Housing developments and personal computers have more in common than you may think.
Manufacturing homes and computers both require careful design, sourcing materials from a large number of suppliers, and assembling all the pieces.
But while big tech companies have building servers and computers down to a near science, the same can’t be said of the construction industry. At least according to Michael Marks, the former CEO of Flex, the go-to manufacturing contractor used by a number of tech companies like Microsoft (MSFT), Cisco (CSCO), and Hewlett Packard (HPE).
Since leaving Flex in 2006, he’s became an investor, took board seats at companies like Zappos and GoPro (GPRO), and was an interim CEO at Tesla (TSLA) during a tumultuous time after the electric automaker’s co-founder, Martin Eberhard, was pushed out.
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Now Marks is taking his supply-chain know-how to the construction industry with a startup called Katerra by streamlining the building process. The two-year-old company has just raised $130 million, bringing its total funding to $220 million at a valuation of over a $1 billion.
Marks got the idea from a real estate investor friend who explained the difficulties that big real estate developers have keeping track of how much their projects cost.
For example, after scouting architects to design their apartment complexes, these developers solicit general contractors who then quote them a price for their services. However, the general contractors also have their own network of sub-contractors like local electricians or plumbers who bid on their respective services. The developers only see how much their general contractors are quoting them, which include markups, and are unaware of details like how much the “subcontractor is paying for the toilet,” said Marks.
These little details add up, resulting in projects costing more than they should, he said.
Katerra hopes to simplify construction by controlling the entire building process, thus eliminating the need for subcontractors to bid on their services to contractors, which can lead to inflated prices.
Prospective customers tell Katerra what type of housing they want—like senior living homes, multi-family apartment buildings, or dormitories—and Katerra will use its software to create a basic layout in which everything from the windows and doors are fitted and placed as cheaply as possible.
Once the developer signs off on the design, Katerra physically assembles the housing complex’s various components like apartment walls and countertops within its Phoenix factory. Katerra then ships those parts to the construction site and hammers everything together.
Marks claims that Katerra can source materials like wood better than any of the residential developers in the United States because it buys in bulk for several projects at a time. Most residential developers buy materials for just one project, he said.
So far, the company has several projects being built in the U.S., including a 12-story town home complex in Portland, Ore. And a 12-acre senior citizen facility in Seattle.
Although several companies compete with Katerra in different areas—Prescient builds frames and panels for developers in its own manufacturing plant while Rhumbix sells software to track construction costs— Marks said Katerra stands out for wanting to do everything. The risk, however, is that Katerra is taking on too many different tasks.
“That’s the skepticism people will have about us,” said Marks. “I completely understand that. It’s just that doing what we are doing here is easier than it was at Flextronics, but we have to prove it.”
Additionally, Marks has to fight the perception that Katerra is just another prefabricated building company, which some developers believe make “cheap and crappy” homes, Marks said.
“It’s not going to be crappy,” he said.
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Marks said Katerra brought in approximately $500 million in bookings in 2016 and has already booked $550 million for this year.
Katerra’s investors include Greenoaks Capital, Moore Capital Management, Khosla Ventures, DFJ, Foxconn, and Paxion, the wealth management firm owned by Marks and others.
