SoftBank Plans Another Big Investment in Katerra

By Cory Weinberg and Alfred Lee  Jan 14, 2019 7:26 PM PST

SoftBank’s Vision Fund plans to double down on Katerra, a startup run by electronics industry veterans trying to build apartments and hotels faster and cheaper than traditional construction firms. The massive fund is expected to lead a $700 million round of financing that would value Katerra at more than $4 billion, up slightly from its previous valuation, people familiar with the matter said.

The deal would further demonstrate the fundraising prowess of Katerra, a four-year-old firm co-founded by prominent tech investors Michael Marks and Jim Davidson, and real estate developer Fritz Wolff. The latest fundraising comes despite some factory mishaps and construction delays that The Information reported on last year. The deal would pull Katerra’s total equity capital past $2 billion, and may make it one of SoftBank Vision Fund’s biggest bets in the U.S., behind WeWork and Uber.

• SoftBank to lead $700 million investment round
• Deal would value Katerra at more than $4 billion
• Investment underscores SoftBank’s real estate focus

Katerra’s co-founders also raised billions of dollars last year for a separate fund, called Kandle, to invest in real estate projects built by Katerra. The fund’s investors are betting that construction projects built by Katerra will generate higher investment returns. Investors in Kandle include Makena Capital Management, an asset manager run by the former head of Stanford University’s endowment. The fundraising by Kandle hasn’t been previously reported.

Spokesmen for Katerra and SoftBank declined to comment. The identity of the other investors in the new Katerra financing round couldn’t be learned.

Whether Katerra can fulfill its lofty vision will be closely watched. It is the best capitalized of a range of startups trying to make a labor-intensive, heavily regulated construction sector more efficient. The potential to upend the industry has enticed more tech investors recently, from Alphabet to prominent venture-capital firms. “The construction industry is closing in on $10 trillion in total spending globally and yet remains one of the least digitalized and digitized of the major economic sectors, ahead of only agriculture and hunting,” according to a report last year by AGC Partners, an investment bank.

Katerra’s business includes three parts. Most ambitiously, the firm tries to sell construction services to large apartment developers, including design, materials procurement, manufacturing and construction—jobs traditionally performed by separate subcontractors. Katerra sometimes sources and sells building components like toilets and kitchen cabinets to real estate and construction firms without getting involved in the construction work. It also sells home-renovation services to apartment owners.

Katerra has built up significant revenue already, in part through acquisitions. It has used its war chest to buy several architecture, construction and manufacturing firms around the world, including India’s KEF, Texas’ United Renovations and Canada’s Michael Green Architecture.

Katerra’s revenue was in the high hundreds of millions of dollars last year and is expected to surpass $2 billion this year, a person familiar with the matter said. It has discussed with investors the prospect of an initial public offering in the next couple of years. The company would still need to prove it can consistently complete projects on time at higher profit margins than traditional general contractors, which are valued much lower than tech companies.

The company has a large pipeline of business, but faced significant challenges with earlier work that came out of its factory in Arizona, several current and former employees told The Information last year. Several people close to the company have said it often takes losses on development projects to win business. Still, some have said the company is showing progress on automating more parts of the construction process, which would help it build faster.

The company appears to have raised enough money to help plow past difficulties. It hinted at its upcoming fundraising in a California filing earlier this month when it said it planned to raise $700 million in preferred stock. Other existing investors include Greenoaks Capital, DFJ, Foxconn and a fund overseen by Soros Fund Management.

Support from SoftBank might have helped in other ways—and created some complications. Mr. Marks, Katerra’s executive chairman, in October traveled to Saudi Arabia to sign an agreement with the country to build several factories there to help the government meet housing development goals. Katerra signed the deal at an investment conference in Saudi Arabia’s capital, Riyadh, just weeks after the Saudi government was implicated in the murder of Jamal Khashoggi, a journalist for The Washington Post.

Saudi Arabia’s sovereign wealth fund is the biggest investor in SoftBank’s Vision Fund. Other U.S. tech executives, including Uber CEO Dara Khosrowshahi, bowed out of the event in Riyadh where Mr. Marks appeared.

Katerra has several other factories in the works, including in California’s Central Valley. It plans to start production this year in a Spokane, Wash., factory to build flooring and wall panels out of timber, rather than steel and concrete—an unconventional approach becoming more popular in North America to make buildings more environmentally friendly.

SoftBank’s Vision Fund, which typically invests a minimum of $100 million to more quickly run through its $100 billion money pool, has shown a strong appetite for real estate and construction—industries historically shunned by venture capitalists. Other SoftBank investments in the sectors include office rental firm WeWork, automated home-selling startup Opendoor, real estate brokerage Compass and “smart glass” maker View.

—Zoë Bernard contributed to this article.

Source Link: eu=X5Fz6_F9dxKg7HsDk4xWVQ&utm_medium=email&utm_source=sg&utm_campaign=article_email