This article first appeared in Builder.
SoftBank Group Corp.'s Vision Fund sneezed this last week or so. What that means is that portfolio companies in the $100 billion venture capital investment program have come down with pneumonia. One of those, whether it knows it or not, may be Katerra, a housing construction disrupter that has aroused both enormous capital support from the likes of the Vision Fund and Foxconn, and an almost equally vast host of doubters since its vaunted 2015 start-up.
Realities of lightning-flash changes--and potential ones to come--in investment disposition and risk suddenly matter far more to fledgling companies with high-potential rewards but no proven track record of operational success, nor a predictable path to profitability.
SoftBank and the Vision Fund wrote down the value of their WeWork stakes by $4.7 billion and $3.5 billion, respectively. The $100 billion Vision Fund also wrote down the value of its holdings in U.S. ride-hailing company Uber Technologies Inc. and about 20 other investments, leading to an operating loss—the fund’s first—of nearly $9 billion for the quarter, and a group-wide net loss of $6.4 billion.
And here, from Dvorak and two other WSJ staffers Rolfe Winkler and Heather Somerville, is a view into why the Softbank juggernaut's stumble is causing bigger health problems for Vision Fund participants with business models, innovation strategies, and profitability expectations that follow a flight path similar to WeWork's.
The failure of WeWork’s initial public offering forced SoftBank to fund a $9.5 billion bailout to salvage its $9 billion investment and helped to sour the market on big-spending, unprofitable startups. It has also drawn attention to SoftBank’s investing strategy, which has had big successes in the past.
SoftBank will be under scrutiny on Wednesday when it releases earnings. Analysts are estimating SoftBank and the Vision Fund will have to take billions of dollars in losses as they mark down the value of many investments. Investors are watching the fund’s performance closely—particularly because SoftBank is trying to raise funds for a second Vision Fund even bigger than the first.
The "we're not WeWork" mantra is quick to roll off the tongues of many a Silicon Valley start-up with aims to gain traction toward Unicorn stature. Softbank itself claims its investment strategy remains on course, and Katerra is no different.
Here, in a Real Deal piece by staffer Kathryn Brenzel, one sees a firm already enduring stresses and shocks of early life as an industry disrupter now--post-WeWork meltdown--enduring a new series of salvos and convulsions as technology start-up models get a new third-degree in scrutiny, risk-aversion, and growing skepticism. There are more than a few incumbent stakeholders--builders, trades, manufacturers, materials distributors, etc.--who'd like to see Katerra become another casualty of construction's long resistance to real progress.
Katerra is taking on a sector in real estate that’s been one of the slowest to adopt technology. While the company’s strategy of being a one-stop shop — a designer, supplier and builder — allows it to ensure new technology is used at every layer of the construction process, it also means the firm is taking on far more risk both in terms of capital and liability.
John Fish, the CEO of Suffolk Construction, conceded that the construction industry has failed to embrace technology and is facing mounting pressure to evolve as a possible recession looms and costs rise — driven in part by the U.S.-China trade war. But, he said, VC-backed firms don’t necessarily have all the answers.
“The industry is at a crossroads,” he said. “[But] I don’t think Katerra’s strategy is a panacea for driving costs to the bottom.”
Until recently, the details of Katerra’s plans to become profitable might not have mattered much. But that may no longer be the case for companies that SoftBank has showered with cash.
“Given what happened with WeWork, profitability is going to become an issue. I would think before Katerra tried to go public, they’ll have to become profitable,” said Frank Sciame, head of the eponymous construction and development company.
The Real Deal's Brenzel reports a relatively balanced piece on the merits of both supporters and skeptics of Katerra's bold plan to bend cost curves in construction by becoming nearly 100% vertically integrated, from materials, to components, to structures, to communities. But she also notes that the WeWork "moment" has real implications for Katerra's strategic optionality. She writes:
Zach Aarons of MetaProp, also a proptech venture firm, said that while he doesn’t have direct knowledge of Katerra’s finances, companies that raise a ton of capital are playing “a numbers game” that threatens to “totally obliterate your ability to have a successful exit other than an IPO.” He noted that WeWork’s potential IPO raised questions about what it would trade at compared to a traditional real estate company. Katerra could face a similar challenge when it goes to market.
“When you think about Katerra, if they are trying to be a GC or they’re trying to be a lumber mill, what premium would they fetch as it relates to the valuation multiple?” he said. “It creates a go big or go home dynamic.”
This conjecture points up not just why WeWork's financial debacle is not just a problem for Katerra, but why Katerra is a problem for housing. Housing may or may not need Katerra itself, but it needs what Katerra boldly aims to do, which is to rationalize home and community building as a procurement, assembly, and sales process in the 21st Century. The Katerra problem is that--by virtue of the investment overexcitement tech start-ups must stir to gain capital infusion momentum--it needs an "exit" even as it makes its entrance. It needs the sale or IPO that will make rich people of its founders and original investors.
What's more, the WeWork nosedive and its aftershocks have occurred in what is generally a positive economy, where both employment and business growth have had momentum. It's difficult to speculate on what will happen if the broader economy hits a couple of hiccups, or worse, stalls due to any number of known and unknown risks.
It's the question of what happens to investors' appetite for innovation in property, construction, and real estate technology that matters right now. Endemic, established, incumbent business players in the space mostly see that technology will have a major impact in how buildings are sources, designed, engineered, and assembled.
But Katerra, its strategists, its investors, and its other stakeholder partners and interests, believe the moment is now to fundamentally address and transform what's broken about building homes and communities.
Or, we'll be kicking the can--and the pain--down the road for others to deal with in the future.
So, when it comes down to it, we do hope that Katerra is different than WeWork. And we hope that it's stakeholders like Softbank's Vision Fund and other investors in construction and housing innovation see that difference. And buy into it, patiently.
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