On Monday, Textura Corp. (TXTR) reported that its largest shareholder, Northwater Capital, was “changing its role from providing venture support to one of activist,” because the investors believed that the company needed to pursue strategic alternatives. According to the letter from Northwater Capital, “three interrelated factors…should influence Textura’s strategy…the anticipated growth, the associated risks, and its cost of capital.”
In defining these three factors, Northwestern Capital identified two specific “hurdles” confronting the company. First, the speed by which the “field of large scale systems” or “mega-players” are moving. Second, the fact that Textura is stuck in the cyclical field of commercial construction and unable to get out and expand outside this field.
In other words, according to their biggest investor, Textura is at a dead-end.
Is Textura’s Business Model Creating Their Own Hurdles?
The Northwater Capital letter states that Textura used an “unfamiliar business model” to make “great strides in ‘automating an industry.” The fact remains, however, that Textura has not “automated an industry.” Northwater Capital clearly states in its letter that the “addressable market within the construction industry is very much larger than that currently captured”. One of Textura’s primary hurdles is that appears unable to expand throughout the construction industry, and instead has limited itself to commercial construction by virtue of its business model. Even more significantly, and what Northwestern Capital doesn’t say, is that the company is stuck in even a smaller niche: that of large commercial construction projects.
Furthermore, while Textura’s largest investor brags that the platform has “network effects,” they don’t dig into Citron Research’s warning about those “network effects;” namely the rate of “subcontractor churn,” and how Textura’s business model necessarily dis-incentivizes subcontractor buy-in. Read the Citron Research Reports on Textura here: Wolf of Wall Street and The Fraud at Textura.
While the Northwater letter outlined some true and significant hurdles, the question we have here is whether Textura’s real problem is actually it’s entire business model.
Part 1: Is It Too Hard For Subcontractors To Like Textura (Even A Little)?
For a company to have “network effects,” the company must provide a product that its users like so that there is substantial use throughout the entire network. Textura has a few hundred general contractors using its CPM application, but a few hundred thousand subcontractors users have passed through the application. This much larger segment of the industry is where the proposed “network effect” would exist, but there is some question as to whether subcontractors like Textura at all.
As any subcontractor knows, Textura’s business model is to sell the product to general contractors and then force adoption (and payment) by all of the subcontractors. Subcontractors historically aren’t great fans of this business model. See, for example, a 2012 letter from the American Subcontractor Association (ASA) president about subcontractor “gripes” about the solution. More recently, the ASA wrote an examination of the “Construction Payment Management” system’s terms and conditions, concluding that:
- Textura’s CPM “allows general contractors to be unduly rigid in the processing of payments”
- The Textura CPM “user experience is often than the generals blame the system and use it to delay issuing payments”
- “Subcontractors have no leverage to negotiate the Textura terms and conditions;” and
Any subcontractor distaste for the Textura CPM shouldn’t come as too great of a surprise to the company and its shareholders. In fact, one of its shareholders – Goudy Park Capital – completely marginalized the importance of subcontractors to the company in this quote:
If a subcontractor is unhappy, the GC will just go to the next subcontractor down the line.
Textura’s platform is sold to general contractors, property owners, and lenders, and then subcontractors are forced to use the tool. In selling the platform to these parties, Textura must necessarily promote that it helps those parties mitigate their financial risks and legal exposures. The trouble is that this doesn’t help the subcontractor end users. To the contrary, because of common financial risk shifting tactics, Textura use likely hurts subcontractors.
Textura’s largest shareholder mentions network effects, and is seemingly is not pleased with the speed by which Textura’s “network effects” are taking hold in the market, but does not swim upstream to inquire why that is. It seems that Textura’s business model, the attempt to position itself as the go-to platform for the industry’s largest GCs, arbitrarily (but necessarily) limited itself to a tiny segment of the addressable market in the construction industry and positioned itself as an adversary to the remaining larger portion.
Textura is aware of its image and use problem with subcontractors, and is trying to get subcontractors on board. They put out a self-serving press release every few months that their application is the “choice of subcontractors,” in California, Georgia, and Texas for example. They pay to be a platinum sponsor of the American Subcontractor Association, and more.
Does the strategic problem actually reside within Textura’s business model? Is the Textura CPM business model unfair and abrasive to subcontractors? Maybe it works when Textura sells to huge, powerful, and heavy-handed general contractors, on big commercial construction projects…but is this exactly why it doesn’t scale into other parts of the industry, and potentially to other industries, as well?
Part 2: Do Big Commercial Projects Uniquely Enable Textura’s Solution In Way That Doesn’t Apply To Other Industry Projects, Or Other Industries?
While the potential expansion of Textura’s model to other industries is a nice story for the investors, the reality is that the “addressable market within the construction industry is very much larger than that currently captured” by Textura. This may be directly related to the way in which leverage is exerted on large commercial construction projects – which is not necessarily mirrored in other construction segments or in other industries.
When Textura announces that Turner Construction will use it’s CPM solution across all of it’s projects, it’s not difficult to see how this deal was struck. Turner Construction has a lot of leverage with its pool of subcontractors because it controls a high volume of commercial projects, and it has a large number of subcontractors in line waiting to bid on that work. Indeed, as noted above by a Textura investor, “[i]f a subcontractor is unhappy”, Turner Construction can “just go to the next subcontractor down the line”.
The relationships between smaller general contractors and its subcontractors, however, are more nuanced. Smaller commercial projects, residential projects, and other construction projects are performed by these smaller players. These smaller players lack both the desire and the necessary leverage to force a payment management solution like CPM on their associated subs. Therefore, as Northwater Capital explains, the market is much, much larger than that which Textura has been able to capture. Similarly, in alternate potential verticals, there may not be the appropriate leverage held by few top-of-the-food-chain parties to allow this business model to work. Because of this, “Textura is not in a position yet to diversify its industry exposure” outside the field of commercial construction.
It’s hard to see how Textura will ever make significant gains into the large portion of the construction industry that remains inaccessible and untapped so long as the prevailing view is that Textura is adverse to subcontractors. And then, it’s hard to see how Textura can change its business model to embrace subcontractors without alienating its mega-player general contractors, lenders, and owners.
Everyone Benefits From A Fair Construction Payment Process
There is nothing inherently wrong or unfair about the construction industry’s payment processes. However, the process is riddled with problems. As explored in a great ENR piece by Richard Korman, the Perception of Payment Risks Differs Depending On One’s Place on the Payment Flow Chart. Those at the top (GCs, owners, lenders) work to “stay ahead” of the subcontractors. Those at the bottom (subcontractors) face huge working capital challenges and are victims of payment abuses.
Textura’s CPM business model appears to be weighted very heavily in favor of those at the top of the chain, and in helping those parties “stay ahead” of subcontractors. This takes an already troubling industry problem for subcontractors and makes it worse. This is best explained by the American Subcontractor Association article in their recent Contractor’s Compass titled ASA Attorneys’ Council Examines Terms and Conditions of Textura’s Construction Payment Management System:
However, the system allows general contractors to be unduly rigid in the processing of payments, and user experience is often that the generals blame the system and use it to delay issuing payments, when Textura allows general contractors flexibility in setting the parameters for acceptable payment documentation. When a general contractor blames a system requirement, essentially the general contract is saying “we set up the system that way, and we are not willing to change it.”
Precisely because subcontractors can be at the wrong end of leverage in the payments process, industry participants have spent decades trying to insulate themselves from those problems. The legislatures created mechanics lien laws to ensure subcontractors are paid. General contractors combatted with contingent payment clauses and lien waiver contracts to push the risk of non-payment off their shoulders. And on and on.
What if the best way to insulate against problems and risk was just a commitment to fairness?
There is a way for lien waivers and payments to get exchanged technologically, efficiently, and most importantly, fairly, without one party exerting unfair leverage over the other. Just as the general supply chain marketplace is starting to see the benefits to fair and fast payment with initiatives like SupplierPay, the construction industry needs an ambitious and transparent commitment to fair and fast payments.