As a recently listed company, it is now more than five years since the founders of Brisbane-based Felix Group (ASX: FLX) made the strategic pivot to build something more than just a third-party vendor marketplace for construction.
In a similar vein to Hipages (ASX: HPG) for tradies or Carsales.com (ASX: CAR) for automotive listings, Felix has been able to benefit from positive network effects in a niche part of the construction and infrastructure sector, which in the words of co-founder and CEO Mike Davis was traditionally "disparate and disjointed".
The marketplace itself now has more than 43,000 vendors and counts Tier 1 contractors like CIMIC (ASX: CIM) and Monadelphous (ASX: MND) amongst its users. But Davis believes it is the compliance and risk management piece as part of Felix's Software as a Service (SaaS) transformation that sets it apart, providing opportunities to grow in new sectors as well.
With backing from Aconex co-founder Rob Phillpot who now sits on its board, Felix was one of the first new tech listings on the ASX this year, raising $12 million to fund further investment in its software, scaling up marketing, and expanding into new verticals and geographies.
IPO-related costs led to a $7.5 million loss in the December half, but Felix's revenue has been growing steadily and if weren't for the listing the loss would have been just under $1 million.
"We think that the IPO capital raise gives us the sufficient capital to break even over the coming years, but the purpose has been to continue to drive growth and capture market share," says Davis, who co-founded Felix with Michael Trusler in 2012.
"The more customers that we sign, the more vendors they bring into the Felix marketplace, and the more vendors there are, the more attractive it becomes to new customers. It's those network effects of marketplaces that are really valuable.
"And the more transactions that are happening from both sides, the more data and market intelligence that are built out, that adds another value layer to the market."
That marketplace is underpinned by significant investment aimed at mitigating what Davis sees as a "sleeping risks" for industries dominated by third-party contractors.
There is a raft of compliance issues that contractors need to be across nowadays, whether they be the Modern Slavery Act, industrial manslaughter laws, local supplier requirements, female participation or indigenous participation, and just simply knowing whether a new vendor you're working with has the right pre-qualifications and insurance in place.
"Traditionally these things were either managed in the big finance platforms such as Oracle or SAP, or just in spreadsheets - third-party vendor details were disparate and disjointed," says Davis.
"So I think that we're fortuitous that it's a really strongly emerging category of software, and I think we're ahead of the curve in that we've developed best-in-class vendor management software, and are really now a modular enterprise solution."
Davis explains Felix's software integrates into the main enterprise resource planning (ERP) software used by companies. Once they adopt the software they tend to see the productivity benefits and have greater security about who they're working with, but it isn't always easy to get clients over the line.
"The hard sell is we deal in industries that are traditionally laggards - construction, infrastructure, they're not at the forefront of technology adoption," he says.
"What the challenge has been from when we first started out is getting change happening in those big organisations.
"Because what we do fundamentally changes the way that they manage their supply chain; it's a quite large organisational change so that becomes very cross-functional and a lot of people get involved in the decision making."
He says whilst organisational red tape can slow down change management and adoption, productivity and compliance are now taking on a higher priority.
"If there's one poor job from a sub-contractor, that's enough in the margins that companies are operating in for the whole project to fall over," says the entrepreneur.
"The more scale, the more complex projects are becoming and the more that they're taking on, if you don't have effective systems and processes and technology underpinning that, it's just inevitably going to invite problems."
Room for growth
Felix already has most of the biggest names on board when it comes to contractors in Australia, but Davis highlights there is room to grow via their international operations and into new sectors domestically, not to mention the opportunities presented by the Federal Government's $110 billion land transport infrastructure development plan for the decade ahead.
"We're at that exciting inflection point now where the robustness of the platform is at a sufficient level," he says.
"We've had validation from industry leaders, there's been a really exciting growth curve. We see a heap of opportunity in Australia and New Zealand where our core customers are at the moment.
"Our DNA is in commercial construction and infrastructure, that's where we started with our marketplace, but we've seen the applicability of the platform into related verticals such as utilities, mining services, facilities management and government."
Davis says what these sectors all share is they've got a critical dependence on their third party supply chains to deliver works profitably and safely.
"The number of verticals that we're operating in means it's a very deep market domestically," he adds.
Felix currently has vendors in 42 countries outside of Australia, mostly through the large multinational contractors that use the platform that are rolling out Felix in their overseas projects.
"That's building us out an organic vendor footprint without yet investing in sales and marketing in those countries," says Davis.
"Through that we're starting to feel already an organic pull with opportunities in some of the larger markets and have a number of international opportunities in the pipeline," he says, adding that the group expects to start converting some of those in this calendar year.
But if compliance and risk management have been a major strength of the software here in Australia, taking domestic nuances and law into account, how well will it be able to adapt to overseas legislations and supply chains?
"If we think back to the evolution of our business from our online marketplace into the enterprise solution, we didn't start a different code base or platform when that happened," Davis replies.
"It's all been an evolution of the one system architecture. So building the internationalisation and international capability of the platform as we go has been a real area of focus over the past 12 months, and will continue to be - things like international currencies we've just launched, even distance matching from a project to where a supplier is.
He says during 2020 a lot of large companies were just focusing on their own internal operations to get through the COVID-19 challenge, but now that the economy is emerging from that Felix is seeing momentum pick back up in the market.
"Being cloud based I think that in the current environment of risk and working remotely the need for a platform like Felix is even more pronounced," he says.Never miss a news update, subscribe here. Follow us on LinkedIn, Instagram and Twitter.
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