Alexis Rivas - A New Blueprint for Homebuilding - [Invest Like the Best, EP.326]

23:33So you're looking at in that$430 ,000 home, you're looking at around$130 ,000 of that being land. Now, when you go into places that are more expensive, let's say California, that can go to like 50%. Obviously, the price goes up. That's just at a high level, first of all, where you start. What's land? What's construction? And then from there, on the typical home, the breakdown is roughly... I mean, you have the soft costs. So things like permits, engineering fees, architecture fees to get the whole community planned. You have the land development costs. So you have the roads, the sewer network, the electricity network, which is all built by the developer.

24:13And then you get to the home, which is the thing that goes on a lot that we typically think of as the home cost. Those costs will vary quite a bit based on the location. But when you look at the typical home, it's like labor and materials are both the major cost areas in the typical home. Our focus in terms of how we change that is first moving a lot of the labor into the factory where you can make it more efficient, you can build tooling and fixtures around it, and then making the onsite installation process really fast to make that labor side significantly less. So that's really the focus. Today, we're starting off with a high end product.

24:52You can use the Tesla analogy, right? We're starting off with the Roadster, and we're focusing on relatively low volume. And the reason for that is you can iterate quickly, you can learn quickly, you don't have to make massive investment in hundreds of millions of dollars of automation. And then as we ramp production, and as we iterate on the product and lower the price and set up the supply chains, we make it available to everyone, and we drive down the price. So that's the approach that we're taking from a strategy standpoint, because it's really hard to just start off with a mass market price product when you're small.

25:22You kind of have to start with something high end where you can make a margin and then lower the cost over time. What is the role of software in the business? Obviously, there's an incredible physical component to what you're doing. I want to talk about what the factory looks like in a second here, but I'm sure that there's a really important software layer to all this and that there's probably a lot of things in the future that will be this interesting combination of material science, production innovation, software and technology layered throughout. Like this is a microcosm of a bigger trend.

25:52So what have you learned about thoughtfully integrating and building software into this process? So our vision for this from day one was always customization in a way that actually scales. How do we compete not with other pre-cap companies that have five models? How do we compete with your local general contractor who can build whatever you want from a layout standpoint. So we have these standardized panels, but then there's a question of, well, how do you combine these panels to make a home? And then does that home overall perform the way it needs to? So how do you generate those designs? So that's where the software comes in.

26:26With conventional construction, you come up with a floor plan, you go and show that to an engineer, they come back with feedback, oh, this span is too big, or you can do this, but it's going to require this steel I-beam that's going to add$10 ,000 of cost to the project. If you go five feet smaller, you don't need that anymore. So there's this kind of value engineering that is part of the conventional construction process with very slow iteration cycles. You have multiple consultants basically interacting with each other. What we've done is we've taken the information about our panels, the structural information as an example, and codified the rules around those.

27:05So you can combine this number of panels for this span in this seismic zone. So we put all of this information to software and we can generate a design that we know works structurally without having to do pages and pages of calculations manually. That's just an example role that software plays. But really, the way you can think about the software is going back to the Lego analogy. The Lego bricks are preset. There's a fixed set of Lego bricks. But what we're trying to do is make different sets, different Lego sets for each person based on their property, based on their needs, their preferences, their budget.

27:42What our software does is it takes the Legos and it intelligently assembles them into sets. And it checks that those sets will fit together well, will perform nicely, will have good energy efficiency, will be structurally sound. And then it generates the permit sets for those Lego sets. All the permit drawings are the engineering drawings. That even flows down into the production line. All the information that's needed to actually go and build these, how many of panel X or Y or Z do we need? That's really the role of the software here. It's kind of the glue that holds it all together. How do you think about the support model?

28:17Or I'm going to lump together two things that popped in mind, the support model and what I'll call like the last mile problem where I've been through this in construction where you get to stuff and there's just like some final little things that need to get customized and you can do them at the edges. Whereas you're dealing just in panels as your unit of work versus something all the way down to like a single nail or something. It just seems like the last mile could be harder. Like if you encounter a problem at the end, it's like with Legos, like if you're missing a piece in the middle, like you're screwed, you got to undo everything and redo everything.

28:46So I'm curious about that. And then also just how you support these things. When something goes wrong inside of a cover home, you can't just call a handyman or something. You need someone probably that specializes in this product. So how do you think about those two potential issues for the company and the product as it scales? On the last mile thing, you're right. Like Legos, if you're missing something, you're kind of screwed. So basically, we've spent a lot of time, a lot of time, and this is a lot of the headaches early on, basically making sure that we're not missing anything. that the parts are fully engineered and that they will fit together when they show up on site.

29:24Otherwise, you're doing all this work in the factory, then you have to go on site, undo all of this work in the factory, fix it, which is way less efficient than conventional construction. That's way worse. That's what makes this really hard. With conventional construction, you can show up on site and just start trimming things. Maybe things are slightly off in terms of dimensions, but you can sand them down, you can trim them, You can fill it in with spackle. And at the end of the day, the home still looks great and works. With us, these panels are these big, not easily modifiable panels that get installed and assembled quickly.

29:57But if they don't fit together, that's a real problem. You have to just solve that upstream with the engineering and then the production. It's one thing to have the right panel dimensions on the drawing. It's another thing to actually have those made consistently every time the right way. The manufacturing side of this is very difficult too. On the support side, how do you think that will work? Inevitably, something's going to break, a pipe's going to burst, normal house, money pit stuff. So what happens? Are you building a support network alongside the manufacturing piece of the business that will service these homes, I guess, over time?

30:31So there's some things that are fairly conventional, like the way that the plumbing goes through the structures is somewhat different, but the plumbing itself, any plumber could go and look at and fix. We're careful not to go too far down to make this completely alien for service reasons like this. You want, if there's a leak, someone to go and be able to quickly turn it off just like they would in a conventional home and then go fix a pipe under the sink. But there's other things from a service standpoint that are more unusual. In most cases, a skilled repairman or general contractor could go and look at this and figure it out.

31:03They would first be taken aback and say, what's going on? But from a business standpoint, we look at this as an opportunity to follow the product past just the handoff point. So we actually, today, we're the first point of contact that our customers call if there's ever an issue, and we go out and solve it. It's possible for others to solve it, but we actually want to solve it because that way we can learn about how did this happen? Was it something in terms of how it was used? We had a case where someone tried to break into a cover. They didn't get in successfully, but we saw how they had tried to do that and the door was somewhat damaged.

31:33And we see that as a learning opportunity too. So we'd love to go out and see what is going wrong. and not only fix it for that customer, but then go root cause it and say, how can we make the product even better? As you think about now starting to really have this concept and product meet with real demand and real reality, and I know you're starting to get up there in terms of the number of these things that have been manufactured and installed. This isn't just an MVP product anymore. What are the most interesting things you're learning about the way this works in reality, whether that's some quirk of customer demand or things they love more than you expected or hate and yet to change or unforeseen problems.

32:15Once the plan encounters reality, things morph. And so what's been morphing for you? One thing that went better than expected and was surprising was just how our whole approach was to offer a lot of customization in terms of floor plan and very little customization. I mean, basically no customization in terms of your finishes and colors and things like that. So all covers are painted white on the inside on delivery. We only use one sink faucet and it's the same one in every single cover. We only have one set of appliances. They're sub-zero and wolf, so they're very high-end. That's all we offer.

32:52So while your layout can be custom, your finish options, they're all high-end, but they're not custom. And the thing that's actually surprising is just we expected more push back on those things. So we were surprised that actually that was very well received. And people really didn't care as long as it was good quality. And on the other side of things, one of the things that's been surprising as this has hit reality is the reality of manufacturing. Going from the idea and this design and turning that into something real in terms of production, in terms of delivering it, that's probably been the biggest learning.

33:27That is remarkably difficult to do. Even things as simple as keeping track of all the parts throughout your process so you don't lose anything. These homes have more than 10 ,000 parts that go into them. You need all 10 ,000 to build the home. If you're missing one, that's a three-hour delay right there, or more, depending on what the part is. Three hours at best is what that is. The reality of managing all of that, that's probably been the biggest surprise. What about factory building? You've mentioned a few times that the perfect version of this story includes parts that are designed to be manufactured well, which is kind of an interesting concept.

34:07What does that mean in terms of factory construction, logistics? What have you learned there? It sounds like a stupid basic question, but you just don't meet that many people that are building factories anymore. So I'm curious what you've learned about it. That part thing that I mentioned that totally applies to the factory too. It's actually more difficult in the factory because you do have parts for multiple homes in there at the same time. Sometimes you might make a mistake. And as a result, you have to scrap a part. And you need to know that because if you don't, you're going to think you have that part for the next home.

34:37And really, you've taken it off the shelf and you've used it for the home before because you've scrapped it. That's a simple example. Just tracking that this is not a novel problem for us. Every factory has this problem. It seems simple, but that's like one thing. You got to build the right culture in the factory. the culture of keeping the workstations clean, making sure that everything is in its place, everything has a place and it's in its place. We know where all the tools are. These things actually really add up. If this operation requires some drill bit and that drill bit goes missing because someone went to use it somewhere else, that can just stop that production line.

35:11There's a lot of things that can go wrong and you have to have it all set up. And then on top of having it set up, there's a theory of having it set up. And then there's the practice and the culture on the production floor where everyone understands why things need to be done this way and why this part quality matters. That's probably the part that has taken the longest. And we've seen really, as we've repeated and built more and more of these, we've significantly improved the speed, but also the quality. This is actually a counterintuitive thing. Initially, we thought, oh, moving faster would result in lower quality.

35:42What we learned was that the things that you need to do to move faster are the same things that you need to do to improve the quality, which is standardize and make the process better. So the faster we build, we've learned that quality actually gets even better. I'm sure you've done tons of studying of philosophies of manufacturing, whether it's Toyota's lean production or something else. What stands out from those learnings and those studies and the way that people have solved these problems in the past? This is like a philosophy question. The single most influential manufacturing philosophy has been like theory of constraints, the goal, the classic book, The Goal.

36:17Can you describe that just for those that aren't familiar? It's written as a novel of this story of this plant manager and the plant was about to fail and they weren't delivering good product on time or probably. And then it kind of goes through the transformation journey where there was this professor that taught him how to do manufacturing and remove constraints in the system and then they'd succeed. So that's the novel, but it's really around this idea that you need to focus on where your constraint is and remove that constraint and really understand that. Because when you're focusing on anything other than that, we're really not moving the needle at all.

36:51This is always important, but what you work on is far more important than how well you get it done. Can you give an example of that? Because the way that sounds is in a manufacturing process, when you want to maximize output and quality, you always want to zoom in on the thing that is most limiting the pace of output and quality, almost like a weakest link analysis or something. Is that right? And can you give an example of you actually doing that with cover? That's totally right. As an example, early on, we're trying to build more and more homes and go faster. And things in the factory were on and off.

37:23It would build a bunch of things quickly. And then all of a sudden, they didn't have what they needed to get their work done. And what we realized was the bottleneck wasn't even in the factory. It was in the information going to the factory. They didn't have the information that they needed to build what they need to build. So they didn't know what parts need to go in to what panels and how many of them were needed for each project. The constraint isn't even always in the factory. So we realized like, okay, let's put people on this immediately and do it manually. And then after we were doing it manually, and this was taking quite a bit of time, we focused our software engineering team's resources on automating a lot of this so that they could get this information automatically and it'd be even more accurate and they'd get it well ahead of time.

38:03So that would not be the constraint. That's one example. If you think about the value of moving slow to perfect some of these processes early on versus I have no idea what your latent demand is. If you just said, we're just going to go for max number of homes versus some other measure of success early on, how do you weigh those two things in your mind? As long as the constraint is not on site where these are being assembled, that works. If the constraint is being on site, it is way more difficult to solve that because that requires meaningful product changes. So then your constraint is effectively your product.

38:40So you want to get the product right before you go and start scaling these. You want your constraint to be in the factory. If the constraint is in the factory, that's a well-known problem. How do you remove constraints in the factory? It's not easy, but thousands of companies have done it successfully over centuries. That's really the focus is making sure that the on-site install time comes out. And just to be concrete, that has been a lot of our focus. And we took it down from 120 days a couple of years ago, down to 60 and then 30 days. And that was with a bigger team. And then we took it from 30 days with 15 people to 30 days with six people.

39:12We're just continuously focused on making the onsite install process easier and easier. Because if you kind of go back to the automotive analogy, the onsite assembly is our automotive equivalent of a general assembly line, where all the different car parts come together and finally get turned into the home. And for us, that doesn't happen in our factory. That happens on site. So that needs to be incredibly efficient first because you don't want that to be the constraint. Once that's not the constraint, then you focus on the factory. Can you maybe describe the scope of your ambition when you think about what success or failure will constitute over the next...

39:47You've been doing this since you were seven years old. I assume you're going to do it for a long time. Over the next several decades, what does success and or failure mean from where you sit today based on what you know? Today, 98 % of homes are built conventionally, and about 2 % are built with prefab. Success is when we flip that. When most homes are built this way, and as a result, they're significantly higher quality. It's not just about making homes cheaper or faster. These are very modern, really high-end homes. The kind of details and finishes that you would expect in a$10 million home is what we're building in, like motorized shades that retracted to the ceiling.

40:26really nice stuff. We see a future where that's available to everyone. The quality of the typical mass-produced American home, and really just the home anywhere in the world, is significantly higher than it is today. It's a much easier process. You don't need three years to build a hundred-home community or a 200-home community. This can be done in a few months. One of the cool things is that you're operating at the bottom of Maslow's hierarchy of needs. Shelter is just one of these basic, biggest things that we think about as a species. What do you think about the evolution of the jobs to be done in a home?

41:00I've not thought until just now that the homes you're building probably have the same functions as all the other homes that everyone else builds. They've got a kitchen, some bathrooms, some bedrooms, maybe an office. Do you think that that will change much as a result of your activity? Are you finding different wants and needs from consumers for what their home does for them that could maybe even get unlocked by this style of building? I do think that the biggest thing that this way of building enables that is different is today, people think of their homes as a very permanent thing that I don't want to change.

41:34Often, if people are running out of space in their home, they sell their home and they move into a new home because that's so much easier than doing an addition or a renovation or rebuilding it from the ground up. the future that we're building is one where you can start off with your one bedroom home with an office, let's say. And then as a family grows, you can literally just order bedrooms as you need them. It doesn't need to be this one-off big thing that you kind of have to honestly waste money on before you need it. A couple doesn't need, in most cases, a four-bedroom home. Most people would prefer not to from a cost standpoint.

42:15But the cost of moving is so high, that they kind of like upsize for like five years down the road. With our way of building, these are panels that just like they're quick to assemble, they're actually fairly quick to disassemble too. So if you want to add an extra bedroom, you can do that. And you can do that way more easily. They're Lego panels. So you can just remove a few panels, attach new panels, grow the home. And to start horizontally, but you can also grow vertically too. Like, let's add a second story. Let's take the roof panels and move them up. And then add the interstitial panels, as an example.

42:48That ability to rapidly change homes and then eventually cities, I think that's probably the biggest thing that will change. And then the other way around, kids move out, you don't need as much space. You can go sell those panels. It'll be a secondary market where someone will go buy used cover panels and build their home. Do these things grow up well? Can you imagine, you mentioned cities there, which right away makes me think of much taller multi-storied buildings. What is the vertical capability of cover panels? Up to around four to six stories, they work really well, which is more than 90 % of construction.

43:24Today, we're not building multi-story structures. We're really focused, but from a structural standpoint and from a panel standpoint... You intend to. At some point in the future, you'll have multi-story homes. Yeah. And as you think about the same idea of build parts that are built to be manufactured well, Is the same true on the business side? How do you think about making sure that these panels are economic, that there's some capital efficiency in the business? I'm curious how you funded it to this point, because it sounds just like an expensive proposition to get things going, get up and running.

43:54Are you designing everything with the business and cash flow in mind as well? And if so, how? Yeah, that kind of went through an evolution, right? When we started off, we just learned how to build something that works. And then it involved like adding more to that. What does that works mean? So let's make it work. Let's make it look nice. Then let's make it functional. Well, be super energy efficient. Now let's make it economical to build and faster to build. We've gone through this iteration process. Most of the time, when you focus on the manufacturability and making it easy to build, for the most part, if you pay attention to what the materials are, and you're making smart material cost trade-offs, the numbers work.

44:30You just really have to pay attention to the material costs and then making it easy to build. What is a type of Lego piece or a component of an existing panel that you don't have yet, but you wish you had? I really love sunlight. I would love a skylight cover panel. From a focus standpoint, I know that's not coming soon and that's fine. But especially if you have a room that has like north facing windows that wouldn't normally get direct light, a skylight can be really nice. Is there anything else you've learned about just the world of housing and manufacturing and all this stuff that we've talked about that you found most surprising that you think people might be interested in?

45:10One of the things that we learned fairly early on, it was counterintuitive. I come from an architecture background. My co-founder also studied architecture, but was much more interested in software and had built and sold a website in high school. So he kind of more of the tech world and I came more from the architecture world. And as we started building Hover, one of the big realizations that we had was that the team that we needed to build was, yes, we needed people that understood architecture and construction, but we needed far more people who understood manufacturing and automotive production and aerospace production, the design, engineering, and building of large-scale, physically complex products.

45:50Because if you're trying to build a home like a car, it turns out that you actually want someone who knows how to build a car more so than even want someone that knows how to build a home. That was actually not immediately obvious to us from the beginning. And now most of our team is not from the construction and architecture industry. It's mostly from consumer products, SpaceX, Tesla. We've got someone that had experience at Keurig. Also construction, we've got one of the world's top structural engineers. He was like the lead structural engineer for the Apple campus in Cupertinos. But the role of the people from outside the construction industry was not immediately obvious to us, but in retrospect, looks really obvious.

46:27As you think about the way that this will roll out, you mentioned you're only in Los Angeles. When do you think me out in the East Coast or near other major cities, what do you think the timeline is for when covers will be available to those of us not in the LA area? Expansion is truly a couple of years out. I'm not going to say to East Coast, but expansion beyond LA is a couple of years out because this isn't the type of product where you want to expand and build like five or 10 or 20 even in one city. Every city that we expand into, we want to be building at least 100 or like in that region within a two-hour drive, at least 100 a year.

47:05As you expand, you basically want to just fill your pipeline and you're likely to be basically production constrained. Your expansion will largely be limited by like how fast you can grow the factory as you go and expand into each place. Any advice that you would give entrepreneurs who are thinking about and dealing with investors when building this kind of business? Because the pitch is very, this is not a software pitch. This is for people that fund early stage technology companies. It's very different. It's more complex. It's harder. What have you learned about that reality and pitching investors and working with investors?

47:42The biggest thing is to develop a really, really clear understanding of what drives the business at a truly in-depth level. and what that roadmap to success looks like on your own, and then figure out a way to communicate that to investors clearly. Otherwise, they will overlay their own projection and their own idea of what that should look like, which in most cases is wrong because they haven't spent as much time in your specific space. That's probably the most important thing is really understand your business and pitch the right story to growth. And for us, as a concrete example, our focus has not been massive scale yet.

48:22That's where we're going. We're not cranking out thousands of these. The reason for that is that we've been very clear around there are certain technical and operational milestones and efficiency milestones that we want to hit before we scale. And that will allow us to scale at an incredible rate. But we have to hit those first. Because if you try to scale with something that is not ready to scale, it won't work. And if If it does work, it won't work nearly as well as if you actually scale something that is ready to scale. And we've developed those milestones, shared them internally and with our investors and are working towards that path.

48:59We've crafted the clear technical milestones that we need to hit to get to where we want to go. We've communicated that and everyone now looks at how well we're doing based on that versus a generic set of startup metrics that may not apply. Yeah, I love that as closing advice. Such an interesting space that you're building in literally. I can't wait to see how this unfolds in the years to come. I ask everyone the same traditional closing question. What's the kindest thing that anyone's ever done for you? I won't name them. This is a very, very successful investor. Came to our factory for the first time and spent about three hours with us and basically really challenged our roadmap.

49:37Kept asking why, like why? And if something didn't make sense to him or didn't seem completely solid, he kept digging. And we came out of that three-hour conversation realizing that we were super far off, but we were far off enough that we readjusted the course of the company out of that three-hour conversation. It was very, not heated, but it was passionate. He really cared. It was like this intellectual vigor. And we changed how we engineered, how we designed, how we planned based on that three-hour conversation. and I think for a lot of investors, those kinds of conversations are difficult to have.

50:16It was somewhat uncomfortable. Honestly, we hadn't experienced something quite like that before, but it was awesome. It was very generous of his energy and time. That was really quite an important moment for cover. Alexis, thank you so much for telling us all about what you've learned and what you're building and thank you so much for your time. Thank you, Patrick, for having me. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

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