Katerra’s failure paved the way for a better solution

contruction hat laying on concreate

Twelve months ago, a four-hundred-pound modular construction behemoth died. 

Founded in 2015, Katerra was one of the most notable venture-backed off-site construction companies to date. It raised over $2 billion to build out its vision of an end-to-end modular construction company. Last June, Katerra met its end at the height of the stock market and housing demand and a record low-interest rate and housing supply.

Demand was not the problem, so what was?

What did Katerra do?  

Katerra set out to solve the housing crisis by offering a design service to their customers. They manufactured supplies—everything from factory-built walls to light bulbs—and sent out crews for assembly. 

Their solution to keeping every step in-house was supposed to cut an enormous degree of time and money, end chronic cost curve models, and drive the level of savings previously unattainable—all of which could have opened the door for solutions to the increasing problems the U.S. housing shortage continues to unearth. 

Michael Marks, founder of Katerra, was also a former CEO of Flextronics, a $26 billion electronics contract manufacturer. He borrowed his playbook for Katerra directly from the world of manufacturing, where the company would aspire to be a “master of all” and control the entire value chain. Katerra would start from scratch, fully productize the build (as opposed to customizing each built, which is how buildings currently get built) and do so at a bill-of-materials level by backward integrating all its parts and producing all of those themselves. 

Instead, Katerra became a master of none. 

Why did the mighty fall? 

Synonymous with other Softbank companies, Katerra emphasized very heavily on growth, disruption, and innovation without having a clear path to profitability. The company was trying to do too much, lacking in focus and boiling the ocean. 

But Katerra’s real problem was much more fundamental and lies in their business model, which they only got half right.

Their “integrated approach” allowed them to introduce innovations across all levels. By controlling all the moving pieces in the modular construction process, they were able to maximize efficiency without worrying whether each piece would fit in the build. 

Still, our team at Creative Ventures predicted their failure in early 2020; only we surmised it would be when the next recession hit. Why? Because Katerra’s approach was simply too asset-heavy. 

To quote my Forbes article again, “Real estate and construction are highly cyclical industries that swing largely with economic cycles. Katerra had built multiple factories to build all its parts, meaning it had to carry a lot of inventory and costs associated with maintaining its infrastructure, regardless of demand swings. This cash-gobbling model is highly prone to recession, and our country ran into one almost immediately after.”

The opposite of failure is success.

Despite Katerra’s failure, the modular construction industry is still roaring and evolving, with many companies producing, selling, and shipping specific elements to sites. 

And therein lies the opportunity for success: a model completely opposite to Katerra’s, where one platform integrates all of these players under a unified design. This approach would be asset-light, capable of taking in parameters and producing customizable designs based on available parts. Upon completion of design, the parts would be shipped to a build site where assembly would be managed by either the platform itself or general contractors. 

Being able to map the entire modular construction supply chain, build its own software for home construction, and ensure quality parts with reliable delivery would be non-negotiable—all while avoiding the stigma of Soviet-era, low-cost prefab housing. That’s not to say the software should be able to generate an architectural beauty, but it does need to offer enough optionality against a cost curve. 

The bottom line.

The housing crisis needs an integrated platform to connect all steps of the modular construction process, but it does not need one that produces its own parts or holds its own inventory. It needs to be sufficiently flexible yet optimized for cost and labor. 

Simply put, we need an Alibaba for modular construction, not an Amazon. 

If you are building such a company, get in touch with our investment team. We would love to talk to you. 

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