Meet The $3B Tech Startup Shaking Up Construction And Development
“Construction has to be the only industry that gets worse every year — costs go up and it gets less efficient.”
Katerra Head of Materials Trevor Schick is outlining the quandary the $3B startup is trying to solve. It has the potential to shake up the industry and make life quicker, easier and cheaper for developers.
The company was founded in 2015, but in January this year it raised $865M in a series D funding round where the investors included tech giant SoftBank, giving it that $3B valuation.
Bisnow can reveal that Katerra has also signed up a trio of significant U.S. developers as its first external customers: UDR, Sobrato and Legacy Partners. Until now its principal client has been Wolff Co., the multifamily development company of co-founder Fritz Wolff. It is also looking to move beyond the multifamily sector into other areas of commercial real estate.
Katerra was founded when Wolff was chatting to Michael Marks, former chief executive of electronics firm Flextronics and private equity investor, about ideas for improving his business.
Marks had hugely boosted revenue and profits at Flextronics. He and fellow co-founder and technology investor Jim Davidson decided to launch a company that sought to apply the kind of efficiencies that tech companies had utilized to the construction sector.
So what does a technology-led construction firm look like, and how does it achieve time and cost savings? In some ways it is not that revolutionary. Process, data and business model are as important as drones or robots.
The company manufactures panels and components off-site, inserts electronics and plumbing, and then everything is assembled on the construction site. The company has one operational factory in Phoenix and is building a mass timber factory near Washington.
Parts are digitally tagged so that once they are delivered to the site it is easy to work out what goes where and how the building should be assembled.
Schick said that the company had steered clear of fully modular construction to avoid buildings being too identical.
“Modular has a place, and sectors like hospitality and student housing are going at it pretty hard, where it doesn’t matter if buildings are similar,” he said. “But in multifamily people don’t want everything to be the same.”
The firm is vertically integrated, having an in-house architecture practice and design team with 70 architects, and fulfilling all of the elements of the contracting process through to the final phase of construction, with no subcontractors.
This means that it can make sure the design is precisely tailored to the materials being used; the components are precisely built in its factories; demand for materials is aggregated between all the projects it has ongoing to ensure best price and no wastage; and there are no subcontractors adding markups on materials or services to boost their own margins. SAP data and technology systems manage the whole process from start to finish.
Schick said that its processes can reduce typical construction times of 24 to 36 months by half. He was more coy on the cost savings, but said “companies who work with us from the beginning of the process can expect the biggest savings because of the nature of the way the business works”.
Katerra has an order book of $1.3B and is working on 13 different projects. The first of those, on behalf of Wolff, are now being completed, and that should help kick-start further orders, Schick said.
“It will be great to be able to take people to actually see the completed projects. When you explain the time and cost savings to developers it is an easy sell. But we are a bunch of tech people who are doing construction so being able to show people completed developments will really help.”
Schick said that the latest investment round — which takes the amount of capital the company has raised to more than $1B — will be used to fund research and development into areas such as automated home energy systems and sustainable materials. It is also planning to move into commercial sectors, but plans are at a very formative stage.
When raising its $90B Vision fund, SoftBank said it wanted to back the companies that will shape the future. Developers might settle for big cuts in costs and time, to the benefit of everyone.