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.
“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.