Katerra, the Foxconn of Construction, Raises $865M from Softbank

The Brief

  • Katerra is attempting to disrupt the construction industry "design-bid-build process" by creating a full-stack solution for the building process. The startup works with real estate developers to replace any or all of the disparate parts of the building supply chain, including architecture firms, contractors, subcontractors, engineers, and materials producers. 
  • The latest $865M investment from Softbank puts the valuation of the company at more than $3B. Katerra has picked up more than $1.3B in real estate projects ranging from residential to hospitality to student housing. 
  • Katerra takes orders directly from owners, uses its own software to create a cost-effective layout for the project, acquires the materials, assembles the building components in a factory, ships them to the site and assembles them there. 
  • The startup is led by Michael Marks, the former CEO of Flex, the go-to manufacturing contractor used by a number of tech companies like Microsoft, Cisco, and Hewlett-Packard. 

The Problem in the Market

Katerra was founded when CEO Michael Marks heard from a real estate investor friend about the difficulties that big real estate developers have keeping track of how much their projects cost.

For example, after scouting architects to design their apartment complexes, these developers solicit general contractors who then quote them a price for their services. However, the general contractors also have their own network of sub-contractors like local electricians or plumbers who bid on their respective services. The developers only see how much their general contractors are quoting them, which include markups, and are unaware of details like how much the “subcontractor is paying for the toilet,” said Marks.

The construction has seen a number of startups chip away inefficiencies, streamline operations, standardize methods using modular techniques, and improve the IT issues facing the industry. Katerra attempts to do all of these things. The company that ultimately wins this space has a massive opportunity; in 2016 alone, total construction spending topped $1 trillion. 

A 30-story hotel in China’s Hunan Province being constructed in 15 days with modular building techniques. 

In addition, modular construction is an increasingly attractive option for developers and has been listed as one of the likely trends to take hold in 2018 and beyond. Modular construction can reduce construction time, reduce waste, and result in cost savings. Labor shortages in construction have propelled this issue forward in the past year. But one of the issues with modular construction is that you have to be doing a large volume of projects for costs savings to pay off. Katerra's pipeline of developers attracted to its end-to-end solution could provide that volume. 

Katerra's Solution 

Katerra handles the architecture and engineering process at the start of the development process (eliminating the need for architects and engineers). Customers tell Katerra what type of housing they are trying to build (EG senior living, multi-family housing, dorms, residential), and Katerra provides basic layouts with its proprietary software. 

The developer signs on to a final design, and then the Katerra manufactures its own components for the building, such as door frames, walls, interior and exterior wall panels, countertops, and floor systems. Katerra's unique "integrated factory model enables a number of efficiencies. Katerra factories connect directly to Katerra job sites, "ensuring a seamless transition from manufacturing, through delivery and installation." Components are currently produced in a factory in Phoenix, and the startup plans to have four or five more factories by the end of 2019. 

Katerra Factory

Katerra Factory

The company keeps costs down by bulk ordering materials for multiple developments at one time, which gives Katerra pricing power over suppliers. The startup has also built a reliable network of suppliers from all over the world, which also keeps quality standards high

In addition to ordering from suppliers, the company is also innovating in materials. They recently broke ground on an $85M facility in Washington state that will be the world's largest supplier of cross-laminated timber, a more environmentally friendly alternative to concrete and steel. 

Developers can utilize the full stack of services offered by Katerra or make use of select services. According to the NYT, the Union South Bay residential apartment complex in Carson, Calif., works with Katerra on the building process but was designed by an outside architecture firm (Architects Orange). 

Founder Michael Marks has unique insight into supply chains, as one of the founders of Flextronics (Flex), one of the world's largest electronics manufacturers and the company that basically created the outsourced manufacturing model at the heart of the electronics industry. In addition, John Hui, head of strategy at Foxconn, will be one of the directors at Katerra. If all goes according to plan, Katerra will be revolutionary in changing supply chain management for construction and developers.

By Charles LaCalle | @charleslacalle

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