Yves here. Shame that momentum trading, aka, betting on dumber money than you providing an exit, has become tantamount to investing. Maybe a few more episode like Katerra will change that. And mind you, that’s with Wolf stressing that Katerra was pretty legit by the standards of unicorns.
By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street
“Incremental progress isn’t enough – we are pursuing transformational change on a massive scale,” says the LinkedIn profile of Katerra, a six-year-old Silicon Valley unicorn startup. “Katerra exists to help transform construction through technology – every process and every product,” it says. It had received about $2.2 billion in funding, largely from SoftBank’s Vision Fund, to disrupt the commercial construction industry “through technology,” as it says.
But it’s shutting down and will lay off the remaining employees – it once had as many as 8,500 employees before the layoffs started – and abandon numerous construction projects that it had agreed to build, according to sources cited by The Information.
The executive that informed employees on June 1 in a video call of the shutdown and layoffs told them that the company didn’t have enough cash for severance packages or unused paid time off. The executive blamed the out-of-money moment on the effects of the Pandemic and the rising costs of labor and construction materials, according to The Information.
Katerra was in the business of modular commercial construction – apartment buildings, office buildings, and other commercial buildings, with the goal of “transforming construction through innovation of process and technology,” as it still says on its website.
This type of big commercial building is where modular construction is the most promising, but with enormous pitfalls.
So it says that its “Katerra Building Platforms take the risk out of construction by applying the principles of repeatable manufacturing to entire buildings. Katerra buildings are made from manufactured assemblies and components; including wall and floor panels, casework, bathroom and kitchen kits, and more,” it says. But the risks are not at all taken out.
Michael Marks, Katerra’s co-founder and CEO was fired in May 2020. Paal Kibsgaard, former CEO of Schlumberger, and the COO of Katerra at the time, was named the new CEO. He stepped down in May 2021. And Katerra is currently being run by folks from the consulting firm Alvarez & Marsal, according to The Information.
This is the second major SoftBank backed company to collapse this year before reaching the IPO window; the first being Greensill, the supply-chain finance giant that collapsed and filed for insolvency in March. Its German bank was taken over by banking regulators, amid allegations of missing funds.
Credit Suisse, which packaged Greensill’s supply-chain-finance notes into funds that it sold to investors as low-risk money-market-style investments – including $435 million in notes by Katerra – is now having a lot of heartburn, as are the investors in the funds.
Yet, last December, months before its own collapse, Greensill was shanghaied by SoftBank into bailing out Katerra to avert a Chapter 11 bankruptcy filing. As part of the bailout, Greensill forgave Katerra $435 million in supply-chain debt in exchange for about 5% of the company’s worthless equity.
SoftBank plowed another $200 million into Katerra, after having already plowed $200 million in bailout funds into it in May that year, at the time Kibsgaard was named CEO. And that was enough to cashflow Katerra through May 2021. But that’s it.
One collapsing Vision-Fund-backed company bailing out another Vision-Fund-backed company and then both collapsing in sequence is a dubious practice, but apparently no big deal in the world of SoftBank’s unicorns.
The thing is, Katerra simply didn’t make it to the IPO window in time, and wasn’t acquired by a SPAC in time to then be dumped into the lap or retail investors. It’s one of the exceptions in SoftBank’s bailiwick.
Greensill is another exception that didn’t make it out the IPO or SPAC window. WeWork, which scuttled its IPO in 2019 and lost another $3.2 billion in 2020, is now trying to go public via merger with a SPAC to dodge the fate of becoming the third big exception in SoftBank’s bailiwick.
But the unicorns that recently went public via IPO or SPAC are burning a running ton of cash, and some don’t even have revenues to speak of. Katerra at least had a real business, real projects, and real revenues.
Katerra tried to grow by offering services, such as architecture, and by building factories in various cities that assembled components for its construction projects, and by buying other construction companies – and in that respect it was a rollup similar to Compass in the real estate brokerage sector, another SoftBank backed company that lost $1 billion over the past three years, including the loss in Q1. But Compass did make it out the IPO window on April 1, though it’s stock [COMP] has cratered, closing today at $12.93, down 41% from its intraday high on its first trading day.
Katerra co-founder and former CEO Marks, and now a VC, calls Katerra in his profile on LinkedIn “a technology company optimizing every aspect of building design, materials supply, and construction.” Turns out what the company was really very good at – like so many unicorns – was disrupting an industry by burning large amounts of cash.
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SoftBank. Just say No.
Thank you and well said, Vlade.
SoftBank can’t say no to former DB staff, including Rajiv Misra and Colin Fan. Sometimes, I wonder if regulators are happy to see SoftBank sweep these likely lads off the street and concentrate them in one pen.
Softbank is a victim of the sales pitch it ran with during the Vision 1 fund raise. Venture funded startups collapse all the time, and VC fund LPs don’t usually get jittery about this and cut the GPs more slack than they perhaps sometimes deserve, on the understanding that said GPs have the knack to find the next google or are already nurturing one somewhere in the portfolio. I’m sure Andreessen, Benchmark, Accel Partners, Sequoia et al have all had their fair share of laggards that eventually collapsed when the infusion of fresh cash to keep them trudging along as part of the walking dead came to a halt.
Son sold SB as this transformative fund that tried to carve out a distinct identity in the venture space by making HUGE bets on “disruptive” technologies and business models, and massively hyping them up to justify the over-the-top valuations. The companies themselves have to sail very close the wind vis-a-vis how they operate, expanding insanely fast, raising eye popping sums at ever crazier valuations, having erratic, maverick CEOs like Adam Neumann etc, all in the name of pushing the narrative that these are not run of the mill startups, but rather transformative companies lead by visionaries. In light of this, a collapse of a SB backed unicorn isn’t the non-event it might otherwise be at other VC firms, but is seen as a sweeping indictment on the SB vision and its operating model. SB increases the stakes but doesn’t manage the risks, and pays the price in the end with supernovae-like collapses of its unicorns. Tiger Global, with its fast and loose, hands-off and low due diligence funding model, is the next SB.
In your formulation where “venture funded startups collapse all the time,” the bystander is very passive. Flip it on its head and you have an ongoing river of impunity for unstable, volatile organizations who also cause harm to bystanders – not a customer, not a vendor, not an employee, not an investor. This is overlooked when you lead with the GP and say oh yeah, they have had their fair share of laggards. So who are the laggards and what did they do concretely, in the real world as they were in the interim between their final round and collapse? Especially to outsiders with no formalized relationship with the startup or the GPs? Did quality suffer as they were in a late, “running out of runway” mode, and was this phase a huge revelation to a young founder but maybe not a huge revelation to a veteran GP who had been through the trajectory with other PCs? Who was hurt when quality suffered?
And after the collapse, where did those alums go next? Does the track record from time period 1 follow them to time period 2? Not if you’re aggregating and washing out the detail. As an outsider, once I am aware that people protected by limited liability premeditate “oh well, we can always shut down, start over and call ourselves serial founders,” I think their second and nth startups should be viewed through the lens of who was hurt by their previous ones. Less GPcentrism and LPcentrism, and more focus on the aggrieved is warranted by the evidence.
For that matter, there’s an issue in the early days as well as the late days. Who did they hurt during “growth hacking”, especially of a laggard that eventually collapses? And does that behavior follow the alums around to future projects?
You misunderstood the point of my comment, which was:
Softbank sold its entry into venture as some sort of 2nd coming of the messiah, and used all channels available to it to brand itself a transformative change agent whose portfolio companies were going to change the world and drag all of us to the promised land. If Silicon Valley perversely incentivizes failure by giving complete downside protection to founders who casually close shop when a laggard collapses and, unsullied by the whole episode, dust themselves off and move on to their next startup, oblivious to the various ways in which bystanders were harmed, that’s of course something that should be condemned, to say nothing of discouraged.
My comment wasn’t meant to commiserate with GPs and LPs as you somehow suggest, but to point out that SB swung for the fences and played fast and loose with its purse strings and the spectacular collapses of its unicorns are the result.
Katerra at least had a real business, real projects, and real revenues.
We ve identified the problem, I think
yeah, and an overzealous plan that walked off the pandemic caused CRE cliff…
Katerra at least had a real business, real projects, and real revenues.
So, I guess those things are optional for companies nowadays?
I’m reminded of Charlie’s questions to Frank Reynolds on It’s Always Sunny in Philadelphia:
“What do we do?”
“We do business.”
“Yeah…but what do we make?
“Make? We make money…”
Am I the only one who thinks that Softbank’s business strategy is to function as a bucket shop?
The model appears to be: Buy something that would never work, drop in huge sums to build profile and valuation, sell off to rubes.
I agree, it’s like the tech lords and the MoU set up a “bad bank” to fund every IoT odyssey like buckets of spaghetti which are then thrown at the wall to see if they stick. I’d love to see that operation collapse.
This is really insane.
My Dad, when we first moved to the Americas, had a job as engineer/draftsman at an American company called ‘Panelfab.’ This company specialized in pre-fabricated building segments for mid sized commercial construction. They manufactured the ‘segments’ in North Miami and shipped them to projects in the Caribbean and Central America.
See: https://flbusinessdb.com/florida/north-miami/panelfab/203439
There are schools, public offices, and other small and medium commercial structures in use ‘Down South’ that Panelfab manufactured and shipped off to be assembled back in the very early 1960s.
My point; Katerra’s “vision” is not new, or even innovative. This looks like a confidence game played on the high end of the financial range.
Until the ‘financials’ are forced to suffer some serious pain and deprivation that is a result of their non-constructive financial machinations, nothing will change.
Even though I am a product of the Capitalist West, I’m fully in agreement with the core cadres of the Old Party in China. If you catch the very wealthy doing things that harm the people of your nation, execute them. The statistics about billionaires in China from a few days ago bear this out.
“Pitchforks and guillotines. Not just for angry mobs.”
I was a veteran of Silicon Valley and was in the midst of raising early round funding in 2001 when the Dot Bomb went off. We even had Wilson Sonsini, the marquee SV law firm, comp us to our legal costs for incorporation. We had meetings on Sand Hill Rd with major VCs, etc. Just trying to say I’ve seen some things and been some places.
That said, all this is so reminiscent of those days it’s not funny. In the late 90s the big management consultants had convinced everyone that Business-to-Business (B2B) was going to revolutionize everything. The WS partner who represented us had as his main client a B2B ‘powerhouse’ called Commerce One. By 2004 they were gone, the only trace being their marketing chotchies like mouse pads and coffee mugs.
If anything, I think the situation today is even worse. We’ve had 20 years of a savings glut chasing returns, and while it came a cropper in 2008 wrt CDOs in RE, it’s been going stronger in tech w/o pause. Google, FB, and Amazon have all had outsized returns, fueled by monopolistic/monopsonistic economies of scale, but few other ‘unicorns’ have achieved anything like this. I think far more typical are Uber, WeWork and even LinkedIn. The first is a predatory pricer using investor capital to buy market share with little hope of profitability short of doubling or even tripling its pricing very soon (thanks, Hubert!). The second was an out and out fraud, with a megalomaniac at the helm who openly talked about living forever and establishing a literal dynasty to control his phantasmagorical empire. The third was smart enough to sell out to Microsoft for $25 billion; all I can say is MS also bought Nokia’s phone business, so keep that in mind about their business acumen.
None of the hardware companies except Apple and TSMC are making money, and Apple is blessed with a customer base that is willing to pay 2x-4x for the cachet of its products. Intel is going down, AMD and Nvidia appear to be doing well at the moment but I’m unconvinced of future earnings as demand ebbs for marginal improvements on performance, and the networking space, which I know best, does not appear to have recovered that much. Cisco is still trading at .6 if its 2000 high, and I’m not aware of any major networking startups since Juniper in the late 90s that has grabbed the brass ring. VR and AR are still promising new user experiences, but apart from Apple’s new tag technology that is supposed to let you find your lost car keys with your Iphone 12, it doesn’t seem to have amounted to anything; and I still suspect that engineers have not conquered the diskinesthia problems that stopped early VR in its tracks in the mid 90s.
I saw a YT clip the other day w/t title “Bill Gates is unloading tech” which if true tells you all you need to know about this moment. Masashi Son had one huge win in China w Alibaba but little to show since then. If and when there is a regime change in Saudi Arabia and their sovereign wealth fund gets an honest auditing then I suspect Son is going to disappear, either to a bunker he’s prepared for such contingencies or to the same Saudi prison that MBS had awaiting Adnan Khashogi.
SV typically has a 7 year boom-bust cycle (83-90, 95-2002, …) and it’s in its 11th year if we date this boom from the FB IPO. The VCs have been funding a lot of garbage and getting rich on “2 and 20” fees. IPOs have been scarce, and the SPAC game looks like nothing so much as regulatory slight-of-hand (=fraud). How the SEC allows it is baffling. When the crash comes it’s going to be brutal.
P
Thank you!!!!
I’ve been around a while and seen the Silicon Valley experience from both sides of the table this century and last.
SoftBank and the others like it really are the ultimate in ego-expression of maniacal money men and women who have no care for their own investors, or for the many others impacted by their unethical shenanigans. Is it really credible that their due diligence didn’t tell them of the criminal behaviours of the founders at Uber and WeWork?
No, they knowingly back illegal and unethical behaviour with ridiculous amounts of money to support ineffective business models all in the belief that their own brand will carry the deals to be bought by a naïve public markets investor community.
I don’t know the story behind the Katerra debacle but, I do know, as ambrit said, that modular construction is not new. An evolution in construction methods that combines modern modular construction with the benefits of a raft of technologies in both manufacturing and building is certainly upon us. It is permeating every part of the supply chain in the construction space, just take a look at the latest, profitable, environmentally sound construction projects. If Katerra couldn’t succeed with bucket loads of capital and sky-high valuations then it was most certainly driven off the rails by its owners, not by the competition, or lack of market opportunity.
In the last 12 months I have worked hard to rescue three of our portfolio companies from the disaster that they have been driven towards by their VC investors. Not one of those VC investors is willing to acknowledge her/his own role in those failures, nor take the hit that would allow the companies to succeed and their staff and early investors to win through. The American VC investment model of last-money-in-first-money-out, last money in is the most valuable and must take control, money is all that matters and the VC investor is more important than all the other stakeholders. That model is so terribly flawed and damaging. To be sure, not all VC firms act this way and some of the very best performers are notable for their departures from these principles but, the principles permeate the global start-up investment world and significantly depress the rate of success that could otherwise be enjoyed all over the planet for the benefit of the broader community.
Oz, thanks for your thanks! One of the best things about NC is the incredible reader base – my guess is we skew significantly older, more experienced, more cynical, and probably more dyspeptic. But mostly more knowledgeable. And when I get a response like yours from someone who has been in the trenches and affirms what I’ve seen myself, it gives me a moment of confidence that I’m not just a deranged voice in the wilderness a la the fool in King Lear shouting on the moors.
Back in the early 2000s when I had dozens of meetings with VCs from both “A” league firms and down to small boutiques, one of the things that struck was just the cynicism, not to mention mediocrity, of most the MPs I met. Because I’d spent 1992-1997 in the trenches at Cisco and 3Com I knew the game and the trajectory most of the people on the other side of the table had taken. The older guys (and it was all guys) had worked at large tech companies, almost always in business development, where they had spent much of their time cultivating relationships with Valley VCs, partly because they were looking for acquisitions, but mainly because they were looking for places to jump to when the opportunity arose.
It was a completely cynical game they all played, not unlike some court advisor in medieval times who spent the king’s money but was not-so-secretly getting kickbacks. Louis XIV had a finance minister who made so much money that he built what many consider the most beautiful chateau in France; when Louis was invited for a royal visit, he immediately sized up the magnitude of his minister’s peculations and promptly had both the minister and the chateau seized. In the 90s any valley firms routinely overpayed for acquisitions and then mirabile dictu their VP of business development would announce his (or sometimes her – 3Com had a particularly worthless VP named Janice Roberts, whom I accidently encountered in the lobby at Mayfield Partners in 2001, a mid-tier VC firm notable for nothing in particular) departure to join the VC firm in question as an MP. Often they are given about 5 years to raise a fund themselves and make a set of investments but if they don’t cut it by then they’re flushed out. Ironically, one of the favorite ways for VC firms to ‘pass on the trash’ is to seed their startups with their also-ran MPs.
I watched the VCs intensely from about 2000 until the GFC, when I basically threw in the towel on my startup (my patent lapsed in 2020 ;-( During the dark period after the Dot Com crash until the pick up post GFC there were articles in the trade press about the state of the investment environment, the unhappiness of the LP communities at paying the 2% management fees while the VCs made no funding decisions, etc. The VCs (and by extension the PE industry, which also is a 2/20 racket) hold all cards; usually, the LPs are pension funds, unions, high net worth private offices and they are ‘stupid’ money. Often the LPs don’t even know the full legal details of the investment partnerships as these are deemed proprietary by the VC/PE firms, and the LPs have *zero* recourse if they are unhappy. To borrow the Ken Kesey phrase, they bought the ticket they’re on the ride, and the LPs are under no obligation to apprise them of their thinking, let alone refund their investments. It’s literally a no-lose proposition for the VCs.
20 years of dead rot has accumulated since the last tech implosion. To repeat myself, it’s going to be gruesome.
P
BTW, as to the networking sector in particular, I wanted to point out in my first post how telling I found it a few years back that there were no 5G switch startups, and the only choice customers had was Huawei and Ericson, whose products apparently sucks. That speaks volumes to the VCs assessment of the potential profitability of the sector.