This is the first article of Investment Week, during which we’re exploring funding strategies, major mergers, and other aspects of venture capital’s growing presence in the AEC sector.
The long-awaited payoff for many construction start-ups is finally starting to arrive. Venture investment in the industry recently grew fivefold, from $51 million in 2010 to $254 million in 2015, and 2016 saw stand-out start-up Procore reach unicorn status with another $50 million in investment, led by Iconiq Capital, while others earned smaller payouts, including $6 million for FieldWire and $8.5 million for BuildingConnected.
Construction technologies are seeing so much action that major industry players are starting to get into the venture-funding mix as well, including Caterpillar. The company’s in-house investment group, Caterpillar Ventures, came together in March 2015, led by Michael Young and Brian Lowry.
Lowry comes originally from the engineering side of the company, and he’s worked on everything from skid-steer loaders to large mining trucks to marine engines to locomotives. He spent five years earning his MBA at night, though, and was eventually hired into the corporate strategy department by Young, who later brought him along when starting the venture initiative. Here, Lowry details Caterpillar Ventures’ strategies as an investment firm connected to a larger corporate entity, he explains some of the investments it has made thus far, and he discusses its involvement in a start-up pitch competition happening at SXSW in March.
So, you started as an engineer. Do you think that helps you see the actual value that the products you’re investing in are going to bring?
Yeah, especially because we’re strategic investors. I not only have a good understanding of our technology strategies; I also have a pretty well-developed internal network with the technical communities. In an organization as large as Caterpillar, it’s no easy feat to find out who to review a technology with to see if it will fit with our strategies. Those are the two main things that I leveraged from my background: knowing what we’re doing and knowing who to go to [in order] to find out more.
Caterpillar Ventures’ early investments were in a diverse range of startups, from TriLumina, a laser-array developer, to FlexGen, a producer of software and power electronics for energy-storage products, to Yard Club, an app-based peer-to-peer equipment rental service. What informed your initial investment decisions as a venture group?
A lot of it was what was being driven by [Caterpillar’s] business units and their interests.
Probably some good investment training wheels that way, right? You’ve got companies that your business units are already looking at, so it’s easier to make the call to invest in them.
Yeah, companies that they’re looking at or areas that they’re looking at. The variety of our investments has really been a help for us. They involve a lot of the different group managers and group presidents of our businesses in what we’re doing. There’s a pretty good awareness now of why it makes sense to be doing venture investments and what value we’re bringing to the organization.
You’ve also invested in Cottonwood Technology Fund II, a tech-focused investment fund; Energy Ventures Private Equity V LP, an energy-focused investment firm; and Emerald Industrial Innovation LP, a European investment firm. Are you already looking to expand?
From the beginning, we always knew that we were going to have a desire to engage funds and directly do investments. You look at it from a financial standpoint, how you would maybe manage your own investment portfolio: you take a bit of direct risk with some direct investments in the stocks, and you try to spread your financial risk a bit through some investments in funds.
There are a lot of areas we’re interested in where we want to keep informed of the technologies or we want to see certain areas of technology develop so that we can be an end-user. We may not want to invest in them directly, but we definitely want to use our fund partners to help us be aware of what’s going on. I think it works well for broadening our exposure. The fund partners are great for providing us with deal flow, they’re great to bounce ideas off of.
Overall, how does being part of a larger corporation influence CAT Ventures’ investment decisions?
It definitely guides us. Like I said, we are looking at things to invest in that will drive our business unit strategies. If we do some great financial returns with our fund, that’s great, but we’re judged more on whether we are helping the business units be successful. I think it’s great to have that ability to focus with our business units and partner with them.
We also have access to a lot of technical resources to help us figure out where different technology areas are going and how they’re valuable, but it does create some additional hurdles. Whenever we’re going into an investment, we always make sure that the company is aware that, “Just because Michael and I think you’re great, don’t mentally put our money in the bank yet. We’ve got processes that we’ve gotta go through.”
Are there logistical advantages to having your venture firm connected to a larger corporation? Is Caterpillar itself able to, say, help out with the business logistics of the companies you want to invest in?
Absolutely, both from the understanding that we’re a large, sophisticated company and just the things that we could potentially bring to [a start-up]: access to our global dealer network and the sophistication we’ve got around manufacturing. There are so many things that Caterpillar as a company has going for it that a lot of the start-ups look at it and go, “You know, that could really be valuable, even being associated with a globally recognized, highly reputable brand.”
Most recently, you invested in a pair of robotics companies. It looks like the investments are tied directly to Caterpillar’s manufacturing potential and the enhancement of its product offerings. Is that accurate?
Yeah, Clearpath Robotics is very software-focused and Sarcos Corp. very hardware-focused. Clearpath started its life making autonomous mining machines, [and] our engagement with them is in the logistics area. We have, obviously, a lot of parts facilities, and we are piloting the Clearpath solution in those facilities. Their solutions, their software systems, can potentially scale and help us continue to be at the forefront of autonomous vehicles. Sarcos has very advanced robotic systems. A lot of what they’re doing has potential as maybe attachments to our machines, making our machines more productive, more user-friendly.
What can you tell us about the “Industrial Technology Pitch Competition” for start-ups that you’re cohosting at SXSW in March?
We are always looking for different ways to get connected to start-ups developing technology in our areas of interest. The more companies we can get exposed to, the better chance we have of finding the right companies to partner with and invest in. Doing pitch competitions like this is just one of the methods we are using to increase our exposure to the start-up community as well as awareness of Caterpillar Ventures in that community.
What prompted you to get this specific competition going?
This event was initiated by Holt Ventures. Holt is one of our dealers in Texas, and they recently launched their own ventures initiative. Many of our dealers, who are independent businesses, are active in finding, working with, and investing in start-up companies that are developing technologies that will be beneficial to their customers and businesses. SXSW is a great venue for Holt, as it is local for them and is becoming a hub for start-up networking. We were more than happy to work with Holt on hosting this event—as well as with our other fund partners, Brick & Mortar Ventures and Cottonwood Technology Ventures.
Are there kinds of technologies or startups you’d like to see in the heavy-equipment and construction sectors that you feel like you haven’t seen yet?
I don’t know that there’s anything that we haven’t seen. There’s a lot out there, and we’re trying to sort through which ones to partner with. Yard Club was one that we worked with and announced, and definitely the drone-analytics space is an interesting area for us.
It’s kind of hard to pick any one because, again, it’s where our business units are going. We’re still very focused on the energy space. Robotics and autonomy is still very interesting. And general digital is huge for many of our business units. So, the things that are on our website today—energy, robotics, digital, and advanced manufacturing and materials—they’re really the areas that we are continuing to focus on.