Inside the Struggles of a SoftBank-Backed Construction Startup

Jon Hamilton, a longtime construction worker, got a job last year leading a small crew building a custom home near San Antonio, Texas. His employer, Katerra, was one of the most well-funded startups in Silicon Valley. The tech-oriented construction company has raised more than $1 billion from major investors including SoftBank, Foxconn and DFJ.

But Mr. Hamilton could soon tell something was off. Laborers hired by Katerra were unskilled. Floor panels manufactured in Katerra’s Phoenix factory were the wrong size when they arrived at the Texas job site to be assembled. The house was slated to be finished in February, but was completed only last month—and by that time he had been laid off, said Mr. Hamilton. “It was behind schedule. It stayed behind schedule,” he said.

The Takeaway
• Delays, factory mishaps hit SoftBank-backed Katerra
• Construction-tech firm sees wave of executive departures
• Problems have occurred amid rapid growth

Interviews with more than a dozen current and former employees, as well as real estate professionals who have worked with the company, say problems like those at the Texas site are illustrative of broader struggles at the construction startup, which is valued on paper at about $3 billion. Those issues show the uphill battle that the tech industry may have trying to popularize more efficient approaches to construction.

The people who spoke to The Information described factory mishaps, production delays and executive turnover at Katerra, which has more than 15 projects under construction in the U.S., including apartment buildings and retirement homes. A team of about a dozen structural engineers based in San Francisco were recently laid off. Some employees and others in the industry who have worked with the firm have been frustrated by what they describe as a lack of construction experience with the people atop the company. “Every day is a fire drill,” a former Katerra manager said.

Katerra’s professed mission is to construct buildings more quickly and cheaply than traditional general contractors and subcontractors like plumbers and cement masons. It plans to do so by providing property developers with end-to-end architecture, manufacturing, supply chain and general contracting services that can cut out markups that typically occur along the construction supply chain.

Technological Solutions

It also wants to emphasize technological solutions, such as building its own software and constructing wall panels on a factory assembly line before trucking them out to sites in cities like Reno, Nev., Carson, Calif., and Spokane, Wash. If Katerra pulls it off, the potential discounts could be enticing to real estate developers.

The three-year-old company has expanded rapidly, growing to more than 3,000 employees after a slew of acquisitions of architecture, manufacturing and other construction firms.

Yet the company is still trying, since opening its first factory in Phoenix about 18 months ago, to complete the first major project that it designed and built itself for outside developers. Several other projects have either been delayed because of factory issues or lost money, people close to the company said.

Meanwhile, a slew of manufacturing and engineering leaders have departed in the past year and a half, including two vice presidents of manufacturing, a head of engineering, and other leaders in logistics, manufacturing expansion, and R&D cost management. The company also has cycled through several finance chiefs. Former chief executive Brad Knight took another executive role in the company last year, and co-founder Michael Marks now leads the company as executive chairman.

Katerra is the highest-profile of a batch of Silicon Valley–funded firms focused on construction innovation. Other startups included Blokable and Social Construct, backed by Microsoft co-founder Paul Allen and Y Combinator, respectively. Construction and tech have mingled in other ways: Alphabet has sought partners like Katerra to build housing for employees and others near its Mountain View campus with prefabricated methods. Big real estate owners like Equity Residential and Brookfield Property Partners invest in venture-capital firms and startups, closely eyeing the construction tech market.

The architect of Katerra’s ambitions is Mr. Marks, 67, a former chief executive of contract manufacturing giant Flextronics and onetime CEO of Tesla. He is a founding partner at the private equity firm Riverwood Capital, and made successful investments in companies like Crocs and GoPro. He oversaw the expansion of Flextronics to become the No. 2 electronics manufacturing company behind Foxconn.

Katerra declined to comment about issues related to factory delays.

But in an email, Mr. Marks said Katerra had been making substantial progress. “We’re doing great in all respects, growing revenue, increasing margins, breathtaking backlog, rapidly falling losses,” he wrote.

Of the executive departures, he wrote that much of the turnover was “at our request as we sort out who the long-term players are.”

Katerra is still expanding. Thanks to an $865 million funding round from SoftBank and others in January, Katerra is planning several more factories in Spokane and Tracy, Calif. It has had talks to construct buildings for Stanford University, as well as hotels on the East Coast.

Katerra has tried to hedge its bets in other ways, including making money from an existing apartment-renovations firm it bought. It also operates a procurement business, in which it sells imported materials such as faucets and countertops from China and Mexico to developers for a discount, people close to the company said.

In June, Katerra teamed up with an Indian manufacturing firm, KEF Infra, to help it expand into India and the Middle East. That could help Katerra with a potentially significant project: It has eyed doing construction for a planned SoftBank-backed tech city in Saudi Arabia, people close to the company said. It also has discussed mega-projects such as building apartments for workers at Foxconn’s future factory in Wisconsin, as well as building homes in a Malaysian resort town, people familiar with the matter said. It’s unclear if those projects will come to fruition.

‘Every day is a fire drill.’

Factory Troubles

All these moves have been dizzying for some employees, who have said they wished the company would focus more on core projects and fix bread-and-butter problems like software systems and improving how it estimates the cost of the construction projects it takes on.

Some of the company’s troubles started at its massive Phoenix factory, formerly the home of a liquor distributor that left thickened wine on the floor when Katerra moved in early last year. The factory was spiffed up and became a showpiece for the company. Katerra executives have walked investors, media, construction and real estate executives through its assembly lines. (Katerra declined a request in July for The Information to visit the factory because the company was taking a “media hiatus,” Mr. Marks said.)

For workers, the factory offered perks including catered lunches. It set a goal of making the labor force 40% women. But the building also lacked air conditioning and only had a few fans, causing temperatures to soar into the mid-90s in sweltering Arizona. Soon after the factory opened, the city shut it down for a week because it lacked the proper building permits. Once it reopened, production started in earnest but skipped past some safety protocols, said two former employees. A wall panel fell onto a worker, injuring his ribs, one of the former employees said.

There was a bigger problem for the business: The initial technology installed last year on the factory’s assembly lines didn’t meet executives’ expectations, people familiar with the matter said. Most of the machinery required several people to operate manually, rather than relying on automation. For instance, windows in wall panels are installed by people rather than a machine. That put the company behind schedule on how many wall panels it could produce each day, several former employees said. The company also has struggled to figure out how to install plumbing and electrical systems inside the wall panels it puts together at the factory, creating more work for on-site crews.

The company recently upgraded to semi-automatic machinery, improving the situation, said people who have been to the factory in the last couple of months. The company has been investing more in technology as it plans more factories.

Mr. Marks, in an interview earlier this year, acknowledged the company had work to do. “We have one factory that’s semi-automated and not at scale...but now we’re automating factories much more,” he said.

There have been other mistakes, former employees and people who have worked with Katerra said. For one California project, Katerra pre-assembled walls in its factory fastened with the wrong kind of nails that wouldn’t hold up under certain moisture conditions, a former employee said. For another project, delays in ordering material pushed work back several weeks. Some buildings have had issues with window leaks, other people said.

Industry Pressure

Katerra’s aggressive fundraising has turned heads among the country’s largest real estate developers. Many are watching the startup closely. Katerra hopes it can eventually become the preferred construction firm for up to a dozen large developers, according to a person who has met with them.

Recently, at least one big deal has gone awry. Katerra had signed up prominent Bay Area developer Sobrato Organization as a customer last year, but the two sides have run into disagreements on pricing and had other issues, according to people familiar with the matter. Katerra spokeswoman Robin Clewley said the two sides are still in discussions.

Other property developers working on projects with Katerra have had concerns about the firm’s performance, said a person in the real estate industry who has spoken with several developers. “Customers are frustrated that what they’re delivering isn’t good. Whole orders need to be canceled. [Katerra is] slowing down the process, as opposed to speeding it up,” the person said.

Katerra’s biggest residential development customer is Wolff Company, a large apartment developer in Scottsdale, Ariz. The two firms are inextricably connected. Fritz Wolff, the real estate developer's executive chairman, also started Katerra with Mr. Marks and Jim Davidson, co-founder of the technology investment firm Silver Lake.

Mr. Wolff said at a Harvard University talk earlier this year that Katerra knows the difficulty of the task it is taking on. “It’s ambitious and crazy, I know, but that’s what we thought it would take if we would try to solve the problem at scale,” Mr. Wolff said.

Cory Weinberg has been a reporter at The Information since 2015. He covers technology, real estate, travel, transportation and venture capital. He can be found on Twitter @coryweinberg.