Katerra Bankruptcy a Cautionary Tale for Construction Technology

A $1.4 billion bet on modernizing construction is lost.

Katerra invested heavily in factory automation of prefabricated building components at its factory in Tracy, Calif. (Image courtesy of Katerra.)

Katerra invested heavily in factory automation of prefabricated building components at its factory in Tracy, Calif. (Image courtesy of Katerra.)

Katerra, the billion-dollar construction technology startup, is making waves again, but this time it’s shockwaves. After the company filed for bankruptcy protection June 6 to implement financial restructuring, it has laid off hundreds of employees. The company could not be reached for confirmation, but reports that it was closing its doors are numerous, including news of officials with Ensemble Investments and S3 Development taking over Katerra projects in Reno, Nev.

The bankruptcy relief filing press release stated that Katerra has “voluntarily filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas as the company takes steps to conduct a marketing and sale process to maximize value for its stakeholders.

Katerra has also secured a final cash infusion from SoftBank, its main investor, a $35 million loan, technically referred to as a Debtor-in-Possession (DIP) financing, to fund operations during the Chapter 11 process.

From the Chapter 11 filing:

“We are implementing initiatives on multiple fronts to maximize value and provide the best path forward for Katerra and its many stakeholders,” said Chief Transformation Officer Marc Liebman in an official filing. “Our multi-step action plan has rapidly evolved and includes consolidating U.S. activities, continuing our international businesses, advancing key asset sales, securing DIP financing and commencing an in-court restructuring process. We are grateful for the extraordinary ongoing work and support of the Katerra team and other core constituencies through this extremely difficult time.

“Katerra recently notified its key stakeholders that many of its U.S. projects will be demobilizing. In keeping with Katerra’s ongoing commitment to the safety of the site and the general public, the company is working to ensure a safe transition.

“The rapid deterioration of the company’s financial position is the result of the macroeconomic effects of the COVID-19 pandemic on the construction industry, inability to procure bonding for construction projects following the unexpected insolvency proceedings of Katerra’s former lender and unsuccessful attempts to secure additional capital and business.

“The company intends to file customary motions with the Bankruptcy Court requesting authorization to continue paying remaining employees, vendors and others in the ordinary course of business moving forward.”

On June 10, the company made a statement that business at Katerra continues in India.

Headquartered in Menlo Park, Calif, the company was founded in 2015 by Michael Marks, former CEO of Flextronics and former Tesla interim CEO, along with Fritz Wolff, the executive chairman of The Wolff Co. In May 2020, former Schlumberger CEO Paal Kibsgaard had taken over for Marks as CEO of Katerra.

Everything had looked promising for Katerra. The company was borne of an initial $1 billion-plus investment from SoftBank and garnered a total of $1.4 billion in venture capital investment. It has had more than $3 billion in project backlog. With so much backing, the company set out to revolutionize the construction industry with technology, boldly stating on its website: “The $10 trillion U.S. construction industry is ripe for disruption. As the last craft industry, construction has yet to enter the industrial or technology age. The majority of the industry is building today essentially the same way they did in the mid-1800s. Economies of scale just don’t exist. Most sites/projects are designed, planned, quoted, bought out and built as one-off projects. Yet, they all have many standardized materials, labor skills, design components and processes in common. We saw a grave need to modernize the entire process of construction, so we’re doing that from end to end.”

Katerra offered a number of services for residential and commercial new builds and renovations and was known for its use of technology across the entire building lifecycle, in addition to providing prefabricated building components, such as mass timber to reduce carbon footprint. It also offered software solutions for design and management of construction projects.

The 150,000-square-foot Catalyst building in Washington was designed by architect Michael Green with Katerra’s cross-laminated timber (CLT) panels from Katerra. (Image courtesy of Katerra.)

The 150,000-square-foot Catalyst building in Washington was designed by architect Michael Green with Katerra’s cross-laminated timber (CLT) panels from Katerra. (Image courtesy of Katerra.)

It also acquired two architecture companies in 2018: Michael Green Architecture (MGA) in Vancouver, a leader in designing with mass timber, and a larger firm, Lord Aeck Sargent, which had six offices in the U.S.

MGA made a statement on its website about the latest news on Katerra, stating, “Unfortunately, this week Katerra made the hard decision to wind down their business.”

“We are sad for the many people impacted by this decision. However, we are grateful that these actions have no impact on our operations, other than the movement of MGA shares back into our control. We are fortunate that we have been insulated from Katerra’s challenges because Principals Michael Green and Natalie Telewiak have been and remain the controlling directors of the firm.

“Our team remains busy with fun projects and great clients, and we are excited to continue to innovate and move forward to help solve the greatest challenges of our time for people and the planet.”

As for Lord Aeck Sargent, Katerra has arranged for the sale of Lord Aeck Sargent architecture business lines to private buyers, subject to bankruptcy court approval.

In 2017, Katerra was named as one of LinkedIn’s Top Startup Companies to work for. At one point, it had 8,000 employees. Now, the company has 2,300 employees, according to its LinkedIn page. There are also reports of former employers suing the construction startup after the employees received insufficient notice of termination.

Signs of financial issues have been in the works the last couple of years as the company has made multiple layoffs. In December 2019, Katerra reported the company laid off approximately 200 of the workforce and closed its building components factory in Phoenix, Ariz., which it moved to Tracy, Calif., where they used automation technologies such as robotics and a digital manufacturing process using self-guided vehicle technology.

The Phoenix closure came shortly after one of the founders, Wolff, left the board—a sign of trouble. Another layoff made the news last July when more than 400 employees had been laid off just one month after the new CEO, Kibsgaard, came on board. He reportedly left the company last month.

It also had factories in Spokane, Wash., and two factories in India. As of May 2019, it had signed a deal with Saudi Arabia’s Minister of Housing to build 4,000 homes in Saudi Arabia. However, the company stated in the bankruptcy filing that the company’s international operations are not affected by the bankruptcy filings.

A letter from the CEO in December 2020 reported nearly $2 billion in revenue and acknowledged that the company had at times overcommitted itself. He said, “Along Katerra’s journey, we have also experienced challenges and missteps. As with many startups and disruptors, Katerra pursued a path of lightning-speed growth, expanding rapidly into new geographies and business lines with a cost-intensive program that included high capital investments and R&D spend.

“As a result, and despite positive intentions, Katerra at times became overcommitted and spread itself too thin. Accordingly, the company spent substantial amounts of investor capital while establishing and growing numerous businesses in parallel — ultimately more than we could fully develop and maintain all at once within this very capital-intensive industry.

“Since taking over as CEO in July 2020, the new leadership team and I have worked to implement a plan to help address these issues. Our priority has been to refocus on our core set of high-potential business lines, reduce overhead spending, strengthen our operational and financial systems and build a world-class leadership team.

“We have made significant progress on this plan over the last several months, placing Katerra on a much stronger path toward sustainable and profitable growth. But it also became clear that we would require additional funding to fully execute on our plan, especially as we navigate the COVID-19 pandemic that has resulted in added project costs and delays.

“After reviewing all potential options, Katerra’s board determined that our best path toward resetting and refocusing the company was to recapitalize the business, thereby strengthening Katerra’s balance sheet by eliminating substantial debt and providing new capital funding. This recapitalization is supported by SoftBank, demonstrating its vote of confidence in Katerra and our future prospects. As with any recapitalization, all Katerra shareholders experienced dilution to their prior investments as part of the transaction.

“Looking ahead, we are confident that Katerra will be well-positioned for success in this next chapter and will continue working to drive transformation within the construction industry. You can expect to see a refined, focused, deliberate approach from Katerra moving forward…”

Six months later, it’s not looking good for Katerra, or its employees, unfortunately. While it may be good news for its competitors, it’s still a shame to see such an innovative company call it quits. Engineering.com reached out to Katerra to confirm some details and hasn’t heard back. Multiple solutions providers were also asked for reactions on the Katerra news, including Autodesk and Bentley, both champions of construction technology. Newforma and Nemetschek Group responded to engineering.com. Slater Latour, Newforma chief marketing and product officer, responds to our questions below. Commentary from Matthew E. Wheelis, Nemetschek Group vice president Industry Strategy, Build & Construct Division, follows.

What does Newforma think about the recent news of Katerra filing for bankruptcy protection of its U.S. operations?

Latour: Ultimately, it didn’t come as a huge surprise. Obviously, there was news several months ago about them being in trouble.  But fundamentally, I think their approach of trying to vertically integrate the entire construction value chain was always going to be a major challenge. Delivering large-scale projects is complex and highly regulated. The industry has solved for that through specialization. 

Don’t get me wrong, there are many large-scale firms operating in multiple disciplines—we count many of them as our customers. But we also know that on a typical large-scale project there tend to be many large and small firms involved across the planning, design and construction phases, each knowing how to deliver their individual pieces of a project profitably.

Katerra secured $1.4 billion in funding and demonstrated strong potential to change and improve construction projects through its technology platforms, off-site manufactured components and acquisition of two construction firms, plus 8,000 employees. What do you think about that?

Latour: I think if the potential was really there, the company would have been able to secure additional funding to continue on. There is a massive amount of money spent on construction. I read this morning that there is a shortage of 5.5 million housing units based on current demand. If the economics made sense, even if only for certain project types or in certain regions, I think the outcome would be different. 

Yes, they raised a lot of money, but it’s hard to prove a strategy as complex as Katerra’s and put $2 billion to work. Frankly, the amount of capital might have worked against them. A more incremental approach may have been wiser, but when investors have poured $2 billion into your company, there is a lot of pressure to put that capital to work. If the business model isn’t proven out, scaling that quickly, whether through hiring or M&A [mergers and acquisitions], can work against you.

What do you think this means for the competition? Should construction technology companies be worried?

Latour: The reality is that almost every built object is one of a kind and there aren’t a lot of repeatable processes or economies of scale. Building technology for the design and construction industry is not easy, and it takes the focus of an entire organization to do it successfully. There is a huge amount of opportunity in specialized solutions in this industry, but no one company will be able to solve it.

Wheelis: Much of Katerra´s investment was in acquiring traditional architecture, engineering and construction (AEC) firms and building factory capacity. This is a very capital-intensive approach. It also made it very challenging to unify the organization. This is always a concern with a very rapid series of acquisitions.

There were many innovators inside the company who will be taking their learned lessons forward into new ventures. Significant effort, thought and resources went into their technology platform, and the people that drove it are unleashed to innovate further and differently. This is good news for the market.

I don’t think it should worry technology firms specifically but should show the need to take improvements across industry in a way that can be absorbed.