The Mosaic Investment Thesis
February 23RD, 2021
Mosaic is a full-stack construction technology company. Mosaic’s technologies make construction more efficient- no small feat in an industry notorious for its lack of innovation and efficiency gains. Mosaic’s efficiencies come from its proprietary programming system that systematizes the construction process by decomposing blueprints into a rich construction model used to automate schedules, budgets, and generate step-by-step worksheets for field labor. The step-by-step worksheets enable a labor model unique to Mosaic, in which a single cross-functional crew can execute on all key trades of the homes: eliminating gaps between subcontractors, parallelizing work, eliminating scheduling mishaps, and controlling quality. This results in faster construction at a lower cost without requiring any changes to blueprints, engineering drawings, city approvals, or construction materials. Ultimately, Mosaic believes our physical environments can either support or inhibit a good life, which is why they choose to initially work at the level of homes and communities. Mosaic’s vision is a world of places- homes, communities, neighborhoods and cities- that feel beautiful, sustainable, connected and alive. Where people feel at home in the world. Mosaic achieves this vision by driving innovation and efficiency at process level, not by standardizing the end product (homes). Making beautiful homes affordable to more people. Mosiac’s Timber Sky project is a fantastic example of the type of beautiful communities that their tech enables.
A bit on the investment process. As I’ve touched on previously, I think outbound deal sourcing has become much more important than inbound deal sourcing. This is a new development over the past five (or so) years. There used to be a high degree of investment syndication among early stage investors. Fund sizes were too small to fill out entire rounds, and many investors were relatively unsophisticated about leading early stage investments, so they liked to move in packs. Today, this dynamic has completely reversed. The most competitive early stage opportunities are not syndicated because larger fund sizes necessitate that early investors write larger checks (typically the entire round). At the same time seed stage investors have gotten much more sophisticated and don’t need to act like lemmings. In this sort of environment investors that have based their deal flow on in-bound syndication with other investors will struggle.
Today, I believe relationships with founders and delivering value-add beyond capital are the most important points of differentiation that help investors get into top-tier opportunities. Investors who commit to getting to know founders personally, and become active/helpful prior to making an investment will be more successful. Early stage firms that build an informed predictive thesis relative to where sectors are heading and become experts on every aspect of those sectors, can compete by being top-of-mind for founders in those sectors, find outbound opportunities earlier due to focus, and use their expertise to be helpful to founders prior to making an investment.
Relative to Mosaic, I keep a close eye on emerging applications for AI/ML in legacy markets. In particular, I look for applications of the tech within industries that haven't innovated much over the past 30-50 years. Non-obvious solutions are needed in such industries (because all the obvious solutions have been tried) and non-obvious solutions happen to be the specialty of AI/ML. Residential construction is one example, but there are others too- farming (animals, not crops), small-mid sized manufacturing operations, legal services, K-12 education, etc. In looking for such opportunities, I ran across a blog post by Sep and Salman (Mosaic founders) about how they apply AI/ML to residential construction. I thought it was fascinating, so I reached out to some contacts in the residential construction industry to see if they could get me an intro. They did. I hit it off with the Mosaic team and offered to make intros to potential customers in the residential construction industry. When it’s all said and done, I believe we’ll add about $1B to the Mosaic sales pipeline. That's the recipe for success- build a genuine relationship and show that you can be value-add beyond just capital.
Mosaic had just raised a $14m Series-A from a16z, who, to my point about syndication, took the entire $14m. This happens with almost all tier-one early stage tech deals at this point. Mosaic had also turned down a lot of inbound interest from other tier-one VCs since March. However, because we were able to build a relationship and demonstrate significant value-add, we were able to carve out and lead our own round.
That’s the backstory on the company and the sourcing process. Now for the investment thesis.
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1.) Team
The Mosaic team is strong in terms of both their tech and construction backgrounds.
On the tech side of the house, I’ll start with an interesting story about the co-founders. They're very humble and when I first spoke with them, they very casually mentioned that Google had acquired one of their previous companies. Well, in talking with the Andreessen Horowitz team, it turns out that it wasn't just another acquisition for Google. It was Google's first ever acquisition, and gave Google the three algorithms that power its search engine to this day. The original Google page-rank algorithm written by Sergey Brin and Larry Page is the algorithm that made Google search better than everyone else. The Mosaic team's page-rank algorithm was 10x faster. They also wrote two algorithms that allowed for personalized search; displaying results based upon browsing history, location, etc. and allowing for personalized ads. It's the foundation of Google's business model to this day. This is my bragging on the Mosaic team’s behalf, because they are far too humble to do so, but absolutely deserve all the kind words and praise.
In addition, the tech team is former Slack, Tesla, Microsoft, MIT and Stanford-representing a very deep in-house tech talent pool.
The Mosaic construction team is similarly talent rich- comprised of former Bechtel, Ryan, Opus, Katerra and Hensel Phelps talent. The Mosaic head of construction is a long-time homebuilder who was/is the founder and CEO of Mandalay Homes. He was so impressed with the Mosaic technology, that he not only became a customer, but also joined the team. The importance of the depth of construction talent on the Mosaic team cannot be overstated. The combination of a world-class tech team building efficiency tools that a seasoned construction team can help design and then use/refine in the field, is a recipe for success.
2.) TAM
Residential single family construction is Mosaic’s initial focus. In 2018, 617k newly constructed single family detached homes were sold representing an estimated $203b in revenue for builders. Further, 840k single family homes were built in 2018 with an estimated construction value of $289b. And lastly, 855k units were permitted with an estimated value of $210.9b. Multi-family homes are the next most logical sector for Mosaic to target. In 2018, 335.6k multi-family units were completed with an estimated value of $59.6b. Additionally, 434k multi-family units were permitted with an estimated value of $54.6b. Thus, the 2018 US residential market was an $817B opportunity and has grown since.
In addition to these historical tail-winds, I’m a big believer that the best VCs are able to time market trends and technology inflection points. To that end, Q4 2020 saw the biggest recorded jump in US residential building starts on record and Jan 2021 held pace. This exasperates nationwide pre-existing labor and materials shortages and increases demand for tech that drives efficiencies while reducing construction cycle time. Builders need to keep up with market demand, and that will be nearly impossible without the efficiency gains driven by the Mosaic tech platform. It’s a perfect storm.
Looking ahead, and beyond single-family residential, the broader US construction industry is projected to be a $1.8T (yes, that’s a ‘T’ for trillion) industry by 2024.
3.) Traction
While I can’t disclose exact numbers, suffice it to say, Mosaic is the single fastest growing startup that I’ve ever encountered. Mosaic’s growth in 2020 easily outpaces the early revenue growth of hyperscale Web 2.0 consumer applications such as Uber and Airbnb, as well as B2B platforms such as Palantir and Snowflake. I realize that I’m stretching for comps here, but I don’t believe there’s a single appropriate construction tech comp in terms of growth and very few B2B comps. I used Uber and Airbnb because, while they’re consumer apps, their tech platforms allowed them to eat entire legacy industries (taxis and hotels). Mosiac is similarly eating the legacy general contractor industry and has demonstrated significant product-market fit within that industry.
4.) Value Add
The last piece of the thesis is also the thing that allowed us to participate in the investment in the first place- adding value beyond capital. Every VC on the planet advertises value-add beyond capital, but few follow through. The value-add equation differs for each startup. The best VCs have an ability to identify a value-add need and then find ways to address it. In Mosaic’s case, we were able to leverage our LP base to make introductions to homebuilders that expanded the Mosaic customer pipeline by an estimated $1B. While this was important relative to participation in the round, it was also crucial to our investment thesis. Historically, Mosaic has a very high pipeline opportunity to close rate- something like 66%. Should that close rate hold, we will have delivered significant revenue growth (and valuation growth) to Mosaic. This ability to influence the destiny of a portfolio company in a very tangible manner is the definition of value-add and also gives us a significant degree of control over our investment outcome.
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In conclusion, Mosaic is a bit later stage than most opportunities we invest in, meaning we had significant KPI traction data to assess, but outside of that anomaly the recipe for making a successful investment is largely the same. Identify tier-one caliber teams addressing large markets where macro trends are on the verge of driving technology inflection point coalescence. Then, find a way to add significant value to those teams in terms of more than just capital. Rinse and repeat.
