RIP Katerra, but it's (still) time to build

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The Weekend Pitch

June 6, 2021

Presented by Masterworks

If there was a final resting place for startups, it would be full of unmarked graves. When a tech bet goes south, the company is often sold and its founders hired away without fanfare.

Not so for construction tech specialist Katerra, which is reportedly shutting down after years of reports that all was not well inside the SoftBank-backed startup. Instead, all signs indicate that it will be remembered as one of the most highly funded startups to go under—ranking somewhere between Theranos and Quibi.

This is The Weekend Pitch and I'm James Thorne. You can reach me at james.thorne@pitchbook.com or follow me @jamescthorne.

(PHG Pictures/Getty Images)

In late 2019, Katerra claimed to have 8,000 employees, $1.7 billion in annual revenue and a pipeline of projects worth more than $15 billion. Moreover, it hoped to become profitable by the end of 2020.

That was the official picture, which turned out to be a mirage.

Much of what is known about the behind-the-scenes operations is thanks to reporting by Cory Weinberg for The Information. Among the findings: Projects were delayed and abandoned, factories were plagued with mishaps, and promises to deliver at low cost were broken.

Most damningly, Katerra allegedly exaggerated its revenues by front-loading the figures in reports to investors, which had ploughed well over $1 billion into the company. The activity is said to have prompted an investigation by the SEC.

An early employee at Katerra told me that the startup's challenges worsened after its Series D round, which was led by SoftBank and brought in at least $865 million. The company went on an acquisition spree, buying up construction companies and growing its book of projects in the process.

Katerra lacked senior leaders with deep knowledge of the construction industry, said the employee, who asked to remain anonymous while discussing a former employer. And as its ambitions grew, the company lost focus on its mission to solve the housing crisis.

Those problems were compounded by a revolving door of executives: The company was led by three CEOs over the course of four years.

SoftBank began pushing for changes in 2019, and the board voted to remove CEO Michael Marks in 2020, according to The Information. That move kicked off a turnaround effort that would be bankrolled by the Japanese investor.

SoftBank became a majority owner last year after trying to bail Katerra out with $200 million—severely diluting other shareholders in the process, The Wall Street Journal reported. And SoftBank-backed Greensill Capital, the British lender that went bankrupt earlier this year, is said to have canceled $435 million of Katerra's debt in exchange for a stake in the company.

The goal of vertically integrating a supply chain as complex as the construction industry was always going to be expensive. But the Katerra drama bears many of the hallmarks of other growth-gone-wrong stories. Poor management, insufficient investor oversight, and tech that wasn't ready for prime time seem to have made for a deadly cocktail.

What makes Katerra's story especially disappointing is that its mission was a noble one.

The company promised to reduce the cost and complexity of large buildings by using prefabricated modular units. It could have been a major test case for how technology can be brought to bear against chronic housing shortages in major cities.

Andreessen Horowitz co-founder Marc Andreessen's rallying cry during the pandemic, published a little over a year ago, was that "it's time to build." He didn't mean that metaphorically.

"We can't build nearly enough housing in our cities with surging economic potential—which results in crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future," Andreessen wrote.

With the prospect of yearslong infrastructure spending on the horizon, there has scarcely been a better time to fund bold new ways of building. Thankfully, construction technology companies continue to innovate, many of them funded with VC dollars.

Prescient is creating multifamily buildings out of recycled, lightweight steel that is prefabricated offsite. The startup raised $190 million from construction company JE Dunn and Eldridge last month.

FactoryOS, another specialist in offsite construction, raised $60 million this year. With a fresh $40 million Series B, Blox is creating a niche in building healthcare facilities from modular units. Mighty Buildings landed $40 million to support its 3D-printing tech for houses. And Canvas recently took in $24 million to make robots that can finish drywall.

With any luck, these and other companies will bring the great disruption that Katerra had promised. They might even be able to do it without burning through a billion-plus dollars.

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Quote/Unquote

(Yuichiro Chino/Getty Images)

"The US is no walk in the park. It's much easier for other business models to say: 'It doesn't matter where I'm headquartered,' but that doesn't hold with fintech."

—Barbod Namini, a partner with Munich-based HV Capital, on the record-setting fundraising by European fintech startups seeking international expansion

Datapoints

Sure, valuations are flying higher across the spectrum of venture-backed deals. But supply chain startups are moving up on an especially sharp curve.

PitchBook data shows median pre-money late-stage valuations rising 100% year-over-year to $200 million in Q1, fueled by demand for ecommerce and food delivery services. The jump was even more dramatic for median early-stage valuations, which rose more than 125% YoY.

Read more in PitchBook senior analyst Asad Hussain's recent Emerging Tech Research report.

Did you know ...

(msan10/Getty Images)

... That the Peloton effect is real? VC funding for fitness technology hit about $2 billion last year, nearly double 2019's total. Check out our Emerging Tech Research on retail health and wellness for more on the booming segment.

Deal Flow

A SPAC backed by Chamath Palihapitiya has completed its merger with SoFi. (Mike Windle/Getty Images)

Are SPACs officially back?

Just over a week ago, Social Capital Hedosophia Holdings Corp. V, a blank-check company formed by Chamath Palihapitiya, completed its reverse merger with SoFi, valuing the fintech specialist at some $8.65 billion and bringing in about $2.4 billion in cash proceeds.

A few days later, Palihapitiya filed to raise $200 million apiece for four new SPACs that will target companies in the biotech industry.

And on Friday, Pershing Square Tontine Holdings, backed by hedge fund giant Bill Ackman, announced it was in discussions to acquire a 10% stake in Universal Music Group from Vivendi for around $4 billion.

The Chatter

Huge shift in venture capital: With the change in size of venture outcomes, the old “20% ownership targets” and getting in early to help build the company seem less relevant than just getting enough $$ into the big winners. What a difference a bull market makes.
— Josh Elman (@joshelman) June 2, 2021

This edition of The Weekend Pitch was written by James Thorne, Adam Lewis and Alec Davis. It was edited by Adam Lewis and Angela Sams.

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RIP Katerra, but it's (still) time to build

Quote/Unquote

Datapoints

Did you know ...

Deal Flow

Recommended reads

The Chatter

Older messages

How fair value accounting skews returns

Volatility and private market returns

a16z bets on Latin America fintech

SoftBank's Katerra to shut down

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