Welcome back to the SMB Tech Innovators podcast blog series powered by Gusto, where we explore the intersection of FinTech, vertical SaaS, and how software combats the rising complexity of running a business. Our goal is to share stories, advice, and best practices from the leaders and investors behind today’s cutting-edge platforms.
In this episode we speak with David Arnold, Chief Strategy Officer at Buildertrend. Buildertrend is the leading software platform for the residential construction industry. David leads the company’s overall corporate strategy, financial services, M&A, and new product development efforts. With an immense amount of experience in building SaaS businesses across multiple industries, David sees a huge opportunity for an industry that only needs to change a few habits to become a software-enabled operation.
Today, David outlines the opportunities software has in the construction niche, why so many are available right now, and how customers and businesses alike will win from the tech boom.
- How to decide whether to build, partner with or buy a company
- A unique approach to marketplace investments
- Why the construction industry has been so active in the last few years?
- How companies should approach new product investments
- Advice for bootstrap founders in their early days
(The following was transcribed and edited for clarity)
Folks have different definitions of what a chief strategy officer does. What does a chief strategy officer do?
My time is really spent on strategic planning, corporate planning, aligning not only the leaders but also the folks, one, two, three levels below that to make sure we’re all marching in the same direction, our investments build upon each other year to year. Beyond that, I oversee corporate development, partnerships and M&A, and then the third bucket, at Buildertrend at least, is if we have a new product or a new business unit that doesn’t quite fit somewhere in our organizational structure, my team will incubate it, get it off the ground, ideally get it to its long-term home as quick as possible, but that’s kind of the art of the early stage. You never know until you get there or until you really have a product that is meeting a demand or a pain point. So it’s the combination of what should we be when we grow up, how do we structure the organization, how do we get alignment, and then often, what are those new things we want to put a little bit of resources to before we know it really is, it’s going to take off.
In the last few years, you decided to take some institutional money. Tell us about why you decided to embark on this next phase of having a partner to scale Buildertrend.
We always did a good job of listening to everybody but saying, no, we’re not interested, we’re happy, we’re doing well. And that wasn’t just a stiff-arm, it was the truth. The three founders enjoyed what they were doing, believed in the growth that we could achieve without investment, but started to listen. And over a few years after I started, that conversation became more of a strategic focus. Myself and a few others started working on preparedness, getting ready for a potential transaction. And then ultimately, around 2018, 2019, started to lean in and have formal conversations getting folks to Omaha to learn about the company, meet the leadership team. Ultimately, at the end of 2020, we did decide to partner with Bain Capital and HGGC. We had a great business with a huge market and a lot of people to go acquire. We had also proven that we could make money off these value-added services. So about 10% of our revenue came from these value-added services at the time we did our transaction. And so collectively, there was a thesis that we believed in that fortunately some private equity folks believed in too, about doubling down on our ownership of the residential construction market, expanding these value-added service areas, investing in them fully, not just on the side, and ultimately becoming a platform as opposed to a kind of one-product company. And so we believe in it, they believed in it ,and ultimately, we found some great partners that still to this day are aligned around that same vision.
“There was a thesis that we believed in that fortunately some private equity folks believed in too, about doubling down on our ownership of the residential construction market, expanding these value-added service areas, investing in them fully, not just on the side, and ultimately becoming a platform as opposed to a kind of one-product company.”
I’d love to have you share a little bit on how you decide whether to build, partner, or buy? Is there a framework in which you go about thinking about these things?
In the bootstrap days, it was pretty easy. We couldn’t buy anybody, and so it was really a build to partner conversation. But we did see opportunities that could make sense in all of the traditional buckets, expansion of products, expansion of market, et cetera, et cetera. And so we came in with, I think, some sophistication around what we could do but didn’t have the tools and resources to do it. And that was another reason that I didn’t mention that partnering with an investor made sense, to unlock that capability. So once you have that capability, it’s a different dynamic, and we were always very clear with each other and our perspective and actual investment partners that we didn’t think we should buy companies just to check a box or feel good about ourselves. It had to make sense.
And that’s still the philosophy we employ today. So as we did strategic planning, we thought about how to grow the company. We index towards organic growth. We index towards things that we can build ourselves. And so where that puts acquisitions is there’s a higher bar. It needs to truly be an accelerant in one of the areas we’re investing in around one of our business units, or it has to be a really big swing that fundamentally changes the business in a way that we all have alignment around it. So I would say, at this point of our company’s life, it’s a pretty high bar. Now, we have executed a few acquisitions. One was combining with CoConstruct. The other are smaller and deals that we haven’t announced to this point, but do fit the category of accelerants. They either bring talent or capabilities or both to our company that allows us to be a better project management software to build out a financial services suite of offerings to attack material purchasing. It has to fall in one of those pre-aligned guardrails that the strategic plan really outlined and we hold ourselves to.
You talked about the acquisition of CoConstruct. Walk us through that process of how that transaction came across. How did these conversations start?
They were the Pepsi to our Coke, Coke to our Pepsi, depending on which side you’re on. Awesome company. I think what we found post-acquisition is that we were functionally the same company. I was on this awesome call when we brought the tech teams together, and it was like two minutes of awkwardness and then they started talking about the pain points and things they’ve been through. And there was this like, oh, we did that. It really has been an awesome coming together. In terms of how it came together, Dan, our CEO, and Donny, their former CEO, were friendly. And every year, there’s this international builder show and they’d talk once a year and there was competition. Both sides really wanted to win, quote/unquote, but it was always a pretty open conversation. And the industry was big enough that it never got to a super contentious level in terms of fighting for deals. But I think both companies and both CEOs knew that we were marching toward a similar vision. And so anytime that’s the case, the topic of combination can come up from time to time. Ultimately, they did a private equity transaction with Serent Capital, who’s now one of our partners. Awesome, awesome firm. And so they kind of went first and took money first. And as we approached our process and our thoughts about finding our ceiling, it was something we thought about coming back to and were vocal about. It could make sense to bring the companies together. And so that was really how the conversation started. I think both sides believed that the combination of strengths, talent, and the common vision just kind of made sense together. And so in terms of all the inside baseball, I’ll spare you of all of that for various reasons, but I think at the end of the day we believed and still believe that we have an awesome opportunity in this industry, that there’s a wealth of experience and knowledge and very useful functionality and features that both sides brought to the table. And that was a big part of it. Put those together, release something that’s better than either of us was before, and just meet the industry where it is and pull them to where we think we can take them.
When you decided to embark on seeing what it could be, how long do these kind of transactions take? Is it a multi-month process? How long do these things take?
I think every instance is different. Because we had really great partners… Both of us at that point, we were whittling down. They had an established partner. I think we had great guidance in terms of how to do it, how to make sure that everyone walked away feeling good, as good as possible and excited about the go forward. If we had tried to do it ourselves, two bootstrap companies, I think it would’ve been a lot messier. Every deal is messy. Every deal has peaks and valleys. There’s always that one thing you think is going to sink the deal, and sometimes it does, sometimes it doesn’t. In this instance, we had great partners, great guidance, and like I said, I’m going to reinforce it, we just believed in the same vision. And I’m not trying to be overly rosy. It just was one of those unique opportunities where, as we all analyzed it from our separate vantage points, we thought we could do more together.
And are you two independent companies that are run independently? Or are you finding common areas to invest in together, go to market, product technology? How are y’all operating now that you’ve been together for some time?
Yeah, I don’t want to rob future headlines and announcements, but I think what’s fair to say is that we have, over time, brought more and more together. We didn’t want to rush XYZ department or integration until it was ready or until it made sense. And so we did take a long-term approach to mapping out all the things that would need to come together, sequencing, prioritizing. The first thing we focused on was how are the products different? What is better on one side versus the other? And what’s the path to bring those into one framework? But the work continues, I think. These are two folks in the same market, come together. There’s a lot of nuances. So there’s still work to be done, but overall, what I’ll say is that we’ve tried to be really thoughtful and tried to put the customers first, frankly. As don’t do something because it’s expedient for us. Do it because the combination makes us better able to serve our end-market.
I’m curious, as you’re thinking about expanding, are there areas that you’re thinking about that you want to partner with?
Our primary focus is on organic growth. We believe that we’re in a fortunate situation where we can meet our objectives through organic growth, primarily organic growth. We’re doing so around our bread and butter, which is the project management software. We’re thinking very thoughtfully about some new areas like financial services, materials, management of materials, purchasing. And so for a deal that makes sense at this stage, it really does need to bring something new to the table, bring capabilities that we don’t have, so get us to our infrastructure goals or expand our product suite in a faster timeframe than we could do on our own. Like I said, we feel fortunate because we have such a big opportunity, and there are so many ways that we believe we can provide value to our clients that we don’t have to over index towards acquisition.
I’d love to learn more about how your marketplace fits into your overall strategy and what’s unique about the way you’re approaching your marketplace investments.
This is another area of the business that is evolving, and we’re building upon the foundation that we built from the bootstrap days. And so I think, like I said about acquisitions, in the days of bootstrap Buildertrend, every integration we did with a partner required this opportunity cost analysis with respect to building something as it relates to our project management software. And so the bar was pretty high for any integration back then, and we had to either tie it to a clear retention benefit or revenue we thought was meaningful. And so it was a limiting factor, but one that I think made us stronger and just sharper around our thesis for X, Y, Z. Like I said, with acquisitions, as you get the resources, you have to decide how to prioritize.
And so over the past year, we’ve taken a new look at how we want to approach partnerships about the infrastructure required to do so in a more nimble and broader way. And in the go forward, I think one of the things we’re really wading through is how to move from a one-product mindset to a platform mindset. And that touches both our new business units as well as how we work with folks who are not under the umbrella, that we aren’t going to provide a service that we don’t want or can’t build ourselves. We now have new capabilities, new talent who have done these things at scale, have been in platform companies, and there’s a lot that we’re working on that we’ll be announcing over the next months and years.
And so that’s a very vague answer, but I think what I’m trying to illustrate is that it’s another part of the business we’re reexamining now that we have best-in-class partners and the resources to invest. I think the hardest thing about shifting from bootstrap to working with somebody as reputable as Bain is that you have to be really thoughtful about how you invest if you want to be a good steward of those resources for the company, for the employees, for our partners. So finally having the resources creates different problems, which is prioritization and thoughtfulness. And so I’ll take it on this side, bootstrap was fun, built some nice muscles, but now we’re just trying to be really thoughtful about how to stage, how to prioritize, where we get the biggest ROI.
There’s a lot happening in the construction industry. What’s going on in this market? And why is it so active in the last few years?
I think a few things. I think at the highest level, the investment community, the founder community, the talent pool all are recognizing that this is, one, a huge industry and, two, one of the least digitized. Even today, at this point, it is one of the least digitized industries out there. And so what they see is likely what we see, which is a lot of folks who have processes that are manual, that may be using Microsoft Excel, and could really benefit from software that manages all or part of their life. Their interactions with stakeholders, their actual production, the whole thing. And so I think at the end of the day they’re looking and seeing the same thing that Dan, Jeff, and Steve saw in 2006. I think the presence of companies like Procore and Buildertrend give them a bit of a blueprint. But I think it’s also fair to say that the market sees opportunity that we haven’t captured.
And I think that’s something that we as Buildertrend and other companies that have been around a while have to take seriously. Because you’ve done well doesn’t mean competition can’t push you, change your opportunity set. So we take that very seriously. And so we watch it closely. We try and remain focused on what we can control and our strategy, but you have to look out. And so I think they see the same thing. We take that seriously. And at the end of the day there’s just a lot to win. There’s a lot of clients, a lot of payment flow, purchasing and the connectivity to material suppliers. There’s three or four things about this industry that you could build a really big and nice business around. And so people are trying to come for their piece of it, and I think that’s ultimately really healthy. The competition will result in great products, great companies. And we want to remain one of those companies.
I know that a lot of companies that we spend time with are going through their own evolution of what to build. What advice do you have to other innovators in this market that’s building products for small/medium-sized businesses and how they should think about what to invest in next?
Okay. I can answer kind of two ways. In terms of which ideas to prioritize, the cliche holds that you have to be close to your customer. And it’s easy to have faux customer, voice of customer efforts. It’s really hard to make sure that you’re talking to customers throughout every phase of the new product development process. It’s hard, it’s inefficient, but I would argue inefficiency caused by talking to customers early on is going to save you a ton of time later. So I think with the truly novel and truly new, it really does start and end with talking directly to your customers and reading between the lines, stress testing, iterating, all the cliches, all the things that people have written books and blog posts about.
When it comes to investing in new areas when you’re an established company, that’s fundamentally the same process, but a little harder because of the opportunity cost. Even at our scale with a mandate to invest in new areas of the business on top of our original wedge and bread and butter, there’s still opportunity cost decisions, there’s headspace distraction, decisions and risks. And so this is an area where we’re trying to get better, frankly. We had a really awesome like, hey, what do we want to be when we grow up? A lot of attention and investment in these new areas. We haven’t taken our eye off the ball, but we are constantly, at this point, reminding ourselves this is what got us here, this needs to remain best in class, the bulk of our investment needs to go toward the reason that people come to us in the first place, which is the project management, organizing their life. And so having agreed upon areas of investment are good, but it’s also really important to have specificity around what that means.
So what are the ratios of investment? Where is your best talent located? Being really objective and thoughtful about reorganizing, reshuffling those ratios and holding yourselves accountable is the hardest part of doing new product development attached to an established product, if that makes sense. So different challenges. The process I would argue is the same. The dynamics and the trade-offs are very different. There’s a freedom in the early days where you’re one product truly early stage because either it works or it doesn’t. You’re not robbing anything else and just, you have a company or you don’t. When you’re doing it as part of an umbrella, there’s just big trade-offs that you have to be really thoughtful about and frankly just make sure you have broad alignment around.
“There’s a freedom in the early days where you’re one product, truly early stage because either it works or it doesn’t. You’re not robbing anything else and just, you have a company or you don’t. When you’re doing it as part of an umbrella, there’s just big trade-offs that you have to be really thoughtful about and frankly just make sure you have broad alignment around.”
When you are looking at a company, what matters to you? How do you evaluate whether they fit your strategy and what are the other elements you look at that sets a company apart?
I think at the end of the day, because of our approach and this platform vision and meeting more than one need in a big market, it’s important that they share that vision, and they wouldn’t get to that point if there weren’t a role for them to play in that. But I’d say it’s important for us to align around what that vision is, that we view the future 95% the same way. I think that helps you understand how their products were built, but maybe just as importantly, do they want to be around? And not every acquisition needs to mean that people stick around forever, but if you could find that perfect balance or that ideal balance of a product that moves you forward as well as talent that you didn’t have or this accelerant talent, you can get a ton of benefits.
One of the acquisitions we’ve done has helped us on both sides. Product has been a great fit. The people and the talents have been awesome at integrating that product, but also have now been put onto a new product build that is another growth area for the business. And so it doesn’t always work out that way, but I think it is helpful to start with vision, like an alignment, you have to do the blocking and tackling, and does the widget add value, all of the things that get you to the table. But I would say that the extra, the intangibles really are about the talent and the vision. And at the end of the day, do we view the world the same way?
What advice do you have for bootstrap founders that are going through that question of should I take institutional money, should I not, should I keep on going at it? What advice do you have for them?
I think at the end of the day, what’s probably most helpful is that people are honest and realistic about what’s required in the next phase from a leadership perspective and whether or not that’s what they want to do. Is that a good fit for their goals, their skill sets? And it’s my opinion, my personal opinion, that if you’re really happy running a bootstrap company and you’re not motivated by getting to the next level or you don’t want to be part of that, then it’s okay to be honest about that. Sell the company and move on to the next thing if you really enjoy the early stage building, or don’t do anything. I think a lot of interest in investments and all the great success stories can get people to lean in when they don’t want to.
If they do want to, I think at the end of the day, it is back to self-awareness, and that’s saying what’s the highest and best use of my time? What percentage of what’s required for the company does that fill? And how do I find people that can fill the rest of those spaces? I think that’s what’s been awesome for us. One of the things that’s been awesome for us about our partners is if there’s a problem you haven’t encountered, there’s a certain specific talent that you don’t have, that’s what they do. It’s an unlock, like, oh yes, talk to this consultant, talk to this search firm. That’s just like this company.
And so I will say, having gone from bootstrap to PE-backed, there are massive advantages, but it’s very different. And I think self-awareness about what you want, what the company needs is key, but then also understanding that it is a step change and it will require new muscles. It won’t be the same, but if you do so with intentionality and with a vision and with a goal, then these firms are very effective at their job and that’s getting companies to grow and become more valuable. So at the end of the day, know what you’re getting into, be thoughtful, be objective, be self-aware, and get ready for the ride.
That’s amazing advice. Thank you for joining us for today. I’m sure there are listeners out there that might want to reach out to you. What’s the best way to contact you if they’re interested in any of these topics?
My email, I’ll give it out and we’ll see if I regret this or not, is just firstname.lastname@example.org. If you’re looking for a partnership with us, email@example.com will get you to the team.
Listen to the entire podcast with Buildertrend CSO, David Arnold, also available on Spotify.