Keith Rabois on Opendoor ($OPEN) Activist Turnaround

0:00The most painful thing one can do other than having healthcare or mess in your life is sell home. On average, in the United States, homes sit on the market for like 80 days. And even after you get an offer, 20 % of those offers never close. Imagine doing venture capital where you knock a term sheet for 80 days, and then 20 % of your term sheets would walk away from you. When Opendoor originally went out, you could sell your house, and it gets taken off your hands in three minutes, and you get the money in three days. How is that possible? Because we priced the home automatically. Let's talk about Opendoor.

0:29You mentioned back in 2015, things started to go south. No, no, no. The company did really well. I think we hit$20 billion as a market cap company for at least a day or two. We were maintaining$500 million to$1 billion of free cash flow. But the company did not build the foundation correctly. The note post on my partner warned us about this. He said, you need to keep your fixed costs as low as possible because all real estate goes through cycles. Airbnb went through a similar problem when COVID hit, which was a true black swan. Let's talk about Kaz. How did you decide this is who we need as CEO?

0:59Kaz tweeted the other day that software, the only speed is faster. So we need to move very fast. lightning speed we wanted someone with a founder mentality who moves at lightning speed 24 7. you're it

1:17keith your boy welcome to sorcery pleasure to be with you this is one of the most quiet weeks of your life oh yeah this is like pretty typical actually the only difference is my phone has run out of batteries like three times and that never happens because people have been calling me all the time and I'm not used to that. You know, Apple just came out with a new iPhone. Yeah. Yeah. Unfortunately, I ordered the thin air. I don't want to carry the heavy one. Really? Yeah. So no, you're not keeping a battery pack on stock. You don't have multiple phones. No. Hopefully people stop calling. I like messages.

1:47I got a message. So what's going on this week? Let's talk about it. Open door. Yeah. So the company has a new leadership team. Most importantly, a new CEO. 99 % of everything that matters is the CEO. The most important lesson for me over the last 25 years is if you have the right CEO, things that people believe to be impossible are very possible, sometimes probable. If you have the wrong CEO, almost nothing else matters. You know, Vinod Cosplay was on my board at Square. My partner now at KB taught me this lesson in kind of pithy in a pithy way, which is the team you build is the company you build.

2:23It's really easy to get distracted with everything else, like the product, the market, technology, but ultimately it comes down to the people. And so if you can marshal a critical density of talent, you have a shot of winning. That's what we did at PayPal. The reason why we were successful at PayPal was we had an unusual density of talent. We were able to sustain the density of talent and we were able to accomplish things that most other people would not have been able to. The same thing hopefully will be true. We hired the single best person in the world that I really wanted from day one. There was no other choice in my mind.

2:55We can talk about why. But Kaz is the perfect CEO for Opendoor. So we have a shot of fulfilling our destiny and our mission to completely transform residential real estate in the United States to start. It's a$289 trillion asset class. It's the largest in the world. And nobody's really innovated in over 30 years of technology. There's really nothing different about buying and selling a home today, except you can perform a search. You can perform a search and start your process. but every other part of that transaction is exactly the same as when I bought my first condo in the late 90s. Let's talk about Kaz.

3:29So how did you decide this is who we need as CEO? Well, we needed someone with product innovation ability. So he was not only serving as the COO of Shopify, but he also ran the product team. So he needed someone to understand how to innovate a product. Opendoor has an innovative product, five, maybe longer years. So someone who has that muscle and steroids. But most importantly, he's both bold and ambitious, but very disciplined and rigorous and analytical. And that's a rare combination. A company like Opendoor needs to be rigorous and analytical, but it can't sacrifice the ambition and the boldness and the willingness to do things and push the envelope and creativity and innovate.

4:11And so that was what was very appealing. And then the company at a kind of tactical level just has too much of a bloated G &A. It's always had too much of a G &A that was way out of control since 2015. We need to fix that. There's 1 ,400 employees. There should be more like 200 or 300 max. And one of the things he did at Shopify when he got promoted to be COO was cut their G &A as a fraction of revenue from 14 % to 4%. And I think they're on target next year to be at 1%. So it's even more important for a non-software based business to have a GNA that's in line with the cost structure that's in line with the cycles that real estate always goes through.

4:56Every decade, residential, commercial real estate goes through cycles and you need a fixed cost structure that can be appropriate for both the high season and the low season. I kind of want to understand how this all went down. When did you get the call that you're going to be stepping in joining. Well, it's certainly the other way around. I decided that the company needed to be fixed and partnered with Eric Rue, my co-founder and former CEO of the company, and said, we're going to fix this and then we'll tell everybody else about it later. Was this like while the meme stock hype was going on?

5:28Well, once the meme stock, so we started this project together on July 16th. Oh, wow. And so the company's market cap had increased a fair amount with the attention brought by like Eric Jackson and his friends. Probably was trading at instead of 50 some odd cents a share, probably$1.30 or so. And we said, hey, this is – well, it's too bad. It would have been easy to buy out the company ourselves and just own the whole thing if we'd paid attention a month earlier, which probably would have been a better thing to do, truthfully. But we were a little lazy. And so it was like, okay,$1.30 is more expensive, but the potential of the company is still there.

6:07And now that we have catalyzed this movement, it's like a true cult of all normal people who care about the company, who perceive the opportunity, the potential of the company, we can use that to help recruit more talented folks. So we worked with our favorite executive recruiter, Paul Diversa. He posted on LinkedIn, explained the process. He said, Paul, we need to still our CEO. Here's the criteria. Here's five things we absolutely have to have. The company is running its own search in the background with the wrong executive firm. They're going to come up with all these boring, bland retread candidates from large companies that are going to be totally dysfunctional.

6:47We're going to find a great candidate and we're going to tell the company they don't have a choice. We're hiring the right person. And that's what we did. Sorcery is brought to you by Brex, the financial stack trusted by more than 30 ,000 companies. including one in three venture-backed startups in the U.S. Nearly 40 % of startups bail because they run out of cash. Rex is literally built to help founders avoid that. Unlike traditional banks that let your money sit idle, chipping away at it with fees, Rex's designs help you spend smarter and move faster. Their all-in-one solution combines checking, treasury, and FDIC protection into one powerful account.

7:26You can send and receive money globally at lightning speeds, Get 20 times the standard FDIC coverage through their partner banks and even high yield from day one. With same day and even same hour liquidity, access your funds anytime. Companies like Scale AI, DoorDash, Service Titan, HIMSS, Anthropic, Flexport, Robinhood, and Plaid trust and use Brex. Start today at brex.com slash sorcery. That's B-R-E-X dot com slash sorcery. I listened to an interview. Well, I think it was a profile that Anthony Pompliano did. And then I think you took a picture with him. I don't know. But in this, he was talking about how this is going to be one of the biggest activist revisions of a comeback story for a company.

8:14And within that, I'm curious, what is the structure? What is the playbook that you lay out here? Is it first talent? Is it then restructuring? Is it then hoping things get fixed around? I think we want to do it all in parallel. Speed, you know, Kaz tweeted the other day that software, the only speed is faster. And so we need to move very fast. Lightning speed. We wanted someone with a founder mentality who moves at lightning speed 24-7, period, and doesn't accept excuses. And so we need to both innovate and execute all at the same time and recruit in parallel. The playbook I outlined, you know, my version of a playbook sometime in July or August.

8:51There's like five or six things the company needs to do, at least according to my strategy. We'll see how Kaz stitches that into an execution plan. I'm sure he has some creative thoughts that are even better to add on top. He's not short of ideas. He's been texting me constantly with like revs on really good ideas. So he has to put together a plan. He starts Monday morning. I expect we'll have a plan very quickly and then we'll communicate the plan publicly sometime thereafter. Can we come? Can we come? while you're making this plan? Sure. It sounds like a great idea. We'll bring the crew and we'll just document it.

9:29Every company that's ever done that hasn't done so well. There's this old documentary, which is a great movie called startup.com. I do not recommend this to founders. Don't document the process. No. Okay. So in terms of all this, all right. So let's talk about Open Door in general, macro. How did we get here with Open Door? You mentioned back in 2015. things started to go south? No, no, no. The company did really well. We were almost, we were just, I think we hit 20 billion as a market cap company for at least a day or two. Minted money. We were actually free cash flow. We were minting 500 million to a billion dollars of free cash flow when we were public.

10:10We went public in late 2020. And the company was doing really well, but the company did not build the foundation correctly so that But when interest rates rose and the Fed raised interest rates six times in a very compressed period of time, unprecedented compression of time, when interest rates rose, the company's cost structure was inappropriate for the amount of transactions that were going to occur in the United States. In a peak United States housing market, 6 million Americans buy a home. And in a bad market, 4 million do. So it's a pretty big variability there. So you need to be able to be profitable or break even in a market when only 4 million Americans transact.

10:52Opendoor is currently a transactional business, so we get paid when we buy and sell. And so if less people, like 50 % less, are buying and selling, all of a sudden your costs are out of whack. But the reason why I mentioned 2015 is Vinod Coase and my partner warned us about this. I remember a meeting, a review we did, Eric and I did with Vinod, and he said, you need to keep your fixed costs as low as possible because all of real estate goes through cycles. And you want as much variable costs in the business and as low fixed costs as possible. For a variety of reasons, that never really happened.

11:23And then in 2021, when we went through the interest rate hikes for 2022, the company's fixed costs were just way too high. And they're still way too high. But this is something that you can't really have. There's no excuses for. everybody knows residential is somewhat cyclical. Airbnb went through a similar problem when COVID hit, which was a true black swan. Airbnb has a great business model, 13%, blah, blah, blah, lots of profits on the margin. But when COVID hit and everybody got locked down, guess what? People didn't travel and all of their contribution profit disappeared overnight. And then they realized, oh my God, we were burning money everywhere and we're going to run out.

12:06Airbnb almost failed in the first month of COVID and they got, they fortunately put together a fairly clever sort of note with Silver Lake that saved the company. But Airbnb, I wouldn't blame too much. COVID was a once every 50, 100 year sort of black swan. Open Door needs to think about residential real estate cycles and build the business to be resilient in any cycle in any macro environment that has to work. In today's high-speed business world, staying ahead means using the smartest tools possible, including the powerful capabilities of artificial intelligence. Meet Turing Intelligence. Turing builds customizable AI systems designed to solve your mission-critical challenges, no matter your industry.

12:48From expert guidance to tailored projects, Turing helps top companies realize AI that's more capable, more adaptable, and more effective. With Turing, discover how AI can accelerate your business growth. To learn more, visit Turing.com slash sorcery, spelt S-O-U-R-C-E-R-Y. That's Turing.com slash sorcery. How do you start making this go faster? Do you start cutting people? Do you start implementing AI? Well, we're definitely going to implement AI. I think that's the biggest unlock. So some of the things that are now, some of the things we wanted to do in the 2015 era in terms of avoiding fixed cost may not have been completely possible, but now are easy.

13:29So it shifted from very difficult to easy to use technology to substitute for humans. We see it more and more of this every day. Normal people do this every day. Instead of calling a doctor, they use ChatGPT. Instead of calling a lawyer, they use ChatGPT. This is very common. Instead of using a real estate agent, there's no reason they can't use ChatGPT or an equivalent product. So I think a lot of things have got easier and the magic wand will be easier to deploy. The second thing, though, that the company needs to do is make homes more affordable. There are many, many Americans that want to buy homes that can't because mortgage prices are just too high.

14:05The monthly payment is too high with this interest rate environment. And we need to innovate so that more Americans can afford a home. Kaz put out this wonderful statement about the mission and vision of the company that when people all buy homes, everybody wins. The communities are safer, better. Kids are better, healthier, happier. Owners build value and renters generally subtract and extract. And so we needed a home ownership society and we want to be the company that propels more home ownership. And that includes innovating on the financing side. Most people don't even know that 30 % of homes in the United States, it's legally permissible to assume the mortgage of the person who owns the home.

14:44So if someone has a fixed rate mortgage at 1%, 2%, 3%, you can buy the home and take on their mortgage. We started a company, Eric Wu and I actually started a company called Rome that enables this and makes it sort of friction free. but by law, 30 % of the homes in the United States are instantly available to assume the mortgage. So there's a lot of clever things one can do to solve the affordability crisis in the United States. When Open Door originally went out, it was you could buy a house and you could sell your house and it gets taken off your hands in three days. Three minutes and you get the money in three days.

15:21How is that possible? Well, because we price the home automatically. and what we really want to do the next level is we want to allow the buyer side to buy the home in 30 seconds that has been on my wish list for a decade because 70 of americans buy homes with mortgages until you could provide an instant guaranteed mortgage it wasn't a mainstream product but many companies now provide instant underwriting for mortgages so having imagine every home you see online having a buy it now button you're like i like this house i want it and just buying it. No agent, nothing. You don't have to go see it if you don't want to, which is also a trend.

15:58There's a macro trend towards buying homes sight unseen that also COVID sort of accelerated. I just had Klarna CEO, Sebastian Schimankowski on the pod. And it was funny. Towards the end, I was like, we should really think about expanding products here. What if we get into homes? You can buy now, you can pay later homes. And it was a joke, right? He was like, Molly, that's called a mortgage. Well, one of the reasons why people don't innovate is there's a subsidized government product called a mortgage for what are called conforming homes. And because the government takes on the risk, there's not a lot of incentive for private entities to sort of underwrite better.

16:36And that's what led to the mortgage crisis. In some ways, people parked the risk on the federal government. Stop that to some extent. But there's still ways to innovate. Like, for example, think about lease to own. Wouldn't you like to lease a house? Test it out. See if the neighborhood's pleasant. The schools are cool. Is there noise at night? And then you have the right to buy it over time. That should be a mainstream product too. Is that on your product roadmap? It's a good idea. Actually, I think it should be, but the question is prioritization. So what's the difference between Open Door, Zillow, and Rocket Mortgage?

17:10How does this fit in? There's no other place in the United States at any scale where you can sell your home instantly. there's other people that profess or try or pilot but we do this in 50 plus markets in the united states in many markets we have double dividend market share in in many many markets we have five percent or more market share so if you want to sell your home you don't want to deal with the uncertainty and risk like the traditional way let's backtrack the most painful thing one can do other than having a health care or mess in your life or family's life is sell home selling a home is so painful because you list it and you have no idea what's going to happen and how long it's going to take.

17:51On average, in the United States, homes sit on the market for like 80 days. And even after you get an offer, 20 % of those offers never close. Imagine doing venture capital where you knock a term sheet for 80 days and then 20 % of your term sheets would walk away from you. That is actually what happens in homes. So with Open Door, there's certainty in speed immediately. The real primary reason people need this, like the number one use case is I want to buy a new home. My family has got larger or I'm moving cities or states. And typically if I'm using a mortgage, the bank will not allow me to make a non-contingent offer or to make an offer that's valid until I clear the mortgage off my prior house.

18:36So you have this delegate like dance of like oh i love this house over here but i can't really buy it till i sell this one but you don't have any idea how long this one's going to take to sell and so you may lose the opportunity to buy the new house that is the sort of house the proverbial house of dreams or someone else buys it from you or you just procrastinate because you know you're gonna have to deal with this mess so we solved the mess it's like you can basically trade in your house like you trade in a car like something like 50 of cars in the united states are something new car purchases involve a trade-in.

19:05So why can't you trade in your house? I'm done with this house. I want this one. We'll take it off your hands. Boom. Get your dream house. Move in tomorrow. America. Free markets. Exactly. So are you going to use Open Door? Well, we don't currently. So the mission and the goal of a company was always to serve the middle of the bell curve of homes in the United States, technically 83%. So when we go into any market, Bay Area, New York, Atlanta, Dallas, wherever, we price 83 % of homes. For better or for worse, my homes are not within the 83 % standard deviation. Are you saying you're out of the bill currently?

19:45I am. Well, intentionally, I remember when I was having Lasix and I was so nervous about having Lasix. It's 2003. And the doctor could kind of tell and he figured out a bit about me professional and and he did all these tasks it was like an hour long uh sort of program and he comes back to me he says like i'm going to tell you something that you've probably never been happy to hear before he's like you're right down the middle of the bell curve this person he's like this procedure was designed for you there is no way anything goes wrong unless i personally screw up i was like great we're finally doing this procedure so you're in miami i'm actually more in new york now okay you're more in new york now yes right down the street is the company going to be here?

20:27Where is the company based? Well, I'll leave that to the CEO, but the company will be in person. The company will probably have one or two key offices. I suspect that Toronto will be one of them. And I wouldn't be surprised if Miami is a great choice. Miami is one of the best cities in America. It's happiest, healthiest, wealthiest. It's very real estate friendly, as many people know. It's a normal market, meaning like the bell curve actually kind of works. Like New York's very atypical in many dimensions, for example. So we'll evolve, we'll see, but I would suspect that there'll be two offices max to start.

21:04What brought you up here? So I have some company needs. Eight of the last 12 investments are actually in New York. And then secondarily, I need to go to DC fairly frequently now. I'm actually going there later today and it's much easier to get back and forth from dc uh to dc or from dc from new york than miami helicopter train plane uh miami you can only take a plane and it gets subject to weather delays you take a helicopter to sure to dc yeah from new york yeah it's like an hour that's crazy why that's so that i've never heard of that helicopters freak me out so maybe well if you get the right configuration with multiple pilots and stuff it's it's it is more dangerous than many other things but with the right equipment and the right pilots and the right discipline it's not that bad so do you blade out of the west side yeah or like down in fideye the west side that's pretty cool okay all right so maybe let's shift over to dc what is the state of the market in dc i'm a big fan of Jacob, all the work he's doing.

22:17Well, DC is not a great market for early stage entrepreneurs, which is my primary job, hence the New York and some trips to the Bay Area and Miami and other places. It is a wonderful market for people who are probably post the scaling of a company. The new environment in DC is business friendly, innovation friendly, and pro-American. And so if you're building a company that can contribute to innovation, GDP growth, productivity gains, or Americans' national security, there's a lot of receptivity towards those kinds of entrepreneurs. And so you see a lot of successful entrepreneurs spending more time in Washington.

23:03It seems like there has been a huge shift, but it seems like it's kind of getting quiet. No, no. When I'm in DC, inevitably I run into very successful entrepreneurs. Like I don't even tell them I'm going to be there. And I just walk down the street and I run into people that are, you know, running 10 to 10 billion to trillion dollar companies without even trying. That was, that would never happen to my life before. So you see like Jensen walking on the street. Yeah. Or friends, Patrick Colson, whoever people are in DC all the time. Hey, it's Molly. If you enjoy our interviews, check out our newsletter, sorcery.dc.

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