Home is where the heart is. Often, for U.S. homeowners, it is also where the heartbreak is.
The process of building, buying, selling, financing and insuring a home has for decades been fraught with red tape, misdirection and hidden fees. It’s only over the past few years that startups have gained the traction, funding and ability to take on this hidebound industry. Hundreds have failed, running out of money or time, but for the survivors, the rewards are extraordinary.
In March, Doma (formerly States Title) announced it would go public via a special purpose acquisitions company backed by investor Mark Ein. The deal will value the title insurance and digital closings startup at $3 billion, nearly five times its valuation in May 2020.
Just days after the news broke, home insurance startup Hippo announced that it too, was going public via a SPAC, this one backed by LinkedIn co-founder Reid Hoffman and Zynga founder Mark Pincus, at a valuation — $5 billion — nearly five times greater than it was last July. Custom homebuilding startup Homebound, for its part, raised a $35 million round in August 2019 at a $210 million valuation.
An early backer and champion of the three startups was Fifth Wall, a real-estate focused venture capital firm with roughly $2.5 billion under management. Co-founder Brendan Wallace explains his playbook thus: Invest in the most promising startups, then stack the deck in their favor by connecting them with Fifth Wall’s LPs – some of the largest residential owners and operators – as well as other portfolio companies who can help with access to investors, talent and product ideas.
The Real Deal hosted the founders — Assaf Wand of Hippo, Nikki Pechet of Homebound, Max Simkoff of Doma and Wallace — for a roundtable discussion on challenging incumbents, the pandemic-triggered changes that sent their businesses skyrocketing, and the elements of residential real estate that have no place in the 21st century.
The definition of a home has expanded dramatically over the past year. How has that changed your own business and the broader residential world in which you operate?
Wand [Hippo]: Home was a lot more of a transactional place — you slept there, you woke up in the morning, you went to the office, your kids were in school. First, we’ve seen a surge of new home purchases. Everybody stayed in their home for 12 months, and there’s a certain point where you fill in the gap — an office, a gym, a place to have my garden. People came to a certain resolution that whatever was “home” has changed.
The second thing was a counter to urbanization. In the ‘50s, the GIs, everybody came back [from the war], it was a move to the suburbs and it was about a utilitarian approach to the house. People wanted to build as many homes as fast as possible. Hence anything that was complex, people got rid of it.
There needs to be a new calibration. The fact that people are now in their home longer changes the infrastructure. You used to have one shower a day, at 7 a.m. or 8 p.m. Now you sometimes have two showers a day, after the gym and then before you go to bed. You’re opening the fridge 5,000 times a day. The rooms are being used more. The home moves from something which was personal to commercial use in many, many ways. And I’m not sure that the infrastructure we have is actually catering to that need.
Where you see a massive default now, which matters in insurance, is crazy breakage of plumbing. And it has to do with a shift in plumbing materials in the ‘90s, as well as the utility and how much the plumbing is being used. There’s going to be some change in the material, in the infrastructure, and over time we’ll understand what the implications are for the insurance industry.
Pechet [Homebound]: We’ve seen two changes in how people think about their home. Number one is a dramatic increase in the importance. The importance of how it worked for you and the perfection of the setup for your life at that particular moment, skyrocketed. You can see it in terms of real estate sales but also see it in terms of sales of materials at Home Depot, people taking on DIY projects that never would have occurred to them before.
The second thing is customization. People really cared that their home was set up exactly for their sourdough bread-baking operation early on in Covid, or that their kids had a school room later. There’s a dramatic increase in the pipeline of people who were never planning to build a house who are now planning to. In some of our newer markets, up to 75 percent of our pipeline are people who are planning to buy a house and just couldn’t find the house that was perfect for them. Two years ago, they might’ve said, “Well, that’s all right, I’ll buy this house. I’ll live there for a while. Maybe I’ll renovate it eventually.” Now they’re saying, “No, actually it matters to get it just right.”
There are a lot of things that are non-obvious, where people have just always dreamed of having a bathtub that is just the right size for someone who’s 6-foot-7. We’re expanding the market of people who are willing to build custom homes and we’re able to deliver on a differentiated promise.
Developers and builders have always prided themselves on being anthropologists, on understanding consumer tastes. But now those archetypes have exploded because there are too many use cases. Has that shift brought a different level of anxiety to the closing process?
Simkoff [Doma]: The level of anxiety in the closing process has always been high. Some ungodly high number of people physically break down and cry during the process of closing a mortgage. What’s changed in the last year is a lot more people wanting to move. But the options for people unfortunately got smaller because traditional homebuilders had chronically underbuilt for the last six or 10 years following the [financial] crisis.
And you then had interest rates dramatically dropping, offering up financing to a lot of people who hadn’t previously considered purchasing. But now with the added pressure of a lot of these people in urban areas being reasonably unshackled [from offices], you had this perfect storm of people moving. Our business is instantly digitally closing mortgages. We have enjoyed 10 years of industry inertia disappearing almost overnight. You saw 20-odd states that had taken five years to approve remote online notarization laws go to 49 in a handful of weeks. There’s no looking back.
What are some of the relics in the industries you are targeting?
Wallace [Fifth Wall]: The entire capital markets ecosystem for all residential and commercial is antiquated. And we’ve seen this conflation of what we used to think of as commercial and residential. If you think about what the real estate industry is, it’s the economy happening indoors. It’s the use of space to create the economy, whether it’s knowledge workers or whether it’s manufacturing. And what we all just lived through is that so much of that moved into our own homes.
I’m sure you talked to a lot of office owners and they have different points of view on whether the office is going to come back. The reality is bedroom communities and commercial districts are more disconnected than they ever have been. And I would expect them to get more disconnected.
There is this great reshuffling. The residential industry saw this innovation first. Look at companies like Doma and Hippo and Opendoor. With creative approaches to the capital markets of buying and selling residential real estate, they were able to render a more frictionless process. [At Homebound,] Nikki’s re-envisioning the whole process of producing homes.
Consumers are more demanding of technologies than businesses [are]. So usually, innovation starts with consumers and then transitions to enterprise. There’s going to be the same thrust of innovation that happened in residential starting to collide with commercial, because it’s just as inefficient. Commercial title insurance, the process of building commercial assets, the process of selling them — it has all of the same features as residential. When we think about macro trends, I would look at everything that just happened in residential and assume with certainty that it will happen for commercial over five to 10 years.
Wand [Hippo]: The insurance industry over the last 100 years built a flawed process. It’s very difficult to purchase. It takes you two to three days to get hold of an agent, then you need to answer like 61 questions that you don’t know how to answer: “How far are you from a fire hydrant? When was the last time your roof was replaced?” You have no idea. When you are bored enough to actually look at the coverage, you see you’re covered for things that are obsolete. Things like fur coats and silverware and mausoleums and crypts.
And then you have a very flawed claim experience when, God forbid, something happens. You know on Day One that in Year 9 when you’re going to have a claim, the first sentence out of your mouth is going to be, “I knew you guys are going to be like that.”
With Hippo, the thought was “Let’s make it very easy and simple for people to purchase.” It takes a minute to get a quote and five minutes to buy. You can buy it if you’re doing a closing with Max [Doma], you can buy it with Opendoor [iBuying], you can buy it with Glenn [Kelman, of Redfin]. I’m agnostic — wherever the customer wants to purchase the product, I’m going to make it available.
“What’s so amazing about the technology that we’ve all built is not that it speeds up the logistics and the fulfillment, but that it enables us to focus on those relationship moments.”
Second thing, let’s modernize the product. So instead of being covered for the fur coats and pewter bowls and the mausoleums and crypts, let’s make sure that you’re covered for the home office that Brendan is sitting in, which is actually not covered if he has all kinds of electronic equipment. Let’s have enhanced electronics coverage, let’s cover the strollers, the camping equipment, the bicycle, all the stuff that is always below the deductible. And then on the claim side, let’s put a claim concierge, one person, start to finish, that handles your claim as opposed to an average of nine to 10 people that you’re touching every time you’re calling — “Oh, God. Let me tell you again.”
People are usually reaching you at an extremely emotional time in their lives.
Wand: This was the reason we put a human as the front person, as opposed to a bot. We were very much about efficiency and automation. And then you realize, what are the claims? There’s a total loss fire, and you’re standing outside of your house that is burning. You wake up in the morning and the basement is flooded. There was a burglary. The last thing in your life that you want to do is talk to a bot. You want to talk to an empathetic person who understands what’s going on. Who would triage the situation. Who would say, “Let me see what’s going on. Did they break anything in the house? Are you with the kids? Is everybody safe? Let’s do this. I’ll put you in a hotel for the night. Once the kids are asleep, I will call you again.”
Simkoff [Doma]: This has been such a missed opportunity, probably for all of the industries that each of us are — as much as I hate to use the term — disrupting. The [incumbents] had such an “infrastructural moat” — the capital, the licensure, the logistics, the construction capabilities that are needed to be a leading provider. They felt like they had license to just treat people like transactions.
In insurance, people pay attention to a metric called retention. Well, let me tell you what influences your retention is exactly what Assaf is talking about. You’re being given a gift. You get to interact with somebody who’s experiencing one of the most significant events of their life. Buying a home, refinancing a home, building a home, making an insurance claim when something happened. And if you can form a genuine bond with that person, you don’t need to build a relationship over a month. You can do it in a phone call or in the way that you instantly, digitally resolve something for them. It pays huge dividends.
What’s so amazing about the technology that we’ve all built is not that it speeds up the logistics and the fulfillment, but that it enables us to focus on those relationship moments.
If you technologize 80 percent of the trash, you can inject the humanity where it matters.
Pechet [Homebound]: Custom homebuilding is an industry that lots of people think is terrible but don’t really understand. Typically, you’re going to have a personal supply chain of a bunch of disconnected parties – of an architect who designs a house, you’ll [then] have a contractor who then tells you how much the house is going to cost. And invariably it is two times your budget. And then you have to get your permit. It’s this terrible chain of totally intransparent experiences that are always worse than you expect them to be, and always result in both time and cost problems that are much worse than you anticipated.
When you look at what’s underneath that, it’s just really complex. That’s one of the things across all of proptech. And that’s why there’s such a huge opportunity, because it’s really complicated and it’s really hard. But if you’re willing to do the hard work of trying to use technology to simplify it, that’s where you can build a business that can get massive.
I want to dramatically expand the size of the homebuilding world, because I can bring people in who have been so repelled by the reputation of the industry, that they can look at what we’re doing and say, “Actually, I think it’d be easier to build a house than to buy some used house that I don’t really want to live in.” The way that we do that with technology is we take things that are really complicated and inherently intransparent, and we make them simple and transparent.
That doesn’t always mean we make them better. Now, we’re having massive delays in getting permits because of communities that have permitting departments working from home, where they’re just not working as efficiently as they typically would. I can’t necessarily make that better. But what I can do is show you a typical permitting timeline, and I can tell you that permitting timelines are expanded right now by about 50 percent in your jurisdiction, because I have the data behind it to tell you that.
If there are natural disasters that are going to slow down construction, I can look at a geographic area and say, “Here’s what’s coming. Here’s what we’re doing to protect your property. And here’s the expected impact on your schedule.” And I can do it programmatically. That changes everything about the way somebody feels and their willingness to actually go through a process of doing something as hard as building a home.
Wand [Hippo]: Looking at these companies as technology companies is actually not the main point. The difference in all of these newcomers is a very simple one: Just focusing back on the customer and understanding what they want. In insurance, for 100 years, the customer used to be the [real estate] agent. And look it up, the actual end customer was called the “policy holder.” In title, the customer was 50 other people — the banker, the Realtor. That’s why the coverage is so obsolete, because nobody cared about the actual end customer.
There is this romantic view that Max is going with his wife, and they want to look at a house. And they’ll see 50 homes and become very jaded. But then they see the wonderful home and they start to visualize: “The kids are going to run in the backyard and I’m going to teach my young girl how to ride a bike.” And you start to envision that when there’s going to be graduation, your girl is going to go down the steps, wearing a nice dress. You envision this amazing life.
And then what happens? You’re getting pummeled and slapped when you’re doing the transaction. And six months down the line, there’s a time when you look at your wife and say “This is a freaking pain. That’s not anything we talked about. The back door doesn’t lock. The faucet keeps on breaking.” It becomes a part-time job maintaining and taking care of the home.
So what we learned from our customers is that they basically want to have a 1-800 number that takes care of their home. If they’re locked out of the home, they should call us. And if you have a water leak in the basement, it’s our problem how to [fix] it and make your life easier as a customer. And I think that’s the mindset that is very differentiated [from the] incumbents.
Wallace [Fifth Wall]: Most real estate companies are old. So they’re not really that customer-centric. I’m sure at one point early on, they were customer-centric or they never would have gotten big. But as they had enough time in the public markets they got into a mentality of reconceptualizing their customers as just “users.”
The leading characteristic of successful proptech businesses is re-injecting a customer centricity. Obviously there’s technology, there’s innovation, there’s a lot of new ways to apply technology. But at its core, that is really the unique, identifying feature of almost every company we look at.
Let’s talk about how incumbents can leverage their position. Lennar is the largest homebuilder in the U.S., but also a key investor in Doma and Hippo.
Wallace [Fifth Wall]: The entire process of residential real estate is painful today. So when we sat down with Lennar, who is an LP in Fifth Wall’s first fund, we plotted out every single aspect of buying a home all the way through to selling a home and identified what were the areas most ripe for disruption. What was so interesting was that there were so many companies that were going after different components of it, but in many ways you had to solve all of them to render that experience completely frictionless.
There are customers who are buying a Lennar home. They’re getting a mortgage through a software that’s powered by Blend, one of Lennar’s investments. They’re getting their title insurance with Doma, they’re getting their home insurance with Hippo, and they are selling that home to Opendoor in a trade-up program.
For a group like Lennar, there’s a lot to learn about how you re-envision your supply chain and your interactions with customers and how you actually transparently convey information about this gnarly activity that a consumer has to do, which is learn how to actually construct the house. So one of the things we try to foster a lot is that our CEOs can interact a lot with each other, but they also interact a lot with our strategic LPs.
Simkoff [Doma]: [Lennar CEO] Stuart Miller is on our board and Eric Feder [managing partner of Lennar’s VC arm, LenX] was on our board for a long time. They were relentless about figuring out what was their core business, where they have true economies of scale and true impenetrable moats, as a homebuilder. And then there was everything else. And when they looked at the “everything else,” they actually found that there was a lot of it in their business.
Most large incumbents, if they did that, would find the exact same thing. I do not think most of them would do what Lennar did. They basically took the “everything else” and were like, “How do we get those businesses operated by people for whom that is their core business and partner with them?” And you saw them doing that with everything from Rialto, which they divested, to North American Title, which we purchased from them, to their homeowners’ insurance business, which they divested to Assaf. It’s so plainly obvious the benefits of focusing on your core business and closely partnering with the best providers in the things that are non-core to you.
You can go to our filings and see that Lennar owned 100 percent of North American Title when it was their business and it was a traditional title business. And by doing this unique transaction and partnership with us, they now own somewhere between 23 percent and 26 percent of our company [Doma is currently valued at $3 billion]. We’re talking about exponential value creation for them and their shareholders.
It’s almost like a controlled fire. You are burning parts of your own village to make sure that the core of it is stronger. And that can be scary.
Simkoff [Doma]: That’s the historical way of looking at it. I think Lennar has now shown that’s not the way you should look at it. A divestiture is the exciting Day One of you taking that business and putting it in the hands of the people who are most capable of truly transforming it. And if this is going to become an exponential value creation platform, we are going to go to the map to try and own as much as we can.
“That’s exactly what entrepreneurs should be looking for: A place where incumbents are doing so well that they can’t and won’t shift to doing everything completely differently.”
Wand [Hippo]: Real estate transactions are [about] negotiating everything on Day One for the entire transaction. Whereas in VC, it’s an ongoing thing because you always know that there’s going to be the next fund that’s going to come in, and they’re going to use that as a base, hence why you’re framing what’s going on. I think this is where Fifth Wall adds value. It’s a dictionary of two sides, one side that’s living in Silicon Valley and one that comes from another world. You need a middleman that is very well-versed, but still trusted by both sides to bridge that gap.
Plus, people that are very good builders are good negotiators. There was a point where I had to explain to my board, we wanted to come up and basically discuss every component of the negotiation. I told them, “Guys, with all due respect to most of the VCs, you were like the Little League in negotiations and you’re talking to MVPs in the NBA.”
Wallace [Fifth Wall]: There’s another dimension to that. Real estate owners are really good negotiators, but they tend to think of assets as commodities. Meaning if you’re a homebuilder, one plot of land versus another plot of land, either one could be valuable at the right price. That’s not true in technology. This is actually one of the challenges that I think corporates [LPs] have always had, including groups like Lennar. The issue is, you want to identify the right technology partner, the right CEO that truly can disrupt the business, and owning a smaller portion of that company is way better than getting an amazing vulture deal on some company that nobody else wants to invest in. I mean, this is basically my life, arbitrating this.
How have your companies benefited from being part of the larger proptech ecosystem?
Pechet [Homebound]: Founders are great helpers of each other, and they know that as they move the ecosystem along, they make it easier for the next tranche of entrepreneurs. Opendoor has been incredibly helpful to us in thinking about our capital structure. Not very long ago, almost all tech companies were entirely funded by venture dollars. Venture dollars are really helpful in building innovative technology where you think you’re going to get 30-plus percent IRR indefinitely. But there are other interesting ways to finance large components of your business. Opendoor paved the way for all of us in figuring out how to go to the capital markets and get large tranches of different kinds of debt that allow us to grow disproportionately. (This past January, Homebound raised $20 million in convertible debt.)
What do you think the motivation is for that? It can’t just be altruism.
Pechet [Homebound]: I actually have seen it as incredible altruism. People who’ve given me just completely ridiculous amounts of their personal time when they really don’t have any extra, where they’ve said, pay it forward.
Simkoff [Doma]: It’s especially authentic when you know that the person who you’re getting advice from is in it for the right reasons. And I say that because you can meet other founders and you know that they’re probably experiencing the same challenges, both in their business and probably in their broader lives. There’s a lot of stuff that people don’t talk about, such as how it affects your personal relationships. There’s an empathy there where you’re like, “I know I’m going to be in the same place at some time. And I want to be treated the same way.”
That said, you used to get a lot of requests to connect and spend time with people who are not real founders. They’re people that are like, “Oh, I’m thinking about starting a company.” And you’re like, “Great. What is it?” They’re like, “Well, I don’t know yet. We need an idea.” And you’re just like, “What? You’re going to start a company and don’t even know what it is?” That’s just dumb. It’s insulting to the people that are real entrepreneurs, people that had to claw and scrape their way and leave a lot of damage in their wake.
Wand [Hippo]: Right now there’s an abundance of capital, and because of that, the bar to start a company, if you have just a good enough resume, [that] would be sufficient. What people forget is that in my book, the highest bar is actually the personal bar for the people that need to do it for themselves. The highest bar is to bring myself to the conviction that this is what I’m going to do for the next 10 years.
Wallace [Fifth Wall]: There’s a bunch of different industries represented on this call — title insurance, home insurance, homebuilding and venture capital. And nobody who’s running these companies worked in that industry beforehand. There’s something to that … [to] approaching these established industries with fresh eyes.
Pechet [Homebound]: Residential real estate is a trillion-dollar industry in the U.S. alone. And that’s exactly what entrepreneurs should be looking for: a place where incumbents are doing so well that they can’t and they won’t shift to doing everything completely differently. And where you can sort of quietly build a business on the corner that looks really small, but then quadruples every year until it’s the largest player in the entire industry. And when you look at what’s happening with millennials getting into their peak earning years and wanting to own homes, they expect something fundamentally different. And so it’s a tidal wave that’s coming. And if we can be watching that and building for it, just put your head down and do the work, we’ll get there.
You mentioned tidal wave. How has the worsening climate crisis plus the growing awareness that the real estate industry has a role in it changed your business?
Pechet [Homebound]: We started [Homebound] after the 2017 wildfires in Napa and Sonoma where 6,000 houses burned down. At the time, it was the largest, most destructive wildfire in the history of California. In the aftermath, homeowners felt totally hopeless. Even if they had million-dollar insurance checks in their pocket, they couldn’t figure out how to get started because the industry is so antiquated.
And so we started out of a disaster, but obviously there continue to be natural disasters happening every single year. This is a worsening problem. It means we need to be able to rebuild a lot more frequently. We need to be able to build houses that are more resilient, but you’re also seeing this year is the single biggest migration year of people crossing state lines in 16 years and is expected to only accelerate.
“With all due respect to most of the VCs, you were like the Little League and you’re talking to MVPs in the NBA.”
Wand[Hippo]: It’s not just climate change, it’s not just this migration. It’s the fact that people moved into places that they basically weren’t supposed to live in, on mountains and swampland, in areas that are known to have flooding. And there were incentives by municipalities and states to put these people in that place. Sadly, many times, insurance [providers] are the ones subsidizing that screw-up.
Now, the frequency of severe events keeps on increasing. Last year, we had three events that were one-in-a-hundred years, and statistically, it’s not supposed to be. But this is the game that we’re living in. When you’re managing a company like ours, you need to be very prudent because we are in the risk business. And because of that, I need to constantly think of the diversification of risk on the pricing of our products and still be catering to customers because it’s honestly dishonest to get Nikki for X and then increase it to 2X post that.
I’ll be the first one to say that we failed at the beginning. We didn’t do a good enough job. But as the company becomes more sophisticated, we up the level of people that we have on the risk team on changing that stuff.
Fifth Wall has raised multiple SPACs and both Doma and Hippo are going public via SPACs. With so much money up for grabs, how do you focus on building a sustainable business as opposed to chasing valuation? We’re talking in the wake of the collapse of Katerra.
Wallace [Fifth Wall]: Building new, compelling businesses is usually very cash consumptive at the outset. So you have to raise a lot of capital. And I think that’s becoming more true, honestly, as a lot of the Total Addressable Markets companies are going after are expanding. That leads to upward pressure on valuations, because if you’re going to raise that money, everyone is self-interested.
What we saw was in the last three years, especially with SoftBank and the effect that they had, is that we entered a weird Twilight Zone of “valuation doesn’t matter — all that matters is building a sustainable business, no matter how much capital you need to get there.”
And I think we’ve now had enough failures of that model to realize that it is actually not what works. Giving companies too much money too fast or valuations that are too high, too early can actually have really negative effects on their ability to realize their potential.
I don’t know exactly how SPACs play into that. It’s probably pretty complicated, but in private venture capital markets, I think we’re seeing, ironically, greater levels of rationality in terms of raising rounds that seem more appropriately priced today than they were even two years ago.
This interview was conducted June 4. It has been condensed and edited for clarity.
(Write to Hiten Samtani at [email protected]. Reach him on Twitter @hitsamty. To check out more of The REInterview, a series of his in-depth conversations with real estate leaders and newsmakers, click here.)