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This prefab builder raised more than $2 billion. Why did it crash?

If Katerra can’t make it, can any prefab company?

This prefab builder raised more than $2 billion. Why did it crash?
The Smyth Building site in downtown Stamford, Connecticut, ca. 2019 [Photo: Greg Patton/Shutterstock]
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One of the biggest and best-funded companies in prefabrication and industrialized construction is going out of business.

Katerra, a Silicon Valley startup backed by billions of dollars in investment, will soon be closing. The Information reported earlier this week that Katerra notified employees that it plans to shut down.

Founded in 2015 with the goal of using mass manufacturing to streamline the messy process of constructing buildings, the company quickly gained attention from major investors and venture capital. In 2018, a venture capital fund operated by the conglomerate SoftBank invested $865 million, a stake that would eventually grow to more than $2.4 billion.

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Katerra has three factories in California, Washington, and India, and has completed dozens of projects, ranging from a Marriott Hotel in Texas to a 15-unit townhouse project in Arizona to a mixed-use 302-unit apartment building in Virginia. Katerra’s closure will result in the loss of thousands of jobs and the company’s withdrawal from dozens of construction projects in progress. It also raises questions about how it could have all gone so wrong.

Cofounded by Michael Marks, a one-time interim CEO of Tesla and former CEO of electronics manufacturer Flextronics, Katerra was a company built around the concept of vertical integration, using emerging technologies like robotics and automation to make the construction of buildings as optimized and as repeatable as manufacturing a widget. Katerra offered a “truly revolutionary integration of services, manufacturing, and powerful technology,” according to Marks back in 2017. He stepped down as CEO in 2020. Katerra did not respond to an interview request.

According to experts in the field of industrialized construction, Katerra may have been trying to do too much too fast—acquiring smaller firms and opening up massive, expensive facilities to reach a national market. “They tried to integrate the entire process too rapidly and serve a large geographic territory, not fully understanding that each state treats modular and off-site construction a little differently in terms of codes and regulations,” says Tom Hardiman, executive director of the Modular Building Institute.

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An industry group founded in 1983, MBI has been involved in efforts to help prefab and modular builders work their way through regulatory systems that are still figuring out how to deal with factory-based construction. Though still a small segment of the market compared to conventional construction, a recent analysis suggests that prefabricated and modular construction are expected to make up more than 30% of the North American construction market by 2026. Prefab and modular construction are far from unknown quantities, and many companies have been able to survive. Hardiman says that his group represents nearly 500 member companies, “many of which have been successful for decades in this industry.”

In the world of prefabrication and industrialized building, the ventures that seem to struggle are the ones that try to revolutionize the industry by proposing a new approach that can largely replace traditional construction for medium- and large-scale buildings. Mathew Aitchison is head of Building 4.0 CRC, government-funded research center in Australia that’s exploring the development of advanced manufacturing in the building sector. He says the scale and hubris of a company like Katerra made a recipe for failure.

“Sadly, I have been predicting for a long time that this might happen. As someone who is committed to innovating in the sector, of course I was hoping I was wrong,” Aitchison says. “The idea that Big Tech or people from technology backgrounds will sweep into construction and disrupt the industry is an appealing fantasy, but must be viewed with a good dose of skepticism. It’s hard to change construction, and tech can’t go it alone.”

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Even with huge investment, revolutionizing a large and decentralized industry like construction is challenging. Katerra had the backing to give it a try. Through its Vision Fund, SoftBank ended up investing more than $2.4 billion in Katerra, including $200 million this past December. Katerra joins another notable SoftBank investment— WeWork—in falling far short of its investors’ hopes. SoftBank declined to comment. “From the outside looking in, the strategy appears to be one of throwing enormous sums of money at a problem, and hoping that some of it sticks,” Aitchison says.

Big investments in industrialized building are nothing new, but Katerra’s was the biggest. Other investors still see potential in streamlining the construction process, including Warren Buffett’s Berkshire Hathaway, which recently made a long-term investment in a modular building initiative. Other companies like Assembly and Bone Structure are developing innovative industrial approaches to construction, and BoKlok (one of Fast Company’s Most Innovative Companies of 2021)—a partnership between Ikea and construction giant Skanska—is expanding its prefabricated homebuilding business from Scandinavia to the United Kingdom.

Hardiman says the companies that are successful in factory-based and off-site construction are the ones that focus on understanding the local regulatory hurdles and building a solid team capable of adapting the company’s approach to regulatory and market conditions. “If I were to suggest some lessons learned, it might be that [Katerra] tried to buy their team and grow too rapidly,” he says.

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Both Hardiman and Aitchison say that Katerra’s failure shouldn’t be conflated with the health of the industry; the international market for modular buildings is expected to grow from about $72 billion in 2020 to nearly $115 billion by 2028. But there could be ripple effects, especially when more than $2 billion in investment can’t translate into a viable business.

“The bigger problem, or risk, is that the collapse of Katerra might discredit other attempts to innovate,” Aitchison says. “This is an issue for all of us, because in boardrooms around the world, upon reading this news, it’s not hard to hear the loud voices arguing against investment in R&D in construction.”

He says vertically integrated off-site builders aren’t necessarily a lost cause in the U.S. market. Others, if they try to follow Katerra’s large-scale approach, should learn from its mistakes. “Companies need to be able to crawl before they can sprint,” Aitchison says.