Disrupting the construction industry makes a lot of sense on paper. The industry is massive. The Associated General Contractors of America estimates that $1.3 trillion is spent on construction in the U.S. alone every single year. Yet it’s a highly fragmented industry. It doesn’t use software or technology intelligently, labor costs are high, it has very intensive operating needs, and it comes with significant regulatory, media, and political risk. Plus, getting it right in one city doesn’t automatically mean it will in another.
That all sounds rough, but it’s actually what venture capitalists are looking for—opportunities to do things better and make a lot more money in the process. But as VCs and analysts were busy extolling the virtues of modular construction and non-union labor, they were also taking a lot on faith.
Why? Because no matter how smart we investors are (or think we are), there are limits to our experience and expertise. There’s always more we don’t know than what we do know. And when we like an investment, we’re usually willing to assume that the things we don’t really understand must be okay as long as someone smarter than we are already checked it out.
That assumption may be necessary but it can also be fatal. Katerra, once the brightest light of the construction tech sector, is a perfect example. The tech startup technology aimed to “connect Building Information Modeling (BIM) tools and computational design directly to its ERP global supply chain infrastructure for ease of material ordering, manufacturing, tracking, and delivery.” So when Katerra debuted as the biggest and most ambitious construction tech startup on the block in 2015, it was with a lot of hope, a lot of promise, but a lot of uncertainty and challenges too.
Tusk Venture Partners didn’t launch its first venture fund until late 2016, so Katerra was already too highly-priced for us to invest in, but it seemed like a perfect client for our political consulting firm, Tusk Strategies. Of course, it’s a lot cheaper to build something when you can manufacture modular structures in a factory and then have non-union labor stack the boxes on site. But that also means the underlying principles of construction tech become as much of an existential threat to the Building Trades (which encompass everyone from electricians and carpenters to painters and plumbers) as charter schools are to the teachers’ unions. That’s not helpful in most political circles.
To make matters worse, land use and zoning decisions are always intensely local and intensely political. Even with using union labor, getting consensus and approval on a major project can still take years. Without it, you need to be prepared for a fight in virtually every City Council of every major city across the country.
So when my partner Matt Yale and I talked to the team at Katerra handling government, media and politics, we were initially very excited. This was a big, disruptive idea that required lots of political know-how, which is right in our firm’s wheelhouse. But then we met them.
Some members of the government relations and marketing teams at Katerra came from the Gates Foundation. Bill and Melinda Gates do wonderful philanthropic work but I’ve observed that their foundation can be just as bureaucratic as any government agency out there. They’re frequently slow, overly process-oriented, and often afraid of risk. It may be a fine way to provide malaria nets in Africa (among many other initiatives, of course), but it’s not how you wage war in the trenches of local U.S. politics.
Once we talked to the Katerra team, we realized they were contemplating a long RFP process to figure out who could help them navigate the politics of each city. They were considering large management consulting firms that knew nothing about politics. They didn’t seem particularly concerned about engaging with organized labor to win permits and zoning approvals. They didn’t seem particularly concerned about anything. The problem wasn’t just that the Katerra team clearly didn’t know anything about municipal policy and politics. It was that they didn’t even know that they didn’t know.
To us, that was a glaring red flag. Maybe just the government relations team was overly bureaucratic and the rest of the company was agile and nimble. But if hiring people from a nonprofit ivory tower foundation to handle highly politicized zoning battles made sense to the CEO and the management team, you’d have to wonder about their judgment more broadly.
Since we were still relatively new to venture investing, I assumed that the prominent funds backing Katerra knew more than we did. We didn’t engage with them, but I still figured that those funds would make money.
That assessment may have been too generous. A few weeks ago, Katerra filed for Chapter 11 bankruptcy. In retrospect, I wasn’t surprised that they had a spotty track record on delivering projects, that they suffered continual leadership shakeups, or even that they (voluntarily) reported “potential improper revenue recognition practices” to the SEC in May of last year which is under investigation. I wasn’t surprised that they burned through $2.78 billion between 2019 and 2020 and missed all of their financial targets. The postmortems from industry analysts such as Pitchbook and CB Insights weren’t particularly surprising either.
Early management didn’t appear to understand how the construction industry works, just like their political team didn’t seem to understand how unions work or zoning works. They were trying to apply ideas that made sense on whiteboards and in Google docs to the real world of urban construction, zoning, labor, and politics. And they didn’t seem to recognize just how difficult that would be.
In retrospect, the company’s fate should have been clear from day one. The politics team may not always be a good proxy for the rest of the company, but in this case, it was. If your interaction with a tech startup is in an area you know well—say finance or operations or hiring—and it seems like they just don’t know what they don’t know, that’s probably a leading indicator of what may be wrong across the entire company.
That’s exactly what Softbank and all of Katerra’s investors got wrong. They either didn’t see the red flags or they just ignored them and kept pouring in cash, to the tune of $1.6 billion overall. They wanted the idea to work, they wanted to think that logic and reason would prevail over money and politics. They wanted to take the idea that sounded great in a pitch deck and fund it regardless of whether that idea reflected the reality surrounding it. That’s how you make bad investments. You discount what you do know and make too many assumptions about what you don’t.
You can always talk yourself out of any deal, so a good venture capitalist can’t be afraid to jump in and take risks. That’s inherent in the nature of the business. But when those red flags pop up—especially in your area of expertise—and when it’s clear the company doesn’t understand the issue at hand, you need to see it as more than a risk that gets noted somewhere in an investment memo. You need to see it as a proxy for the management team, their vision, and their ability to execute. What you want to see and what’s actually there aren’t always one and the same. In other words, take your own expertise seriously. It’s worth more than you may realize.
Bradley Tusk is a venture capitalist, writer, philanthropist, and political strategist. Tusk was not an investor in Katerra nor was he ever retained by Katerra as a strategist.
EDITOR’S NOTE: At press time, Katerra’s team had not responded to a request for comment. We will update this post when we hear back.
**UPDATE** When reached for comment, a former Katerra executive pushed back firmly on the claims in this article. They said in part: “The potential government relations challenges facing Katerra’s business model were a secret to no one. Tusk Strategies was one of a dozen public affairs firms the company considered bringing on a short-term contract. Tusk was impressed with the Katerra vision and asked to be paid in equity. We declined, and Tusk balked at the notion of competing with rival firms for our business. There were no discussions between Katerra and Tusk Ventures.”