When life is long enough to have spanned being a magical thinking-prone six-year-old when

Source: The Builder’s Daily

If you phrase the question the same way for Entekra’s downfall, we’re curious as to what we’d hear (and we will in a follow to this story).

However, observations about both the business model itself and its day-to-day execution would need to appreciate two separate time-frames. One, as a boot-straps, primarily self- and family-and-friends funded entrepreneurial start-up. Then later, after Louisiana Pacific invested $45 million and went on to become a majority owner of Entekra in 2021. For as an entrepreneurial standalone, the complicating factor of “other peoples’ money” had not yet played a role, either from an accounting and overheads standpoint, nor as a fire-in-the-belly-driven crusader driving to make its solutions work for a portfolio of charter customers.

Further complicating external forces attached to both business model vulnerabilities and the operation’s ability to execute during the post-pandemic convulsion: Shocks to building materials and products supply chains, its follow-on inflationary impacts, a historically sharp intervention by the Federal Reserve to tighten money supply and make it more costly, and a pall of volatility and uncertainty that clouds both the duration and severity of potential negative housing correction forces.

Today – with strong signs a Recession is brewing up a threat to the nation’s strong job market, and signals a bank credit crisis continues to unspool in ways that will impact both businesses and individuals borrowers’ access to lending – every equity dollar is worth an order of magnitude less than it was 24 months ago, and every debt or leverage dollar costs at least that order of magnitude more than it did.

Impacts to both a business model and its ability to execute are a night-and-day different analysis today than it may have been from 2017 to the end of 2021, the time Entekra’s star seemed to shine brightest.

Facts include these:

  • Weinig Dimter, Hundegger, Weinmann, Randek and other proprietary construction automation, fabrication, production, and assembly technologies run in the millions of dollars each to buy, are costly to set up and tie to front-end code engineering and development, and continue to be expensive to link to architecture and construction documentation. Informed estimates are that it cost Entekra $25 million in CapEx to open its Modesto facility, an enormous upfront outlay requirement before generating a dollar of revenue, nevermind profitable revenue.
  • As a velocity-enabling production capability, known risks to Entekra’s operational model include that it’s building envelope solutions disrupt a partial – not full – stack of the 25 or more specialized subcontractor trade crews essential to a start-to-completion build cycle. In a lower starts volume period, some of the velocity advantage loses its appeal as home construction customers look to slash variable costs and revert to lowest bid contracts.
  • Further, LP Building Solutions serve both framers and builders as key customer bases, and may have disrupted some of its own customers’ businesses by adopting Entekra offsite capabilities.
  • GAAP accounting and enormously, sprawling protocol-driven enterprises – even ones with an innovation, de-commoditization, and solutions focus as LP – mean that differences between “gross profit positive,” “breakeven EBITDA,” and actual net operating profitable can mask significant unit-level profit versus losses. A hypothetical revenue decline, from $100 million in 2021 to 40% of that in late 2022-early 2023, for instance – as a result in slower starts we’d heard about in the back half of 2022 – could have caused a huge swing from profit on paper to real world losses.

More will be revealed. The questions of “what it means” and “why it matters” are the ones innovators – in integrated offsite panelization of walls, roofts, and flooring, in modular construction and pre-fabrication, in 3D and robotics factory-in-the-field industrialization, and in other automation, modern precision-manufacturing, and building systems and processes – will find to be a hard, simple one.

Does the investment of money, time, people, and materials necessary to modernize building and scale wide and fast enough to expand the tightening box of access to homeownership and affordable, ground-up rental housing make sense as a discrete business model that does not tap into the multi-layered benefits and profit streams of real estate residual values?

Here’s a characterization of the post-Fed hike innovation landscape the entire construction technology and innovation cohort is operating in these days:

As the market downturn drags on and investor cash remains hard to come by, more startups will start to run out of money, experts say. Some venture-backed companies will be forced to raise new funding even if it means agreeing to a lower valuation than they once secured, a deal called a down round, dreaded by founders and investors alike.

“We haven’t had a compression in values like this in more than 20 years. It’s an absolute bloodbath,” said Cameron Lester, global co-head of technology media and telecom investment banking at Jefferies, adding that companies that are able to raise money, even at a lower valuation, are the lucky ones. “What matters is you’re a survivor,” Lester said. – Lizette Chapman, Bloomberg

This is why the fallout of the demise of Entekra matters. It will not be the last failure we’ll be reporting on in the weeks ahead. Mind you, we’re not likely to be taking our own, biased views that seriously, but would rather to tune in and listen to you, as you’ve been living these same questions for a good stretch of time.