Why My New Real Estate Development Company, The Change Order Group, Is the Anti-Katerra

Not sure what’s happening in this picture. Courtesy of Katerra. Or is it KATERRA?

This post was originally published in the blog for my new development company, The Change Order Group.

To anyone shocked at the pitiable state of construction startup Katerra — evidenced by Softbank’s recent $200M re-up investment to avoid bankruptcy — I would like submit this piece to voice an alternative narrative. Like their Softbank Vision Fund contemporary WeWork, the signs that Katerra was doomed were obvious from the start. I will highlight some of those signs and then explain what the Change Order Group is doing to present a qualitatively different and effective approach to market disruption.

Katerra first came on my radar in early 2017. I had never heard of them, even though they had apparently been around for a couple years by that point. I looked them up and all I found was a holding page with a kinetic black-and-bronze wave pattern emblazoned with the company’s logo and a declaration that Katerra was a “technology company” based in Menlo Park (not to be confused with a construction-logistics company in Arizona).

In April of 2017, they announced a $130M C-Round — one of many unprecedented construction startup raises — and despite the lack of information about their actual business, the raise sent buzz through the VC-backed PropTech world.

Around that time, I was something of a modular gadfly with a focus on mid-and-high rise and experimentally designed buildings. Among other endeavors, I had recently concluded a gig for leading San Francisco modular developer, Panoramic Interests; I had helped my friend Jeff with his startup Kasita; and I had started a three-year gig with the high-rise steel volumetric startup, FullStack Modular (FSM), based in Brooklyn’s Navy Yard. Despite my breadth of modular connections — as well as other preb and offsite ones — I knew no one at Katerra who was ostensibly working on these technologies, nor did virtually anyone in my extensive network.

Over the next few years, I watched and listened to Katerra’s saga unfold through headlines and insider scoops, from buzz to bust. Rather than list Katerra’s transgressions — of which there are many — I wanted to call out a few of them as examples of the culture of deceit and corruption that allows billions upon billions of dollars to be wasted on moonshot projects. This culture and these sorts of investments undermine human decency and fundamental economic principles; this is done at the expense of more credible companies, people, and technology. Until we acknowledge that failed ventures like Katerra fail for reasons — largely because so many win even when they lose — investor dollars, talent, and the media will keep cloning variations of this theme, wasting time and money, while failing to move innovation forward.

The Wizard of Marks

There’s a widespread misconception in the VC-backed startup world that goes something like this:

Disruptable sector + white-insider founders from analogous industry + gobs of VC capital and press hype = can’t miss startup and success [until said inevitably startup fails]

In the case of Katerra, the industry was “construction” (or was it technology?); the white guys were part-time CEO and private equity and high-tech logistic-vet Michael Marks and his buddies Fritz and Jim; the VC was Masayoshi Son and the Softbank Vision Fund; the “successes” — in the absence of notable projects or tech — were their waves of venture raises, company expansions and acquisitions, and press pieces about those things.

In 2017 as now, I made it my duty to know who was doing anything interesting in the construction and PropTech startup scenes, and the $130M C-Round certainly qualified as interesting, though I still wasn’t sure why besides the amount. As a construction-focused communication expert, it struck me as odd that long after Katerra’s site went live, no one, including them, seemed to be able to clearly communicate what they did.

They had a shiny factory in Arizona whose function wasn’t explicit: was it a warehouse, a manufacturing center for fully or partially modular buildings or prefab sub-assemblies? [Turns out, at least initially, the factory did nothing due to a prolonged closure stemming from an inadequate air conditioning system.] Were they a supply chain company with their own distribution networks? Were they doing NetZero CLT in Washington State or carbon intense construction in the middle-east for their Saudi partners, as suggested by their cast concrete factory in India? Were they developing projects as well? One of their founders, Fritz Wolff, had a massive development company, and Katerra used his portfolio projects for their own. As inferred by their vague web and press messaging and strategic acquisition choices, the answer seemed to be, “yes, Katerra does that too.”

Anyone who’s been to a few nightclubs knows that long-lines outside are not positively correlated with how lit a club is inside. My suspicion that all the Katerra buzz was actually a night at the Roxbury were increasingly supported by numerous rumors of botched projects, logistic nightmares, improvised and incompetent teams, cost and time overruns, stopgap solutions, absent CEOs, massive hiring and firing rounds, zero applied-innovation whatsoever, and endemic Softbank sketchiness.

I also started to look past the manufactured mystery to realize many companies like Katerra stay stealth or have impossible-to-explain and/or execute businesses because they have nothing to hide: like the wizard in Oz, there’s just some bumbling operators trying to stay in power while masking their incompetence and greed behind slick holding pages.

Katerra, like WeWork, never offered real solutions. It was a hubristic, bound-for-failure hail-mary from the outset.

In WeWork’s case, there were never millions of social-impact entrepreneurs to fill their millions of desks. There were, however, countless developers and owners hoping their existing and pipeline assets had a future in an increasingly emphemeralized office industry. Conveniently, there were heaps of unconditional ill-got Softbank cash to fit out those spaces. And flush with that cash, Adam and Mig had no problem serving up free IPA while perpetuating the myth that if they (developers) built them (WeWork locations) they (members) would come. They never did, or certainly not in sufficient numbers.

The same dynamics played out at Katerra: since 2015, they have raised around $2B total (which may or may not include the latest $200M). Katerra has, until recently, treated each additional investment like successes. They’re not. They’re lifelines, and my guess is the last one will be the last one before they have to liquidate.

Raising Capital and Having High Paid Executives and Media Hits ≠ Results

Katerra burned through this $2B without producing a streamlined logistics juggernaut cranking out high quality, standardized real estate products. Instead, they’ve ambled along without apparent strategic end-goals, revolutionary technology, or proprietary process efficiencies. There’s nary a novel building in their portfolio — mostly generic low-and-mid-rise multifamily in Arizona, more generic, but high-rise, concrete in New Jersey, and some recent vanity projects coming from their afterthought-bought CLT factory in Spokane. They have done nothing Turner couldn’t have done 1000x better with a few subs and without Katerra’s burden of meeting fantastic investor expectations.

The reason Katerra has ventured so far in terms of funding while doing so little in terms of market disruption relates to their falseness of intent rather than the enormity of disrupting construction.

For companies like Katerra, success is a function of making more money, whether it’s made through venture raises or revenue . Founders like Adam, Miguel, Michael Marks, and their myriad imitators have realized raising and exiting — even on awful terms — is easier and better compensated than building ecologically and economically sustainable companies. That’s why Elon Musk wannabes slobber every time they hear news of the latest raise or exit, which often disproportionately enrich investors and founders. In other words, the successes of VC-backed startup founders and investors are discrete from the successes of VC-backed startups. Katerra’s endgame was always to raise and spend as much money from Masayoshi et al’s open investor-spigots would permit, hoping something good would come out of it, but facing few negative, and regularly positive, consequences if nothing did.

Yet there were negative consequences galore, not least of which were the blown billions, wasted attention, and uprooted lives from Katerra’s famous firing rounds.

Katerra set back the industry. Other venture-backed construction and PropTech companies hoped a Katerra success would augur well for getting their projects backed. But Katerra’s top-heavy and unfocused approach eventually made the already-risky construction startup investing landscape appear that much riskier. More personal to me, Katerra’s catch-all marketing approach included some of my favorite buzzwords — modular, offsite, prefab, multifamily, CLT; their generalist failing threw shade on specialized folks actually trying to do good work.

This leads me to today.

There’s a school of Greek philosophy called via negativa, whereby the right path is only found through the negation of the wrong ones. Using that as a guide, the Change Order Group will succeed by not being Katerra. More specifically:

1. We are transparent about our intentions, our tech, our business approaches, and the identities and values of the people working with us. We believe the more you know about us, the more you will like us and believe in us. Blog posts like this are ways you will get to know me and my team, but we are easy to Google. Rather than make people excited by mystery and inference as if in some toxic romance, we want to entice people by sharing and being open. We are out to start a movement, not just turn a buck and that will only happen by sharing the best ideas, people, projects, and tech. We rely on authenticity, right-motivation, and inimitable experience — not tricks, deceit, and nonexistent IP — to generate attention or establish credibility.
2. We value starting small and are conservative with capital and resources by default. We are solving what we see as the biggest technical challenge in human history: decarbonizing the world’s economy through its built environments and using those environments to create sustainable, just societies. But we’re going to do it one project at a time and using as much existing knowledge and as many existing resources as we possibly can. We will not take on big executive payrolls or staff up or take on overhead unless it’s absolutely necessary. Nor will we propose new, far-fetched, and expensive ideas when existing, simple, and attainable one work as well.
3. Product development will be done lockstep with deal development. Unlike many construction and development startups, we won’t design or sell products without defined markets. Whether it’s Katerra, Blokable, or the new wave of eco-friendly integrated outfits, there is an obsession to present fully-baked plans and gorgeous renderings for projects — and I’ve seen this too many times — that have only suggestions of ever actually being built. For reasons of efficiency and remaining solution-agnostic (i.e. not trying to shoehorn our awesome product in the wrong market), our products will be developed for specific markets, sites, and deals rather than projected and imaginary ones.
4. We are developers. People seldom care for things they don’t own, so COG eventually plans to have an equity stake in our projects to make sure they are operating optimally in perpetuity for the owners and markets they serve. We are not improving developmental efficiency so we can enable and profit from short-horizon develop-and-dumping.
5. We won’t take multiple stands on issues. We have consistent stances on how we believe people, the planet, and resources should be used, and we won’t compromise those. We won’t promote unsustainable development in one part of our business while claiming eco credibility in another part. For example, Katerra claims to be a sustainable company owing to its new CLT factory in Spokane, yet much of their core business comes from building sprawl in scorched and overbuilt areas like Arizona, as well as carbon-intensive concrete towers in New Jersey and elsewhere.
6. We will use emergent systems and lean management principles to produce distributed-overhead and cost-and-time effective procurement and manufacturing channels. Put another way, rather than attempting to consolidate all the procurement and manufacturing capabilities under one roof like Katerra, we will create a network of vetted and aligned partners who can be assembled and disassembled as project and product needs dictate. Contrary to my peers, I don’t believe affecting massive change in real estate development and construction requires a capital-intensive, fully-integrated, one-stop invest-develop-construct-operate outfit. That said, in order to revolutionize real estate development and bring its efficiency in line with other manufacturing sectors, there will need to be lot of cooperation and coordination between smaller, specialized entities, which is a lot of what COG will do.
7. We will not rely on implied or associative competence to establish our credibility. Real estate and construction requires real estate and construction knowledge. The scores of real estate startups boasting Apple, Tesla, and Amazon alums are outing themselves as people to be avoided. I know few real estate operators worth a damn who’ve been in the industry less than a decade. It’s too complicated and specialized for lateral skill transference. My team is the best of the best at our business, which, as luck would have it, is tech-enabled and applied innovation in real estate development, design, construction, tech, operations, efficiency, financing, mobility, agriculture, affordability, and more ; all of these sectors are directly related to our product offering. My co-founders and I can boast as much or more experience as anyone in the world at grafting innovation onto investment-grade real estate assets and startups. We believe we can disrupt the real estate industry because we’ve have disrupted the real estate industry before — not because we were big shots in the automotive or trade school industries.

We are currently raising a small seed round to make sure we have adequate resources for deal scouting, but even this round is connected to a couple specific projects we’re scoping out. And though I cannot publicly talk about those projects, I can liberally communicate the ways in which we will engage all of our projects, thereby helping our various partners understand what we’re up to. In doing so, Change Order Group can attract quality investors, development partners, and tenants based on transparency of intention and process rather than hype and subterfuged status quo maintenance. We’re the good guys and we’re happy to prove it.

If you’re interested in our investment deck, our product, or projects, drop us a line at info at changeorder dot group.

Thanks

David, CEO Change Order Group