Katerra, the most highly funded and valued startup in the construction tech space, earlier this month filed for bankruptcy protection, a spectacular demise for a company that had raised some $2 billion from private-company investors. But while the sector’s biggest unicorn has imploded, venture capitalists say they’re still bullish on the construction tech space overall, though investing more cautiously.
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Katerra aimed to disrupt the home construction industry by creating prefabricated materials that could be assembled into structures on site. It had raised around $2 billion from investors — mostly SoftBank — before filing for Chapter 11 bankruptcy and announcing it would shut down earlier this month amid investigations into its accounting practices and reports that it burned through cash and missed its financial goals.
Despite Katerra’s spectacular rise and fall, investors and startup executives in construction tech say the company’s troubles aren’t indicative of the investment opportunities in the sector overall. Rather, investment in the space is likely to shift more toward software workflow efficiencies rather than new ways of physically building, industry insiders say.
“I think (Katerra’s collapse) is going to be a bellwether to spur on more investment in construction technology, but on the software side, and [into technologies that] show a real ROI within weeks, not years, for a construction company,” said Bassem Hamdy, CEO of construction tech startup Briq, which makes a financial workflow system for the construction industry.
The Katerra saga is “an education that this isn’t like other industries,” he added. “This isn’t manufacturing adjacent — construction is its own thing.”
The reported issues surrounding Katerra were company-specific — not a sign that innovation in the construction space is in trouble, according to Charlie Plauche, a S3 Ventures partner who has invested in proptech companies including Levelset and Interplay Learning.
Plauche predicts the construction tech space likely will not see a significant dip in funding as a result of Katerra’s collapse.
“What they were trying to solve was around prefab, building materials, streamlining the construction business,” Plauche said. “And the majority of construction tech, proptech solutions is going toward SaaS solutions.”
While it is challenging to innovate in the area of physically constructing homes, there are still opportunities to innovate in other areas of the construction ecosystem, according to Plauche. Construction tech’s biggest win of the year, newly-public company Procore, raised $635 million through its IPO and reached a nearly $10 billion valuation by creating construction project management software.
There’s plenty of room for other software innovators to disrupt the space, Plauche said: “It’s still an industry that hasn’t been eaten by software.”
Some of the most recent construction tech companies to receive funding include Extracker ($5.3 million), which digitizes change orders and helps those involved in a construction project keep track of costs, and Briq ($30 million).
But Katerra was by far the most heavily funded startup in the space. It had raised around $2 billion from investors including Khosla Ventures, Greenoaks Capital, and most notably, SoftBank. Japan-based SoftBank led at least three rounds of funding for the company, starting with a $865 million Series D in January 2018, per Crunchbase.
Katerra held the industry crown
Katerra has drawn more private-company investment than any other startup in the construction tech space for each of the past five years, Crunchbase data shows. Of the $1.5 billion raised in the construction tech space so far this year, its $200 million funding round announced on Jan. 1 is tied for the largest.
The company also had the largest funding round for a VC-backed construction tech company last year, with its $200 million venture round in May of this year surpassing Procore’s $150 million round. It also had the largest funding rounds for the sector in 2018, 2017, and 2016, according to Crunchbase data.
Over the years, the company acquired at least 14 traditional firms in the construction, lighting, and design spaces, according to The Information.
Searching for the ‘Salesforce of construction’
According to Hamdy, Briq’s CEO, part of the reason Katerra failed was because investors and early management generally didn’t understand how the construction industry works.
Katerra’s former CEO Michael Marks, for example, was previously the CEO of contract electronics manufacturing giant Flextronics. That pedigree seemed to have instilled confidence in investors who saw in the CEO an executive who had experience in the complex world of supply chains and with running a publicly traded company.
But Katerra began to run into problems delivering on its vision. “The vision was solid. The execution was not, and the execution was the part I was less worried about because of Marks and his experience with big, complex businesses like Flextronics,” one unnamed investor in the company told Axios last week, after Katerra filed for bankruptcy.
In many ways, you can think of the construction industry itself as the anti-SaaS, Hamdy said: If subscription software is all about going out and building something repeatable with recurring revenue, construction is the exact opposite of that. But the workflows surrounding construction–such as payments and tracking financials–can benefit from SaaS solutions.
“I think Katerra started with a decent idea,” said Hamdy, who’s worked in construction tech for over two decades. “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.”
Hamdy expects that going forward, investment in physical products will see a dip while investors search for the next “Salesforce of construction.”
“I think you’ll see a decline in the idea of, ‘We’re going to automate the job site with physical products,’ and you’ll see a big push into what workflows in construction need to be disrupted,” Hamdy said.
Katerra’s implosion likely won’t affect seed or Series A companies in the space that are looking for funding, but investors would likely want to see smaller rounds of funding and incremental progress first, before the big checks roll in, according to Morgan Flager of Silverton Partners.
“I think there’s a lot of capital in the private markets in general,” said Flager, whose firm has invested in proptech companies and whose brother previously worked for Katerra.
“It’s a huge space and I don’t think people are going to be deterred,” he said.”I think they’re going to believe if done the right way, if done incrementally with the right goals, change is possible. So I don’t think people are going to stop going after it because there aren’t that many industries left that are that large that haven’t seen tech really transform it.”
Illustration: Dom Guzman
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