Reflecting on the Procore IPO

US AEC SaaS player Procore raised over $600m in its May 2021 IPO, but its global ambitions face significant competition.

Procore logoIn February 2020, US-based construction Software-as-a-Service (SaaS) provider Procore filed its intention to make an initial public offering of its shares on the New York Stock Exchange. But the onset of the global COVID-19 pandemic forced a postponement (read March 2020 EE post: Procore IPO in for prolonged coronavirus lockdown?).

On 20 May 2021, however, Procore pressed ahead with an IPO of 9.47 million shares (leaving a further 128 million shares outstanding). It initially had a target price range of $60-65. Achieving a midpoint IPO was forecast to generate net proceeds of around $553 million. If IPO underwriters (Goldman Sachs, JP Morgan, Barclays and Jefferies) exercised their right to purchase additional shares, Procore was potentially going to raise $608.5 million. The midpoint deal would have valued the company at $8.9 billion.

Doubled valuation

However, it sold the shares for $67 each, raising $634.5 million (Yahoo!Finance). On the first day of trading, Procore shares opened at $84 per share, and closed at $88, indicating a market capitalisation of $11.3 billion (Forbes; on 10 June 2021, they were trading at $87). This was a significant step up, effectively doubling previous valuations.

An April 2020 funding round raised $150 million, giving a valuation of $5 billion, up from a September 2019 raise ($94.9 million) where Procore was valued at $4.77 billion. Before the IPO, the company had raised over $450 million in venture capital funding. Investors included D1 Capital Partners, Tiger Global Management, Dragoneer Investment Group, ICONIQ Capital, Bessemer Venture Partners, Lead Edge Capital, Lumia Capital and Scop Venture Capital. Pre-IPO, entities associated with ICONIQ held around 44% of the company’s shares, while entities associated with Bessemer Venture partners held  almost 15%. Post-IPO, they hold approximately 37% and 13% respectively.

Procore: deepening losses

According to its updated IPO prospectus (S1 filing), Procore has seen its revenues growing but it has also seen deepening losses. Prior to the pandemic, the company generated revenue of $112.3 million in 2017, $186.4 million in 2018 (up 66% year-on-year), and $289.2 million in 2019 (up 55%). In pandemic-affected 2020 it generated revenues of $400.3m (up 38%). Up to the end of 2020, it had accumulated 1.6 million users through 10,166 customers – of which 843 each contributed annual recurring revenues of over €100,000.

However, it had mounting net losses: $55.5 million in 2017, $56.7 million in 2018, $83.1 million in 2019, and $96.2 million in 2020. The company was blunt about its history of losses and the uncertainty about future profitability:

“As of December 31, 2020, we had an accumulated deficit of $397.0 million. We are not certain whether or when we will be able to achieve or sustain profitability in the future.”

In the first quarter of 2021, Procore had a net loss of $14 million on revenue of $114 million, compared to a $19 million loss on revenue of $92 million for the same (pre-pandemic) period a year ago.

Capitalising upon construction’s continued digital transformation

Procore platform pitch

Procore aims to become the dominant construction management platform in the world, with a suite of products supporting workflows from pre-construction – it launched Procore Preconstruction yesterday (10 June 2021) – to project completion (outside its July 2019 acquisition, post, of Honest Buildings, it largely ignores the opportunity to host asset owner-operators’ whole life data). However, as its prospectus made clear, there are substantial risks in delivering technology to a notoriously fragmented, volatile, low-margin, short-termist, traditional and historically low-tech industry.

Construction businesses have tended to under-invest in information technology. Procore sees a big opportunity to capitalise as construction’s digital transformation continues. It quotes a Deloitte 2017 estimate that construction currently invests in IT at half the rate of other industries – 1.5% of revenues versus a 3% pan-industry rate. A 2020 McKinsey report suggests industry spending on software and infrastructure could double, and investors have been pouring money into construction tech businesses over the past decade (AEC TechTV Episode 16: Investment in construction software is booming).

Procore says the total addressable market is large and significantly under-penetrated. It estimates the global construction industry spends approximately $9.2 billion per annum on software.

The COVID-19 dividend

While the global pandemic delayed Procore’s IPO, it may also have helped accelerate technology adoption, including use of platforms such as Procore (Procore: Lockdown accelerates demand for digital transformation).

The architecture, engineering and construction (AEC) sector has historically been reliant upon exchanging drawings and documents, and managing numerous, often fragmented and disconnected workflows. Despite significant adoption of Software-as-a-Service information management platforms since the late 1990s onwards, many projects – particularly at the smaller end of the scale – continue to be managed using email and generic file-sharing solutions. The pandemic prompted many businesses to rethink their approaches, increasing use of various construction-oriented solutions (desktop, web, mobile), alongside expanding use of video-conferencing applications, some of which were quickly integrated with AEC platforms (read: Coronavirus, construction and software, and Coronavirus construction impacts (and software offers) continue).

International ambitions and competition

Procore is running projects in over 125 countries. This sounds impressive, but just 12.2% of its 2020 revenues was generated from customers outside the United States. It faces significant competition from longer-established and now well-entrenched SaaS businesses offering largely similar functionality, plus additional applications. Mature and more widely distributed players include Autodesk, Aconex (now part of Oracle), Trimble and Bentley Systems.

The latter’s September 2020 IPO suggested a market valuation of $5.5 billion (post). It is perhaps bizarre that Procore has already achieved double this valuation despite only having a construction management platform, while Bentley’s portfolio includes the widely deployed, enterprise-grade ProjectWise SaaS platform and UK-based Business Collaborator (post), plus design authoring and other solutions. Similarly, Trimble then also had a market capitalisation of around $11 billion, despite a portfolio including multiple SaaS products – e-Builder (post), the former 4Projects (post), Meridian, GTeam (post) later relaunched as Trimble Connect, and a mobile-oriented platform, Trimble ProjectSight.

Oracle acquired Australia-based Aconex for $1.2 billion (around ten times revenue) in late 2017 (post). The SaaS platform joined a construction portfolio that included the widely-deployed Primavera programme management application. The deal made Oracle the first major B2B software giant to make a concerted play in the construction SaaS vertical market (“they know data, they know SaaS”).

Outperform Autodesk?

Autodesk BuildAutodesk has a market capitalisation of around $60 billion. In the 2000s, it learned some painful lessons about trying to export US-oriented AEC SaaS platforms – remember Buzzsaw and Constructware (post)? –  to new geographies. And, like Bentley and Trimble, Autodesk’s biggest AEC revenue-generators are not its SaaS collaboration tools (for example, BIM 360, now part of the Autodesk Construction Cloud; post). Its cash cows are its design authoring tools (AutoCAD, Revit), among others (though there are tensions with some of its architect customers – post). And, while we are talking about BIM, Procore also lags other vendors in its detailed support for BIM process capabilities.

There are also some strong regional SaaS players in Europe (thinkproject, Hexagon/Bricsys, RIB, Asite). And the Germany-based Nemetschek group also has a well-embedded base of AEC design, BIM and related authoring tools.

Caveat emptor

In short, Procore investors need to look realistically at the global competitive landscape. If Procore is serious about becoming the major global player, it will have to shift from its reliance on the US market. International expansion will need to accelerate. This won’t be easy. Across many countries, their AEC sectors remain highly fragmented, volatile, low-margin, short-termist, low-tech, parochial and often change-resistant. And if these sectors embrace digital working enthusiastically, other players already have local resources in place to service their needs. US stock market sentiment towards Procore is clearly positive. However, it faces some critical competitive challenges over the next three to five years to retain and reward the confidence of its VC-based backers.

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