Katerra and WeWork had ambitious goals to disrupt and redefine the Architecture, Engineering
and Construction industry.
Construction has remained relatively unchanged for the past 100 years and is notoriously
inefficient and unproductive.
Katerra and WeWork preached the value of vertical integration where a company has direct ownership
of various stages of its production process.
In theory, eliminating external contractors or suppliers can streamline operations, shorten
timelines and decrease the margin of error.
WeWork provided flexible shared workspaces for startups.
They claimed the business was worth $47 billion in January 2019, despite losing $219,000 every
hour of each day from March 2018 to March 2019.
Once the public realized how unsustainable and reckless the business was, their valuation
quickly dropped to $9 billion.
They laid off two thirds of their employees and Adam Neuman stepped down as CEO of the
company.
SoftBank, a Japanese conglomerate, pumped around $18.5 billion into WeWork.
They also pumped $2 billion into Katerra, an off-site construction company.
Katerra was founded by Michael Marks and Fritz Wolff.
The company manufactured large building components off-site, and advocated the use of mass timber
like glued laminated and cross laminated members.
In many of its projects, the company served as a manufacturer, architect, MEP engineer,
supplier, general contractor and subcontractor.
However, within 4 years, the company had burned through their funding and their overambitious
plans started to crumble.
By June of this year they laid off many of their employees and filed for Chapter 11 bankruptcy.
So, what happened to Katerra, and what can we learn from its failures?
For starters, we have to be cautious of outsiders, particularly from the tech industry, who have
grandiose ambitions to “fix” Architecture, Engineering and Construction or AEC.
While an external view is helpful, it is also naive.
Michael Marks, the founder of Katerra came from an electronics field.
He wanted to bring the electronics industry’s end to end manufacturing process to the construction
business.
They would buy materials and fixtures in bulk, skip the middleman and sell them directly
to GCs.
In order to become a full service firm, Katerra spent millions on acquisitions and mergers
around the world: United Renovations, Fields Construction, Bristlecone Construction, KEF
Infra, Equilibrium, UEB Builders, Fortune-Johnson, KGD and Michael Green Architecture.
However, you can’t simply buy companies and expect all the employees to blend together
perfectly.
This reckless, artificial growth can lead to head butting and clashing cultures.
Eliot Brown interviewed a former Katerra employee for his Wall Street Journal article.
He said that: “When architects and engineers raised concerns, Katerra executives would
hold up an iphone, telling the skeptical workers that if it could be done for phones, it could
be done for apartments.”
That kind of thinking brings us to the second point.
The difference between theory and practice.
Construction isn’t the tech field.
An iphone is not a building.
Katerra thought it could save time and money by controlling everything - from manufacturing
windows to making its own light bulbs.
They believed that any structure could be built with assembly line parts in its own
factories and then shipped to job sites.
Instead of mastering a single type of building, Katerra built offices, hotels, single family
homes, and apartment buildings.
They proudly claimed to do it all, traditional wood frame on grade, tilt up concrete structures,
cross laminated timber, cold-formed steel, post-tensioned concrete structures, and wide
flange structural steel.
This is another clear sign of naivety.
An iphone or a car can be used in any part of the world with relatively small tweaks.
Buildings don’t work that way.
The programmatic and construction requirements of a hospital are vastly different to those
of an apartment building.
Additionally, buildings are the embodiment of culture, tradition, local environmental
conditions, expertise, materials, code requirements, etc.
In theory, producing repeatable, prefab components would bring in profit margins of 25-30%, as
Katerra promised.
In reality, Katerra underbid projects, missed construction deadlines, and blew through budgets.
The racked up $2.8 billion in losses over the past 3 years.
There were some suspicious, potential conflict of interest dealings going on at Katerra.
This article on the Real Deal says that Fritz Wollf, co-founder of Katerra, owns a private
equity firm with a massive construction arm.
His firm was Katerra’s sole customer in its initial years.
Michael and Fritz also started Paxion Capital, invested in their client’s businesses like
Lolli & Pops, and started an investment fund called Kandle which allowed them to take an
equity position in some of Katerra’s projects.
Seems like they were both the owners and the customers.
Adam Neuman, former CEO of WeWork did something similar, he owned the buildings that he leased
back to his company.
So, why should we care?
Plenty of businesses declare bankruptcy and companies with the highest valuations aren’t
even profitable.
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Back to why we should care about companies like Katerra going bankrupt.
People have accused me of being too negative and of being fearful of progress.
I admit that I can be pretty cynical at times but I’m not afraid of progress.
It’s just that after turning 30, I have a very low tolerance for bull.
I also think that businesses like Katerra and WeWork delegitimize slow-growth companies
that are doing the right thing.
Companies that have started off with humility and respect for the complexities of the AEC
industry.
Additionally, the entire construction industry has thousands of highly specialized fields.
It is very disappointing when outsiders dumb it down into the ever-elusive “kit of parts”.
I’ve received so many illogical questions from people who have somehow secured funding
for their “disruptive” but senseless projects.
When companies declare bankruptcy or insolvency, the costs have to be borne by someone, right?
Adam Neuman, who ran WeWork into the ground, was given $1.7 billion to step down.
CEOs and investors are not going to bear their costs.
It’s us, the middle class, tax paying citizens and consumers that deal with the repercussions
of reckless companies.
That’s why we should care.
I’m going to wrap this up with a clip from Grand Designs UK.
If you haven’t watched that show, go check it out now.
It is the most addictive, calming and inspiring architecture and design show.
These owners wanted to build a sculptural home in Exeter, UK.
The house would be made of giant timber components and clad in zinc and glass.
To save time and money, the architect and owners decided to prefabricate all 300 timber
components.
However, moisture had swollen every timber beam.
Even though they slotted together in the factory, they now didn’t fit on site.
They had to go back to traditional methods of construction and manually cut and route
each beam.
An initial budget of 835,000 pounds turned into 2.5 million pounds.
We cannot dismiss the power and unpredictability of mother nature in construction.
AEC is a very difficult industry to automate.
Instead of automating small parts of the process and understanding how trades work together,
Katerra tried to master every element at once and failed.
Their “hypergrowth” strategy is employed by social media and software companies but
it doesn't work in complicated, slower-moving industries like real estate and construction.
I think professionals who respect and understand the complexities of Architecture, engineering
and construction will be the ones to initiate change.
If you worked at Katerra or WeWork and would like to share any personal stories, leave
me a comment below.
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See ya.