Katerra was a startup founded in 2015 trying to become the Salesforce of construction. Its goal was to be a one-stop-shop, vertically integrated, construction project management company.
The startup was trying to disrupt its $12T industry by implementing modern tech that was supposed to reduce the cost of construction projects. This in theory made a lot of sense, since construction is one of the industries that have seen the least technological change in the last few decades.
Katerra promised to cut out time and money wasted in the traditional construction process by integrating vertically and productizing the whole value chain and workflow.
They aimed to create prefabricated materials that could be assembled into structures on site. The founder, Michael Marks, used to work as the CEO of Flextronics – an industry-leading electronics manufacturing company, and investors in Katerra believed he’d be able to transfer his experience in manufacturing to the construction industry.
“Katerra is a new kind of company in the building industry, delivering a comprehensive suite of products and services for our clients. This offering is possible because of Katerra’s distinct model which combines end-to-end integration with significant investment in technological and design innovation” - Sourced from Katerra’s website.
$2B was invested into Katerra over its lifetime, with the leading investor being SoftBank’s Vision Fund (which also is the leading investor in WeWork). According to Crunchbase, Katerra drew more investment than any other private company in the construction industry for the past 5 years.
There were signs of trouble in December 2020, however, SoftBank issued an additional $200M bailout to Katerra to help it avoid bankruptcy. Moreover, it canceled $435M of debt to SoftBank-backed financial services business Greensill Capital, which also filed for insolvency protection on the 8th of March 2021. This debt cancellation may result in a lawsuit by Credit Suisse for SoftBank.
In June 2021, Katerra employees were told that the business would shut down without paying severance packages or unused time off. While some of the companies previously acquired by Katerra (e.g. Equilibrium Consulting, MGA, etc.) would continue to work independently by separating from the parent company, the failure of Katerra would naturally cause trouble to a lot of their existing clients.
The transfers in project management could lead to dramatic delays of projects taken over by companies who didn’t have construction management experience of their own.
There were a lot of red flags in Katerra’s brief history, including a rotating cast of CEOs, series of layoffs, factory closures, a controversial track record on delivering projects, etc.
Moreover, as is common with SoftBank-backed projects, Katerra emphasized very heavily on growth, disruption, and innovation, without having a clear path to profitability.
In its essence, however, the main reason for Katerra’s downfall was the clash of the initial idea with the real world.
“... unfortunately, the Katerra team was trying to do too much. There was a lack of focus, boiling the ocean vs. addressing a couple of key low-hanging fruit opportunities successfully, then building on that expertise and trust with customers. Over-spending without any returns on their investments. The number one rule of business -- in my mind -- don’t run out of money! They failed but others are succeeding with more deliberate and discreet efforts.” – Margaret Whelan, founder, and CEO of Whelan Advisory
Achieving product-market fit is the single most important task for any innovative startup, and focusing on a single issue increases your chances to do it a great deal. Lack of focus is a great way to introduce a lot of complexity to your business while at the same time creating very little actual value.
A startup that grows naturally from a very small bootstrapped project into pre-seed and seed investments is forced to focus because it lacks the resources to create too many features and tackle too many problems. You simply cannot create a vertically integrated one-stop-shop company while bootstrapping.
Startups with founders who have previous exits under their belt, and who can attract a lot of funding from day one, are much more likely to run into the problem of premature scaling before PMF.
Besides Katerra, a great example is Justin Kan’s Atrium, which was backed by Y Combinator and Andreessen Horowitz and attempted and failed to become a one-stop-shop tech-driven legal consultancy.
The principles of the lean startup are industry-standard for a reason. You avoid them at your peril, regardless of your size.
Besides trying to do too much, Katerra might have also underestimated the complexity of the problem they were trying to solve. There is a good reason why home renovation projects always take more time and money than planned.
Construction is extremely complex. Design, engineering, assembly, legal framework, local codes and guidelines, personalization preferences by every customer – the work required to integrate all these aspects is immense and the interplay between these facets of the business is unique for each project.
“I think Katerra started with a decent idea. I think they started with consumer packaged goods people pitching an idea that they could turn construction into a manufacturing and logistics play…without ever having done anything in construction. And then they frantically tried to hire people in construction, and at that point, it was too late.” - Bassem Hamdy, CEO of construction tech startup Briq
Katerra’s venture backing led to more than 20 acquisitions, but this wasn’t enough to turn the tides in their favor. While the acquired companies were successful in their fields, the problematic part was the integration of the different verticals.
In that sense, while Katerra claimed Covid played a big factor in the company’s failure and prevented them to raise additional capital, in truth the startup’s problems weren’t simply financial. They struggled to generate real value for their customers and as a result - to make the lower prices they were promising sustainable.
SoftBank’s troubles in some of their projects showcase that often you can’t simply throw money at a problem to make it go away. Real added value proven by an idea and product validation followed by reaching product-market fit are essential steps for any successful startup, and even two billion dollars cannot save a product that the market doesn’t need.
Construction is a huge space and the failure of the biggest startup there isn’t likely to scare away most startups and investors who wish to tackle it. That said, the lessons from the company’s failure can make future projects a bit wiser to the challenges that the construction industry presents.
There were various reasons why Katerra went out of business. The main ones were not having product-market fit and a viable path to profitability. The company also blamed the soaring construction costs and pandemic hurdles for the company’s downfall.
The company that bought Katerra’s assets was Volumetric Building Companies (VBC). They had been searching for a West Coast location and the opportunity presented itself with the availability of the Katerra facility.
Katerra received $1.6 billion in funding over 12 rounds of investment. The most recent of these was obtained on January 1, 2021, from an undisclosed series investments.