data centers or whatnot, kind of the balance sheet, to have a great balance sheet, to get leverage
Public Companies Lose The Innovation Game
SPEAKER_01on your balance sheet, mostly just because the accounting and transparency is so great. And but you know, private companies are getting better at that too. So it'll just be really interesting to see. And I think the the general narrative, right? The people we hang out with is well, what's this gonna do for someone's 401k when the private markets start outperforming the SP, which they rarely do, right? During windows of time. They do. But generally that, you know, do you will you see like public investors further and further away from being able to get like outsized you know returns compared to private investors?
SPEAKER_00Yeah, I think um there's the you know, at the micro level, the frame of the MBA versus the engineer is interesting, like at an individual level. Yeah. That's the bat, like that's the battle that's taking place of like, yeah, who will win? Yeah. Do you back a Silicon Valley company with engineers or you put do you back a you know New York-based private equity approach with more Wall Street types? But I also think at the macro level, too, it is West Coast versus East Coast. Like there's a lot of commentary on like exactly that dynamic, but really at a my at a macro level, if you zoom out of that of that mindset, Silicon Valley has and the West Coast has dominated investment returns. And when you look at the foundation labs, that's not a Wall Street-driven thing. This is all like you know, West Coast equity-driven, private, you know, private venture-driven investments that seemingly are going to be the most important companies in the world. And so like the influence of the West Coast is growing. Now, somewhat of a tangent, but a relevant topic for this week. We just saw a fairly notable macro investment vehicle blow up and was bought by a call the the hedge fund is called Situational Awareness, San Francisco-driven hedge fund investor, former open AI, open AI researcher who left to start a macro hedge fund and has been the what the wonder kid of the AI capital.
unknownYeah.
SPEAKER_0024 years old. He I I saw at his height. It's been two years since he launched the fund, and it's at its height, it was, I think the fund was worth hundreds of billions of dollars. Right. Blew up yesterday because he was overleveraged. And there was one buyer in the market, and it was Citadel and Ken Ken Griffin. And by the way, Citadel published a research report that the Fed was going to hike rates. They didn't yesterday, but they published a research report before the Fed meeting. And clearly, Leopold Leopold from Situational Awareness, his head his hedge fund broke as a result of that research report. Nice. Who bought who bought his his assets? The what the the East Coast, the East Coast Wall Street firm. So that that battle, like that, that battle is actually happening, like not theoretically, it's like literally happening, you know, within public markets, within private markets, within company building. I just think it's it's going to be a continued theme over the next decade.
SPEAKER_01Yeah, I think it's it's kind of interesting, right? Like, I think how capital has become like an unfair advantage. Like these moves, you can't do these moves. They don't work with small amounts of capital. You have small amounts of capital, planned to production markets, right? But when you have large amounts of capital, you do have the ability to start shaping your outcomes. Like Citadel, if they have influence and power and money and write a good article that nukes everyone else. And I don't militia, I don't were they targeting him? Maybe, maybe not, but probably just macro, you know. My conspiracy is that they were targeting him.
SPEAKER_00They knew he was on the bricks. Yeah, I mean word gets out.
SPEAKER_01What's that movie about the meme stock guy? I forgot what that is. There's a there was a movie about the meme stock guy. The game stock GameStop. Yeah, I forgot what the movie's called. Yeah, I know you're that was pretty that's that was targeting, right? Yeah, so yeah. But but no, I think like not to turn this into like an investment podcast, but I think it has more, I think all these dynamics, these dynamics, I was talking to a crossover fund and they were talking about how they look at the venture lens through their public, through what they see in the public markets, right? So they're not saying, hey, that's a really cool innovation, I could see you go to the moon. Their reference isn't the startup world, their point of reference is the public markets and understanding what's happening in the public markets and kind of incubating, right, for these companies to go into the public markets. And I thought that was fascinating in terms of how they think about that lens. Very interesting. And you know, when we sit here and go, oh my God, the crossover funds doing XYZ, what are they doing? They're getting the data, they're getting actual real data, right? I think venture can be a bit mercurial, like how we think about things and it's somewhat data-driven. It's more qualitative, more qualitative markets, yeah. But I think the the crossover guys are much more quantitative. I mean, I met with one yesterday and he started like whiteboarding out a market map. And I was like, wow, you've really thought about this, you know. Yeah, which I've never seen a VC go onto a whiteboard and start mapping out a market map. Maybe some tech or like you ought to think about this, but not like, okay, here's what the the market map looks like and the sizing, and here's the here's the the wedges you can insert yourself into. And if you build enough with your startup, you can go own that and go create a wedge here, right? Yeah. Very different mindset and very different thinking. It's a lot of fun, right? Just to but for AEC friends, right? So drone deploy got purchased by Procor this week for a couple bucks.
SPEAKER_00Fairly good outcome. I think the yeah, the order of magnitude was around 800 million is the number I saw.
SPEAKER_03Yeah.
SPEAKER_00Good out, good outcome for the industry. I mean, that's a sizable outcome. I mean, like we continue to see outcomes of size, which I think was a a critique on the AEC industry, is that there were some acquisitions here and there over the years, but the sizing wasn't, you know, wasn't that wasn't that compelling. But we've now seen a couple in and around the billion,
AI Roll Ups And The MBA Battle
SPEAKER_00the billion dollar plus mark. And I think that, you know, it's important for the cat, I think the capital markets to to see potential and be excited about our space. And I I mean, I've talked to a lot of V VCs when I've since I've been in the Bay Area, and everyone kind of views our market as like somewhat consensus right now.
unknownYeah.
SPEAKER_00They view it as like, oh, you're a part of the AI CapEx build-out. Like AC is at the center of that. We can't, you know, we can't we can generate all the energy we have in the world, but where is it going to go if we don't build the data centers or how are we going to connect to the grid? All those big questions that we're like dead center in the middle of. So it's it to me, this feels like the first time that we are like truly at the center of that conversation. And but that to me, the Durham deploy pro core acquisition is an example of continued demonstration that there are valuable companies being created, and it's not $100 million, you know, or or below size size outcomes. Like there's there's actually real scale to them.
SPEAKER_01And they actually announced the number. Yeah.
SPEAKER_00Which, yeah, that's usually which is the like for an undisclosed amount, a very real good outcome for everyone. Yeah.
SPEAKER_01Now I think the challenge though is I was talking to a VC that has had a couple wins in the space. And they said that basically for them the outcome is get bought by autodesk, pro core, hexagon, write the list. Ipo not on the tape, not on the table. And I think the problem with that inherently is Procore just made a massive acquisition. I don't know what the what's it called? Data Databricks. Databricks. Which one that they bought. Oh, Datavrid. Data Grid. I always get confused. Databricks is the bricks is the massive public company. Yeah, yeah, yeah. Datagrid. They bought them for an undisclosed amount. They made some acquisitions. But you know, at some point you can't keep making these massive acquisitions without actualizing. And by the way, you also have a relatively new CEO at Proto Core, right? It's not Thule, it's um someone who I think is fantastic that came from ANSIS, right? So you have to kind of start proving yourself. You have to go make the purchase, absorb it, you know, prove to people you can do that motion. It's a different motion. Yeah. And then you know, Autodesk just bought was a maintenance X or whatever for like a design. How much how much was that? I don't see the exact amount. But it seemed like it was over a billion, right? Yeah, over a billion, right? So you have two players in the market that just have made relatively sizable acquisitions. So they're they're off the table, right? So if you're a founder looking to exit, those two are off the table. So you're left with Trimble, Bentley, Nemachek, which Nemacheck just did HCSS, the civil company. So they're probably off the table for a little bit, yeah. But as they absorb that. So now you're left with I think Hexagon, which is no longer Hexagon, it's called Optive over there. And then you got Trimble and Bentley. It's kind of about it. Now, our friend Bilal over at Red Glass Ventures made a comment like he was very excited about the drone deploy outcome. And I'm continuing to see like this interesting thing about our space that a lot of us of what we're building is in the middle of the intersection of digital AI and physical AI. Yeah. And I think that's what excited them about companies like drone deploy. I think he's also in open space from when he was at Lux. Oh, yeah, yeah. I think that's right. But I but I do think there is an interesting dynamic happening of, you know, is Procore going to be about being a CRUD application doing construction management, project management, or are they doing something different over time? Much like Trimble. I mean, Trimble started in the field, right? Trimble was about surveying and telematics, and they kind of started in hardware and moved up into the software layer. Yeah. And that's why they've got a great diversification of you know, of products. Yeah. So they have a great diversity of products. But it'll be interesting to see. I think my question is always great signal for founders. Okay, I can point to some exits. I mean, think about what people have been pointing to, right? People still point to plain grid. Playing grid.
SPEAKER_00When I said the word the words 800 million out loud, my head went to playing grid because that was the only software company in the space that had, you know, that's that's the size of an outcome.
SPEAKER_01If you uh factor in for inflation, that was like a multi-bil, that was a multi-billion dollar exit. It's true. Yeah. If you look at uh how long ago it was. So I so I think it's interesting because what people will say is like large public incumbent software companies is where innovation goes to die, which could be true. Which I mean, there's a track record of that. There's a track record of interesting ideas going into large public companies, and then next thing you know, there's 50 product managers making every decision about what color a button should be, and there's they actually stop innovation. I mean, I remember back when talking to Autodesk, I'm like, well, why don't you guys building new stuff on on Revit? They said, We don't have to. Like, we don't have to. Yeah. We're an incumbent. We're an incumbent, we release enough features, but we're at a point now where like, you know, why even we barely have to market ourselves anymore? Like, what are you buying other than Revit? Yeah, and so there's definitely like economical reasons why innovation goes and dies at these places. So it'll it'll be interesting to see what they do with it.
SPEAKER_02Yeah.
SPEAKER_01I I've you know, I've seen the guys from from Datagrid talk about how great it's been. Yeah.
SPEAKER_00But you know, we'll see. Have you seen any examples in our space of a sizable acquisition happening and the product or the product experience becoming better after the fact?
SPEAKER_01Revit did early on. So Revit was doing sub three million in Reviting, got bought, I think, for 130 million. Yeah. And then I think at that point, you know, Carl Bass and a few others got really doubled down on like this is the future. Yeah. And actually, the when I saw Revit Technology Court first, there were a couple of things. One, it was cloud-based, it was natively cloud-based, right? Um, they built it was a web app, right? Not as sophisticated as it is now, right? But definitely a web app. And you pretty much had to hire someone to be in your office to help you run it. Yeah. User interface was not pretty, it was not easy. So no, I think they made a lot of progress. Then once they moved it on to desktops at that point in time, like a lot more compute available, and they were able to add features to make it a lot of people at that point didn't believe that you fused Revit before they bought it, like you couldn't create a set of drawings. You could create 3D models, but you couldn't create drawings. Yeah. And Zwatodesk was really able to do a lot of that. So during their heyday, they did a lot with that.
SPEAKER_00Yeah. I think it's just like probably the last 10 years. I think there's yeah, the the question is, is like, so at that phase, maybe that is a maybe that product improved or of it improved because they had so few resources at that stage that yeah, they just needed more capital to make it a great, yeah, a great product and build out all the tools and bells and whistles versus like a you know drone employee, they've raised $150 million. And so the maturity of the product is it's way further along. And you know, the revit uh companies further along, the revenues is much higher. And so at that stage, when you when you are a late stage company and the product is is fully completely baked, you know, multiple products and features within the, you know, within the suite at that point, like how how can they improve it? Like into back to your point, their incentives now become, let's move it into a maintenance phase. So we can or we can take the cost down, the cost of maintenance down. We don't need to invest in a massive engineering team to go build out, you know,
DroneDeploy Meets Procore And Exit Reality
SPEAKER_00ship features every single week because that's not that's not the game anymore. So to me, the incentives at that stage become, yeah, it's like there's a reason like they think these companies die out when they're they're bought and they're already large. But the reverse of like, you know, potentially a data grid, data grid might be a good comparable to Revit because they were not, you know, $100 million a year revenue company. They're filling out an agentic platform that's you know still fairly, fairly immature. But the idea would be like with more resources and you know under the Pro Core umbrella, they can go out and build a way more robust product for you know today for the construction industry that it that hasn't really adopted. Agent at scale, yeah.
SPEAKER_01Do you see any signal in the fact that it was an all-cash deal? Like, is it being an all-cash deal mean that the employees and the existing investors do not believe in a pro core growth story? Right. Because if you look at some of the stories you hear from like Sequoia, where like, no, we distributed shares. We distributed shares to our LPs. Yeah. Right. We stayed in. Yeah. And a lot of people believe, like, you know, the Facebooks of the world, like, if you stayed in, you're doing great, right? It was good to be in it. Right. Why? In other words, we'll negotiate less cash, higher valuation, but do an all-stock deal. Do you think that's a signal to confidence in where where this togetherness is going?
SPEAKER_00I think the expectation if you're a if you're a great company with really solid financials and good growth, the expectation is that you can get an all-cash deal. And that's that's the signal to the market is like that's a high quality company that that can demand a high cash deal. It's usually when they have no leverage that you get, you know, you get shares in exchange for for you know the value of your company. And so there, but there, but there is a threshold of like, okay, now what's the incentive for everyone that we just you know brought on to the pro core team to go out and stay with the company and build for the long term? Maybe the I I personally I don't view it as a as a negative signal, but I to me it's more like to answer that question, I would want to understand what the incentive structure is, like the real reasons the sellers are selling, you know, that like the drone deploy founders are selling. What is their long game? I don't know those answers because I've never talked to them, but that would be where I would be able to get a little bit more precise.
SPEAKER_01No, and I also think like how long we're since seed round, how long how many years is it? 13. 13 years. It's a lot of years, right? So there's some LPs crying somewhere about like, hey, I need to get some equipment.
SPEAKER_00Which is a real thing. Like yeah, yeah. If you take venture capital, like yeah, you're gonna hear from your investors.
SPEAKER_01I don't want to stick and you know, stop some cash. Yeah, do a distribution. But I think it's I think so. I think there's another interesting angle to when we look at these transactions, and like three years from now, are the customers gonna be like, man, that was the best thing ever. Like I know competitors in that space. They all love that they got sold. It's a double, it's a double dip, right? One, it's a signal to investors that, oh my god, look, you can have outsized exits. Yep. And two, they be they believe that, like, oh great, like we don't have to worry about them as a competitor anymore. Like in a couple of years, they may not even, you know, exist in their current form. They're not going to innovate nearly as much as we can as a startup. Their hunger goes down, so not they're not hunting as hard. Yeah, all of it. Yeah.
SPEAKER_03Right.
SPEAKER_01So I mean, look, I think it's I think anything that happens, our industry, we should all be like super excited about. Like we should be.
SPEAKER_00But it's happy for everyone. Yeah. I mean, uh obviously we have a lot of we have a lot of construction firms that that that buy the incumbent products that we're speaking to here, Procore being an example, Autobest being an example. And I think generally the sentiment though is if you are a customer of those products, there's a lot of fear and a lot of annoyance when great products they that they're used, they've been using for years get bought because pricing structure changes. Again, the velocity of the product improvement goes down pretty significantly. Personnel changes, yeah. Their account manager's gone, like all you know, massive personnel changes. So, like me, yeah, yeah. So I there's a lot of reasons that the the industry itself is you know, does not get excited. Really, the industry, I'd say most cases feels like the loser, unless they get like a crazy bundle deal and you get now drone deployed for free because you know you're on the pro platform. That usually is not true. Usually there's an upsell involved. So I think in general, like most most services companies in our space are always annoyed when they see a deal of this size because a lot of them have used the product and they're like, it's great. Now it's not gonna be as good. Yeah. No, 100%. And our price is gonna go way up. And we we have like very we have a lot of anecdotal experience of like we have we have we have firms that have invested with us because they wanted to be equity shareholders in these companies so they can have influence on who not to sell to. Yeah. Because they don't want their ex their customer experience to go to shit.
SPEAKER_01Yeah. No, I think it I think I think there's another interesting thing. If we say now there's call it three big players off the table to do transactions. One company I know that's I would say two companies I know that have had a a bit of uh in and out type mentality, a wishy-washy attitude around our space has been Microsoft and Oracle, right? About every few years I get calls. Hey, we want to get into AEC space, we want to, you know, sell Microsoft dynamics into the AEC space. We think we're, you know, and it and you know, you think about a Microsoft, it makes
Do Acquisitions Improve Products Or Kill Them
SPEAKER_01so much sense when you have an industry that is mostly Microsoft shops, right? They can't get Microsoft product. I mean, there's not a GC out there, I know that uses Microsoft Sketch um project, right? Which is wild. Yeah. But I think they kind of they feel like they have a good install base, they have a good brand, yeah, right, all those things. And so they'll they'll try to make some plays to enter the market, right? And then they try to look for acquisitions and then they go nowhere, right? And they then they say, okay, we're not gonna do that. I was even talking to someone at Salesforce that's been looking at the market, right? They've been studying it, trying to understand it. And I think companies like that have to make an acquisition, they can't organically get in these markets, and then Oracle. One day it's like, hey, we owned Primavera, we bought AKinex, we bought yeah, what else have they bought? Probably one else, but there's been a few, right? There's a couple others. There's a couple others that they bought to be in kind of the AEC space, and they're like, oh yeah, we're not doing that anymore. And they like dip out again. Yeah. Well, it was Josh Canner's company, Bella. They bought Bella. And what's that other payment thing? Text Texas, yeah. So they've made acquisitions, but they definitely have not been had a high level of conviction about our space. Yeah. So you do wonder do some of those folks come out of the woodwork and start.
SPEAKER_00Yeah. I think one, you know, one in another interesting thing about drone deploy is that it has some hardware attached to it. And so to me, I don't know what the intent of the acquisition was, but hypothetically, you can make a case that Procore sees the value in owning some of the hardware layer. Because they're right now they're they're you know, they're really this strictly a software company, but knowing that reality capture does have a hardware component and you know their entrance into now owning a company with with hardware signals that there might be maybe some defensibility, maybe some moat into the hardware products that are servicing the AUC verticals. And so that that'll be an interesting thing to see if they they make a couple more bets in that space.
SPEAKER_01I I talked to someone the other day, because I've published a couple of articles about BIM being dead. I had someone the other day say that they thought reality capture was gonna kill BIM. I thought that was kind of interesting. And their their hypothesis was you're capturing all this as built data, and then you have the drawings. Can't you move backwards in understanding like how you got there? Yeah, right. And if that's the case, then isn't it easy to use AI to design a building? So if you've reality captured 20,000 buildings, you have a great corpus of data to train on. And the reality is design software is just lines, arcs, and circles. It's actually, I mean there's plenty of open source stuff, yeah, right? It's not that hard. People get very focused on like CAD being hard. It's like CAD's been around for a while. It's all vectors, right? It's it's just all vectors, it's just all math. And so their point was if you're a reality capture company, you might be able to create a AI native design tool, yeah, that's very, very efficient.
SPEAKER_00And I thought can do machine learning on past data sets and past designs to design more efficiently. Right. Interesting. Yeah. I mean, I I to I mean see a world where that product would not exist other than like someone just needs to go build it.
SPEAKER_01Right. In the world of like, can you prompt design me a new airport for da-da-da-da-da, you know, and it just designs it because it has a thousand airports and it's and they've been reality captured in the system.
SPEAKER_03Yep.
SPEAKER_01And it's the end state, it's not a set of drawings that the building may or may not have built been built by. Yeah. But I thought that was an an interesting take. Um, I've never heard anyone talk about it that way.
SPEAKER_00Yeah, the the archive of of scans seems to be enough data for machine learning algorithm to go learn and then do do both conceptual and then like actual, you know, compl like complete set of drawings. Yeah.
SPEAKER_01Just based on a historical archive. So one more point, and we'll kind of shift a little bit. But I think what's interesting is if you're an analyst at Goldman Sachs, right? And you're looking at a market, you're looking at Pro Core and Autodesk, you got your little charts, right, of market share and all that, it seems like the slice that has to start showing up, not just in our industry, but in every industry, which is you aren't spending as much money on ProCore Autodesk or whatever, but you're rolling your own. Right? There that slice has never really existed. And you know, when you look at a soft form market and you say, okay, well, these guys are, you know, it's a it's a fixed pie that's growing
Reality Capture Could Eat BIM Next
SPEAKER_01and everybody's little wedges are moving around, right? Now there's this new wedge in there that actually it's not a wedge, right? It's it's like leaving the TAM, right? It's not part of the TAM, it's actually egg. Like so the market, it's the pie is starting to shrink, right? Which is rare in tech. The rip the pie doesn't shrink that often. The pie actually grows. Yeah. So now we have a market where it's possible that we start to see that the market shrinks, the pie shrinks.
SPEAKER_00Because people are building their own software.
SPEAKER_01Yeah. Yeah, I I think that's already happening. And pricing pressure.
unknownYeah.
SPEAKER_01Pricing pressure on it, right? I mean, we talked to uh we're we're going through a process right now of buying some enterprise software. I won't name names, but one of them's big public company, they gave us a price. We talked to like the AI native competitor, basically all the people that left that company and started this company, and they were gonna charge us for five years what the incumbent was gonna charge us in one year. Wow. We went back to the incumbent and said, Hey, like we're talking to so-and-so. They were ready to give it to us for free, practically. Wow. Right. And the key key difference was well, if you buy our software, here's how much the software is per year, and here's how much implementation is. The AI native one was like implementation. What do you mean? We have a meeting and we have the agents listen to us and it configures itself. There's no implementation. You don't go out and hire Deloitte or whatever to do an implementation. Yeah. Uh I was just like, wow. All right. So you take the implementation layer away. And so, like the fact that I mean, anyone that's negotiating with a large incumbent software company right now, go find the AI native version that's been well funded by name the you know, premier firm and just name drop that, and you're probably getting a 50% discount. Because the last thing anyone wants to do is go say, hey, we're losing market share to this company that's raised $100 million. Yeah, that's not what anyone wants to go tell their shareholders. So it's super interesting that this SaaS stack, you know, it starts like the pie starts to shrink, and people aren't really, I don't I don't think people are thinking about it. Because I think it's happening in little slices, right? It starts with, yeah, I don't think we're gonna ruin renew our reporting package, right? So you're you spend a hundred thousand dollars on software if they try to upside you twenty thousand dollars on the reporting package, like nah, don't need that because I'm gonna do it with Claude. Yeah, right. I don't I don't need your I don't need Tableau. Why do I need Tableau? Why do I need BI, right? Then you start to probably start lopping off features, like, yeah, I'm not really gonna use your accounts payable module because I'm using ramp. So you can just remove that from my bill, right? So I think you'll start to see this like the the disassembly of these systems of records at a feature level. Yeah, right. Those key and then eventually it's gonna be just down the bone.
SPEAKER_00Yeah. I think this is a this is the I mean what you're painting is the bear case for software as a service. And I think it, I think it's really hard to argue the other side, actually. And I think one of the reasons one of the reasons I think on the pricing side that's maybe under discussed is the software companies had had perfect pricing power. They it's marginal cost of producing a new you know license for the product was zero. And yet they could like unapologetically raise prices by whatever amount they wanted a year because you're entirely dependent on running your business on their operating system, or one of the other three choices, right? There was like a small oligarch oligarchy of options that you had. And so, but but now there's a you know, there's there's multiple new options. You have the AI native challenger that's driving the cost down substantially. So back to your negotiation, that's a real thing. And then you have the hey, I might just go build some of this myself. And like the the and then you have you're competing with, we talked a lot about Palantir, right? They're helping people build their own, you know, enterprise enterprise great software for many different components of their business. OpenAI has their, you know, OpenAI and Anthropic, they're gonna have their own enterprise, you know, consulting groups too, that are gonna help people do the same thing. And I just it's like that pricing power is gone for all those reasons. And so the valuations that we the crazy P ratios and the growth rates, like they were all reflective of that pricing power not going away. But I think as of you know six months ago, it's like it is it is coming down, and I do not see what's going to pull that pricing power back, you know, back to the lower.
SPEAKER_01Because even if you switch, when you go to renew, you're getting 20 to 30 percent off, right? Because you're just gonna show up and say, Hey, I've been looking at these other companies and these AI, I'll tell you the AI company, the AI native companies, they know what they're doing. Because you know what part of what they do is they say, Oh, you're on the X system, our agents can migrate you. Yeah, how much is that? Uh a couple tokens, don't worry about it.
SPEAKER_00Yeah, right. So even like this the the data migration was always really, really painful.
SPEAKER_01The switching costs were high. Switching costs were really high. I remember, yeah, I remember one time switching off a Salesforce, and it's like, okay, let me export my data, which oh, you have access to your data. I exported, I don't know, 1200 tables with no schema. So then I had to like sit there, literally, I put it through this like engine to rebuild to reverse engineer the schema. Yeah, to be able to like deploy it into another software system, right? It wasn't like export and like there's it's hard, right? Yeah, totally. Today I would just drop it in the cloud and say, hey, here's a corpus of data. I need it to go into this model, yeah, this new CRM, transform it for me, and it'll just do it. Transform it and then push it to the new system, right? Done.
SPEAKER_02Yeah.
SPEAKER_01Right. So no, I think it's super fascinating. So a little bit switching gears, I'd posted this thing on LinkedIn. And it was kind of I would I wouldn't say it was like me trolling, it was just more like I just want to understand how people thought about it. And it's like if we believe all this technology, right? AI, the hit the 500th AI estimating tool that came out this week, right? There's another AI estimating tool, there's another AI this AI that right. Lots of startups, AI scheduling. And who knows what happens to them, right? But if all the software's coming out and making everybody that much more productive, right? The GC's that much more, you know, we're gonna save you 30%
SaaS Pricing Power Breaks And Buildings Stay Costly
SPEAKER_01in your pre-con department. Yeah, we're gonna see, you know, oh, architects, we're gonna save you 50% on your construction administration, like all these things. Yeah, and the value prop is we're gonna help you make more money on your projects. Yeah. So everybody's gonna be very efficient in their little silos, right? In theory, if everybody is 10, 20 that much more efficient, yeah. Aren't buildings 10 to 20% cheaper? Should be. It's not gonna happen.
SPEAKER_03Yeah, right.
SPEAKER_01It's not gonna happen. So to me, it's like the so part of it all. Why is that?
SPEAKER_00Why is that? Why is that not happening?
SPEAKER_01Because all the waste exists in the interoperability, the uh you know, the the playing together, right? We can all do, we can all optimize our workflows within our own little silo, but I don't get to optimize how you do business, right? It's not like Walmart saying, okay, here's how everyone's gonna do business, here's the rules, right? And we're the buyer, we dictate it to you. So therefore, this is how your invoices shall be, right? So Walmart did a fantastic job of basically engineering their supply chain to comply it to a workflow that reduced their costs. That's how they became the low-cost leader, right? Yeah, Costco is the modern version of that. Yeah. But as long as everybody's optimizing themselves really well in silos, the question becomes like the so what, right? Does that mean they're just making that much more money?
SPEAKER_00And are they just gonna get to keep it? I mean, I from anecdotal experience, the goal is to increase margins. It's not to, you know, it's not to create value. Like, yeah. I mean, it's it's the the business incentive is not to, you know, distribute those as like the 10 to 20 percent savings as dividends, right? They're keeping it, they're gonna reinvest into growth and reinvest in the so like the I I think the the good outcome, like the the the good outcome from the cost, you know, being being being lowered, at least for one of those one of those vertical providers, is they're gonna create a better product experience. They should, in theory. Um should be faster, should be more accurate, should be better, it's better technology, better tooling. I don't think though that it's going to occur immediately to the bottom line in most cases, but but for but for the incentives, for the for the exact incentive reasons, like if you made 10 to 20% more profit, your incentive is not immediately to go out and give that directly to your to your customer. Your incentive is no, I want to show higher margins for my shareholders and then figure out how to reinvest that into something, something else.
SPEAKER_01Or possibly, right? Or possibly you go to market and say, hey, we're 20% cheaper and start owning start owning markets.
SPEAKER_00Someone will do that. Someone will defect from the prisoner's dilemma. Right, as about to say prisoner's dilemma. And that will be the first time that you know someone will be forced to actually say, okay, am I going to lower my cost or am I going to be the premium option? Eventually everyone will have to lower their costs, but we're not in the phase now where that prisoner's dilemma is taking place, is my my read.
SPEAKER_01Yeah, because I always it's I always have mixed feelings when I talk to like our engineering friends, they're like, Yeah, like AI could help me reduce my time by 50%, but how do I bill? And I was like, maybe just bill half as much. And society gets more roads. Right. Yeah. Society gets better roads, like you know, like whatever it is, right? Yeah. So if robots' quality goes up, if robots are gonna lay pavement, like why should it cost so much to lay roads and build schools and that kind of thing? So to me, there's always that internal friction with me of like, yeah, great, we can build more schools. So what? You're like, well, that's the help. Like, I got all these people I gotta keep billable, right? Yeah. So all right, man. Well, the last one good roof. Yeah. No, yeah. So I guess we'll see on we'll see on Zoom.
SPEAKER_00Back back to the back to the video camera. Back to the digital AI. Enjoy enjoyed the in person.