Red Ocean VS Blue Ocean

One amazing part of my job is that I get to build community. This morning, I posted in my private online community platform for any requests for insights on my Sunday Scaries post. Nick H. posted “KP Reddy (Shadow Ventures) one I have been thinking about a lot recently -
Blue ocean vs red ocean strategies specific to AEC, and the pros/cons of both.
Specifically how that may affect a startup’s/founder’s journey depending on which they fall into.”

I really like this question. As a short recap on what a red ocean vs blue ocean market is -

A red ocean market is characterized by intense competition and a battle for existing market share, while a blue ocean market is relatively uncontested, allowing companies to create new demand and avoid direct competition. The key distinction lies in the strategy - red ocean companies focus on outperforming rivals, while blue ocean companies prioritize innovation and creating new value. This difference in mindset and approach can lead to vastly different outcomes in terms of profitability and sustainability for businesses operating in these distinct market environments.

The interesting thing as a founder is the juxtaposition of going after a blue ocean market (is there a reason it’s blue, IE maybe there is no market) vs a red ocean market (there is significant data to validate that the market exists).

In the AEC space, the industry is massively a red ocean market. It’s very competitive and highly driven by a procurement process. Buyers are looking for the best price on an “apple” abd want to compare “apples to apples”. Throw in an “orange” and you are likely to have your bid thrown out.
For startups this is a huge challenge. Let’s walk through an example that Nick can relate to well.
An asset owner puts out an RFP to hire engineering firms to inspect a bridge. The firms put together their response.
Here is our firms extensive experience, here are the projects we have worked on, here are the bios of the people that will work on the project an finally here is our rate sheet. The asset owner receives 5 of these proposals. Most of them look very similar (and with AI use in Proposal development, likely are practically identical).  The owner evaluates using a point system that has been shared in the RFP process to evaluate the proposals. They then shortlist 3 and ask them to present. Then they pick 1.
This is a classic red ocean market process.
Now, here comes along an AI inspection software company Aren.ai (yes, one of my portco, and yes I can’t help but talk my book) and they deliver a proposal saying that they will use AI and their proposal is results based for a % of asset value. They provide case studies etc, but not a lot of bios or a rate sheet. IE, they throw an orange into the bushel of apples. They are immediately thrown out by the asset owner. Why? The proposal scoring system can’t be used, so it’s not a valid response.
So what does a startup do?
There are a few options-
1. Stay away from red ocean markets all together.
2. Propose as an apple, but execute like an orange.
3. Partner with apples. Meet with the engineering firms that are responding and partner with them as a technology enabler.

I think it is inevitable that startups will chase red ocean markets. They have to become change agents, which means they need to keep a narrow focus within the market to drive their innovation as the new standard.
In 2003, I launched my BIM consulting business. I saw Autodesk focus on the GSA (Federal Government) to drive BIM (really Revit) as the standard design tool. This included creating a BIM standard, implementation playbooks etc. CAD was a red ocean market with a heavy switching cost. The strategy was that if the largest landlord in the world standardized on BIM, then others would follow. Also, any design and construction firms that did federal work would have to adopt. They picked a larger customer and a customer that had a unique need. They own and keep their buildings forever and care about facilities management. Autodesk was able to demonstrate that BIM was beyond design software (like CAD) but rather supported FM as well. It was a long road, but was effective.

Is it possible to be an AEC startup going after a blue ocean market. Yes! However, the market has to be underserved process. Finding areas that are underserved by the incumbent technology or is an area of the process without clearly defined ownership. The key issue here is that the first market may be initially small. While small, it is a flanking strategy (see Sun Zhu) to take share from an incumbent technology provider.
Here is an example-
Construction Administration. This is a very underserved part of the building process. The process is “owned” by architects , however the Contractor is most affected by it. The challenge being that most collaboration tools for designers are created to support the design process with other designers to develop CDs. Once a project design is completed, designers are out of budget and have intellectually moved on to their next design project. Most designers view CA as a necessary evil of their work. So to recap, I don’t have budget, I don’t want to do it, and I’m busy with my shiny new design project. However, it’s part of the contractual obligation. Autodesk does not do this well, nor does Procore.  Why? It’s a weird “no man’s land”. So a startup could
have a strategy to serve this small underserved process with the idea that they flank Autodesk in the design world or flank Procore in the build world. To execute this, a startup needs a lot of capital to get in the door? Why? There is no technology budget for this process. Probably needs to be free/cheap. So until it becomes the standard and can start taking share from incumbents, it will experience a ton of cash burn. Probably need 5-7 years of cash.

Happy Sunday my startup friend s :)

Thanks Nick for the prompt. Also, I had a blast at last weeks Founders Circle (an open forum for startups to chat with me). Chatting with founders with these types of topics.

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