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

0:00 I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridge line offers a better way forward, one unified platform that automates away the complexity across portfolio accounting. Reconciliation, reporting, trading, compliance, and more, all at scale. Ridge line is revolutionizing investment management, helping ambitious firms scale faster.

0:25 Operate smarter and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.ai. Hello and welcome everyone, I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolosis.com.

1:00 Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. My guest today is Alexis Rivas. Alexis is the co-founder and CEO of Cover, which is pioneering a new way of building homes.

1:40 It's no surprise to anyone that aspects of our housing market is broken. The market is undersupplied and littered with regulatory issues. The home building process has also not changed for the better part of a century. Alexis is attacking the problem and has taken a leaf out of the car industry's learnings. To create a similar production process for home building. In our discussion, we talk about his idea of Lego pieces for homes, how they're refining production with backyard homes first, and how this may change the way people buy and sell homes in the future. Please enjoy my conversation with Alexis Rivas.

2:13 Mm-hmm. So Alexis, this topic has been really interesting to me lately, especially after I discovered cover and all that you're up to. And I thought the right way to frame this conversation would be to start very, very broad and very, very narrow with very specifically what cover is doing and building. I'd love you to give your interpretation of like the supply and demand situation for housing. In the United States writ large.

2:37 When you approach this market, which is obviously enormous. And this problem What stands out to you after your many years of investigating it? There's like a five million

2:48 Home. Shortage. In the United States. So that's just a huge number. And then on top of that

2:54 Do you have places where you just cannot get the homes built that Are needed. Because there isn't a supply of labor. Because there's just Neighborhoods, areas

3:04 Where There's a lack of Skilled construction labor. And there's demand for homes there. And those homes are just not getting built at all.

3:12 And couple that with Right now. High interest rates. It's even harder to afford a home. Especially for a first time home buyer who's

3:21 Gonna have a lot of debt. On top of that You add the fact that the construction Workforce. Is

3:26 Aging and Dwindling. The average is is around forty five. Which is Really older than it's ever been.

3:33 That's a kind of scary situation'cause it's not getting better. People aren't going into Becoming carpenters and becoming plumbers and electricians. So there's this problem where there's a need for homes. And there just aren't the people to build them.

3:45 If I think about the five million shortage. the very naive way to do this in the US, let's say, would be Okay, I've got a population map of the US. My first order. Expectation would be that that is somewhat

3:56 distributed. That shortage is somewhat distributed kind of like the population is. Is that true? And if not what explains it not being true. So like what other factors are there that contribute to where the shortages cluster.

4:09 There is also a regulatory component to this. Where To make it specific. In Let's say Los Angeles or in California.

4:17 Yeah, very restrictive. Zoning. And it's very difficult and time consuming and expensive to get. large new projects built. With

4:26 Hundreds of homes. Even though a lot of people want to live here. You have relatively little housing growth compared to the population growth. Which is what's causing An affordability crisis.

4:36 It's not just a California thing. It's not just a Los Angeles thing. It's a lot of the major cities. But I think California specifically A very pronounced problem and that's partially on the regulatory side. So in some ways It is a

4:48 problem that local cities and States have the ability to solve. From a regulatory standpoint. And then of course once the regulatory side is solved, there's still The construction side and

4:59 The question is like how are you actually gonna build them? Because even in LA Where it's very difficult to permit a home. Once you do permit it, it's still difficult to find a good contractor to go execute on that. When I was thinking about our conversation, I have this scene from a movie in mind. I think it was from the movie Fugitive, but I could be making this up.

5:15 where a group of Amish people build a home in like two days. from nothing to like a fully established home, they do it together and I don't know why that that scene popped to mind, but your comment on the aging workhorse of the labor supply side is really interesting. Why is that the case?'Cause you would think that

5:32 If there's this huge shortage. And the price of homes has gone up. And so people want to pay these huge amounts over the last ten years to build a new home or get a new home. that supply would rise to meet the demand, that people would go into that as a great career and make a lot of money. So what is going on in the labor

5:49 Course. That's made the situation not reach a new equilibrium. There's not enough young people going in and saying, you know, I want to be car a carpenter, I wanna be an electrician, I wanna be a plumber or a framer. Part of it is

6:00 As a society and I think culturally There was more respect for someone that would go build homes or even, you know, work in a factory. A hundred years ago than there is today. I think culturally There's been a very strong shift towards

6:13 Everyone getting higher education. And the reality is like we need people to just go build homes. And we need people to go build things. So I think it's partially cultural. I mean even A hundred years ago. It was actually not uncommon for people to just go build their own homes.

6:26 And you had Sears Homes. That would be shipped. From a catalogue. And then be, you know, assembled.

6:32 The DIY home that was You had an instruction set. And people were just Have some friends over and assemble their homes. Think we've lost a lot of that. I mean

6:41 Home building has also become more complicated. There has been improvement from an energy standpoint, from a building safety standpoint. And so homes have also gotten a bit more complicated to build. But I think we need a lot more people going into that. And the reality is There is good money to be made. For many degrees, you'd be better off being a plumber and electrician.

6:57 Or even a carpenter. In terms of how much money you can earn. Then going to college. Okay, so let's talk about the Potential solution here and

7:05 Again, I'm gonna keep throwing analogies at you just'cause it's helpful for me to understand the problem. One of which is this like idea of the percent of the population that were farmers over time. It's gone all the way down to something. de minimis and tiny, even as we've gotten more and more efficient. Because so much has become automated.

7:21 technology, machines Even software inside of John Deere rigs or whatever. has just made us ever, ever more efficient at Farming land and feeding the world. I think you think something similar to the

7:32 Can, should and will happen as a result of your activities in housing. So maybe just tell that big picture story. And what your vision is for how this could all change. Where we see this going is

7:43 Homes being built. More like Legos. So you have these Blocks Wall panels.

7:50 Floor panels. Roof panels that are made in the factory. With insulation. With plumbing. With conduits.

7:58 with waterproofing and even finishes already installed from the factory. Then you ship these on a regular flatbed site. And you rapidly assemble them. And the keyboard is like rapidly assembling them on site. I think

8:11 The factory is where you have the automation. The factory is where you walk in and this looks like an automotive factory, right? Where you have like robotic arms welding things and Which Highly automated mass production. And then you ship them onto the site. And that's where

8:24 People assemble them, but they assemble them So quickly that Looks nothing like home building today. I m today, just as an example.

8:33 We're already at Building these in about a month. With six people. Which is way faster than conventional construction. It would typically take anywhere from Eight months to a year and a half.

8:44 And the average home in the US actually has twenty four subcontractors. involved in the process. That's where we see this point. And what that means is that There's still actually need for a lot of people to be in the construction industry. We can just build a lot more homes with those people.

8:58 If you think about the original insight here that the way to solve this problem. I think you probably knew coming in that You wanna bring more technology, more automation, more Scale. to this problem where it's not twenty four subcontractors, but just as a more standardized process.

9:13 How did you arrive at the insight that it should be like Lego pieces? Did you go there right at the beginning or what was the winding path to get to that insight? So growing up From when I was honestly like seven years old. Ten years old.

9:25 I loved Architecture, design. Construction Like I drew my first floor plan in grade one. So I wasn't interested in this space. And the more I learned

9:35 Through you know, working with family and friends that were doing their own renovation projects or their own construction projects. And then through internships. And through school. I learned and saw a bunch of mistakes being made.

9:46 Small stage. But I just saw a process that was very time consuming. Very expensive, very unpredictable. And it wasn't A localized issue. It wasn't this one place where I saw that. It was consistent across the board, even in multiple countries. I grew up in Canada.

9:59 Side in Canada, side in the United States, and I also side in Europe where I had an internship. So I saw those patterns even though the physical way that they were constructing buildings was very different. The underlying patterns of basically being a slow process, expensive process, and unpredictable process were the same.

10:14 That's when I started asking questions. Why is it like this? At one point I was thinking about automotive production. And cars. And how a car like a home

10:24 Is this space that you go inside of. It has windows, it has doors. It has heating and cooling. It has a lot of safety features. It actually is a quite comparable product to a home. It's very different, obviously. It's in many ways much more complex.

10:38 Than a home. But it's similar. So I was looking at that. And realize That a Toyota Camry

10:44 Was Two hundred and sixty bucks per square foot. And I knew enough home building where Mass production homes are built cheaper than that. But basically a lot of homes in cities, cities like Los Angeles Are built at a higher price than that.

10:56 And that shocked me as a number because when you look at the physical car versus the physical home and how complex each one is. The car is Much more complicated. So then my mind went towards, Oh, it's gotta be a scale thing, right? There's gotta be way more Cars built than homes, and that would explain it.

11:12 And then when I started looking that up There are more cars built per year than homes, but if you look at it in terms of square footage, there's more square footage of homes built per year than cars. They're basically the same order of magnitude in terms of you know, how much physical stuff are you making a year. And that shocked me too, because I was like, This doesn't make any sense. Why is there such a big difference in the quality and the whole process, the whole way you do this? And the more I thought about it, the more building homes in a factory like cars

11:36 It seemed Obvious. So that's when I started looking into prefab and researching prefab, and I went and worked for a prefab company thinking that they had the solution to the problem. And when I work there What I realized is that

11:47 What they were basically doing is taking conventional construction. Building with like two by fours and hammers and nails and drywall. And replicating that exact same process inside of a factory. And I knew enough about manufacturing to know that

11:59 When you move something into a factory, you want the product to be designed for manufacturability from the start. You design the parts for how they're going to be made on a specific machines. To make it easier and lower cost and faster to make. And nobody had done that for the home. And

12:14 It struck me as This is an incredible opportunity. to improve the quality of the homes that are built, lower the costs and make them abundantly available to everyone. You talk about the materials insights that you've stumbled upon over the years of doing this. Yeah, there's a lot of two by fours in the prefab.

12:29 World just like there is in the custom home building. And I heard you say somewhere else. One insight was to make the ceilings make it really just easy to access the mechanicals behind them and still have it look like a ceiling without having to poke holes in drywall and repatch it and things like this. So Just the materials themselves are fascinating to me in this concept before we get back to like

12:48 What a good Lego piece means to you. And what you've learned there. What have you learned about materials that go into a home? Most prefab companies basically said, Oh, let's build homes in a factory the exact same way as conventional construction. We took the complete opposite approach. Which as we said. What does the wall need to achieve?

13:04 From a performance standpoint, from a look and feel standpoint, just overall, what does the wall need to achieve? Cost standpoint. And then how do we achieve that? When you're doing that. And you're thinking that you're gonna rapidly assemble this and you want to be easily serviceable. The resulting materials are completely different from conventional construction.

13:20 It's not like we said, Oh, we wanna have different materials. We just started with a different set of Objectives. And then that resulted in different materials. Let's take the ceiling as an example. The ceiling is not something that most people touch often.

13:32 This seems to be like a hard surface that you can lean against. it needs to do well from like a sound standpoint. You don't want a hyper reflective ceiling that's gonna Room you've room. Ideally from an installation standpoint. You want it to be lightweight.

13:46 You want one or two people to be able to just quickly. And also remove it. The reason I say remove it is so that you can access plumbing electrical Behind it. The way construction is done from a service standpoint is insane.

13:59 Imagine if every time you had a car trouble You took a whole saw. to the body of your car and like Drill out a hole. To like inspect on what's going on inside.

14:09 And then maybe you drill the hole in the wrong place, you've got to drill one somewhere else. And then take a hammer to it and rip apart the body of the car to access What's behind it? It sounds absurd to talk about surfacing a car like that. But somehow we've all accepted that that's how home should be serviced.

14:25 And we said there's gotta be a better way. So our ceiling panels. They're an aluminum composite panel. They get installed with one or two people. It's lightweight.

14:33 If you want to access all the plumbing or electrical behind it, you can basically just pop it out. It requires some force that it doesn't pop out if someone's jumping on the roof. Or during an earthquake. But you can pop it out.

14:45 And see everything behind it and put it back in. You don't need to repaint or re spackle anything. If you think about the Lego Peace concept itself. Talk through the early learnings and insights there.

14:56 So you said okay, we want something that can be sort of mass produced. I'm sure there's X number of skews. You need a certain number of different kinds of panels. And linkages. I'm curious like how plumbing runs through these things. Like I'm curious all the details.

15:09 But early on What were you learning about What makes for a good Lego piece, like almost at a strategic level. I looked pretty thoroughly at the time.

15:18 When we were starting cover What was already out there. My co founder and I. Even actually after we started recover, we spent quite a bit of time researching existing prefab companies.

15:27 Or even Prefab companies that had existed in the past. To learn what they had done right and wrong. And one thing That stood out was that.

15:37 The Lego block. That most of these companies had were these large Basically container like room size Lego blocks. Where it's an entire room. And

15:50 The more we research that, the more we learn that there are a lot of challenges with that. One was just From a factory standpoint, you have this giant room moving through your production line. Which is hard to move.

16:01 Hard to store. requires a ton of space. And it looks a lot like conventional construction because You're not gonna be rotating an entire Forty foot thing all the time.

16:10 That'd be Very expensive. So Access is limited. It's just not an easy way to build a factory.

16:17 Not to mention that the room itself You do need a lot of customization on room size. You want from a factory standpoint to be building The thing that's as consistent as possible. You want repetition. You want to build the same thing over and over again.

16:29 And when you have room size Lego blocks, it's very hard to make those the same because that's the level where people really care about customization. And the other thing that we learned was that these large room size Panels. You needed a pilot car. Basically you need special permits and a pilot car and you can only transport it during certain times of the day.

16:48 Because it was often wider. than what you could fit on a truck. You know when you see those trucks with like Flags and front and back. Driving down the highway. That's how most of these

16:58 Or transport it. Most of them still are with conventional prefab. That's expensive, it's time consuming. And then on top of that once you get to the site, you need this Large crane.

17:07 to lift it into place. twenty thousand dollars a day. Which is a lot. That's like ten percent of the typical American home.

17:16 That might make sense in LA and some other high end markets, but it doesn't seem like a solution that can really scale. And we saw that. We said This is interesting. This is probably not the right size Lego block. You probably don't want Lego blocks that are entire rooms.

17:30 The way we looked at it was What is the thing that is truly standardized about construction? And it turns out it's the walls, the floors. The roof, the windows. If you look at most homes in America, those are built

17:42 Very similarly. There's not a lot of Different. Yeah. Construction.

17:47 And so we said, Well, why don't we standardize that? Why don't we build these ball panels, floor panels, ceiling panels? design them for manufacturability from the start. But We can build those repetitively. In the factory the exact same wall panels a hundred times.

18:00 Or thousands of times and then Deliver those to site. And assemble them and assemble them to create different homes. That was the other thing is like By going to that

18:09 Lego block. The amount of variety in terms of a layout that you can deliver is huge. For all practical purposes. Infinite Amount of customization.

18:19 Despite having the exact same thing leave the factory. How big are these panels? Just give us a sense of scale for the three types. You know, like a wall panel is like six feet by ten feet. Roughly, and then we have different sizes. That's kinda like a typical wall panel.

18:33 And then floor panels, I mean they they can be Five, six feet wide. And then from a length standpoint It could be five, six feet, or you can go to thirty feet. But you don't need a big crane.

18:43 As I think about again, comparing this to like the house construction that's going on, you see like some framing go up with two by fours, and then you see lots of guts being laid. Pipes and wires and whatever else. And there's a continuity to those things. There's some thinking in how those systems flow through the house and through the walls. How's that same concept work with these panels? Are all the panels built such that

19:05 Water and electricity and all these things can flow through them. No matter what. That seems really complicated and hard. So early on, that's not what we did. We said oh this wall panel is gonna have Plumbing. So let's

19:16 out of chase for the plumbing. And then what we realized was exactly that. Let's actually make it so that every single wall panel You can put plumbing or electrical through and then whether you choose to use it or not. It's just a different option and that way.

19:29 It's more standardized, which means from a production standpoint and a process standpoint, you build the same thing over and over again more. You've got the added benefit that if you ever want to renovate your home and change things up. It's actually really easy. If there was the world's most talented craftsman general contractor on the zoom with us right now.

19:47 What do you think he or she would say about Why this won't work. What would the skeptics take be like, Yeah, okay, great, you're gonna keep iterating, you're gonna have these panels. Like, here's why this'll never be more than two percent of the homes being built.

20:00 Whatever their criticism would be. We have some really great construction people on the team and A lot of them actually were skeptical at first. The more they did this, the more they realized like this is actually crazy efficient. I think from a craftsman standpoint

20:12 This isn't for everyone, I will say that. In terms of home. If you want a home that's going to be exactly how you want it, and you're willing to spend the time and the money to achieve that. Now we're not talking about This is not the typical American home at this point. This is it.

20:25 Less than I'd say point five percent of homes or maybe even point one percent of homes are built like this. But where you have An architect, an engineer, a set of really incredible craft people. And you make really a work of art come true.

20:39 This is the artistic vision for your home. We are not well suited to do that. That's not what we're trying to do. There is a high end market. Where Some people just really want exactly what they want and we can't deliver that. So I think

20:53 Someone might say that. But they would be right. Having said that, though, we've also built homes on twenty five million dollar lots in Los Angeles. And in those cases The person building it could afford anyone.

21:04 And they chose to go with us because they love the product and it was really easy. It was way, way less headache. That's the other thing is that even if you wanna build something like that, you're gonna have to Spend a ton of time. Hours. Every week.

21:17 Just seeing that vision through. Whereas us if you like what we have. It's extremely easy. You just say, Yep, I want this layout and then we'll go deliver it and Comes with everything standard. You talk a bit about

21:29 The area of cost. To the Buyer. on the production side, so I'm curious about margins. I don't know enough about

21:37 Let's say the economics of a traditional middle of the road home that's being built in the US, like how much it costs and What the margins are and who gets what. Maybe you could walk us through that and how cover stands up to that. Standard model.

21:50 The medium Home price in the US. is around four hundred and thirty thousand dollars. Now that includes land. And most of those are in fairly suburban

22:01 locations, right, away from city centers. That's kind of what the typical American home looks like today. So today we're not building there. We're very focused. Right now on building backyard homes. And the reason for that is

22:12 It's the true minimum viable product. What's the minimum viable product of a home? A backyard home. It still has a kitchen, it still has a bathroom. It's just smaller. So that's why we're focused on that.

22:21 We're also focused right now on the Los Angeles market. And the reason for that is also start small. Incredibly focused, develop operational excellence. And then once you've got the whole process and product working really well. Then scale it.

22:33 That's the approach. I mean, look at the typical American home. It's about thirty percent. Land. So

22:40 You're looking at in that four hundred and thirty thousand dollar home, you're looking at around a hundred and thirty thousand dollars of that being land. Yeah, when you go into Places that are more expensive. Let's say California. That can go to like fifty percent.

22:51 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

22:59 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

23:18 The developer. And then you get to the home. Which is the thing that goes on a lot that we typically think of as like the home cost. Those costs will vary quite a bit based on the location. But

23:27 When you look at the typical home, it's like Labor and materials are both the major cost areas. In the typical hole. Our focus.

23:35 In terms of how we change that. Is First moving a lot of the labor. Into The factory.

23:42 Where You can make it more efficient. You can build tooling and fixtures around it. And then making the on site installation process really fast to make that labor side. Significant last. So that's really the focus.

23:55 Today we're starting off with a high end product. You've kinda used 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.

24:12 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,'cause it's really hard to just start off

24:25 with a mass market price product. When you're small. You kinda have to start with something high end. Where you can make a margin. And then lower the cost over time.

24:34 What is the role of software? In the business. Obviously there's an incredible physical component to what you're doing. I wanna talk about What the factory looks like in a second here, but I'm sure that there's a

24:44 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.

24:57 Of a bigger trend. So 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.

25:07 How do we compete not with other prefab companies that have five models. How do we compete with your local general contractor? We can build whatever you want. From a layout standpoint.

25:18 So We have these standardized panels. Then there's the question of well How do you combine these panels to make a home? And then does that home overall Perform the way.

25:27 It needs to. So how do you generate those designs? So that's where the software comes in. With conventional construction You come up with a floor plan.

25:35 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 gonna require this steel I beam that's gonna add Ten thousand dollars of cost. To the project. If you go five feet smaller.

25:48 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.

25:59 Basically interacting with each other. What we've done. Is we've Taken the information about our panels. The structural information as an example.

26:08 And Codified. The rules around those. So You can combine. This number of panels for this span.

26:15 In this seismic zone. So we've put all of this information to software. And We can generate A design.

26:22 That we know work structurally without having to do pages and pages of calculations manually. That's just an example of the role that software plays, but really The way you can think about the software. is going back to the Lego analogy.

26:35 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.

26:44 Based on their property, based on their needs, their preferences, their budget. What our software does is it takes the Lego's. And it Intelligently assembles them into sets. And it checks that those sets will fit together well.

26:57 We'll perform nicely, we'll have good energy efficiency, we'll 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.

27:13 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.

27:21 How do you think about the support model? Or I'm gonna lump together two things that pop to mind. The support model And what I'll call like the last mile problem where I've been through this in construction where

27:31 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. 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 gotta undo everything and redo everything.

27:52 So 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

28:00 Call it. handyman or something. Like 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 smile thing. You're right.

28:12 Like Lego's if you're missing something. You're kind of screwed. So basically We've spent a lot of time. A lot of time.

28:18 This is a lot of the headaches early on. Basically making sure that we're not missing anything. That the parts are fulfilled and that they will fit together when they show up on site. Otherwise.

28:30 You're doing all this work in the factory. Then you have to go on say undo all 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.

28:41 With conventional construction You can show up. On site and just start Trimming things, maybe things are slightly Oh.

28:48 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. В ас. These panels are

28:58 These big Not easily modifiable panels. that get installed and assembled quickly, but if they don't fit together, that's a real problem. You have to just solve that upstream with

29:08 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.

29:21 On the support side, how do you think that will work? Like inevitably something's gonna break, uh, pipe's gonna burst. normal house money pit stuff. So what happens? Are you building like a support network alongside the manufacturing piece of the business that will

29:35 Service these homes, I guess, over time. So 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.

29:47 We're careful not to go too far down the Make this completely alien. For service reasons like this. You want if there's a leak Someone to go and build it.

29:55 quickly turn it off just like they would in 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

30:05 repairment or general contractor could go and look at this and figure it out. They would They'd first be taken aback and say What's going on? But from a business standpoint. We look at this as an opportunity to get the follow the product past.

30:16 Just a 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?

30:28 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 kind of how they had tried to do that and the door was Somewhat.

30:39 Damaged and We see that as a learning opportunity too. So We'd love to go out and see What is going wrong? And not only, you know, fix it for that customer, but then

30:48 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.

31:01 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

31:14 some quirk of customer demand or things they love more than you expected or Hate and yet to change or Unforeseen problems. Once the plan encounters reality. Things morph. And so what's been morphing for you?

31:26 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.

31:35 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 sync faucet and it's the same one in every single cover.

31:51 We only have one set of Appliances. They're sub zero in Wolf, so they're very high end. That's all we offer.

31:58 So 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 pushback on those things.

32:09 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.

32:17 One of the things that's been surprising as this has hit reality is Reality of manufacturing. Going from the idea and you know this Design. And turning that into something real.

32:27 In terms of production, in terms of Delivering it. That's probably been the biggest learning. That is remarkably difficult to do.

32:36 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

32:44 ten thousand parts that go into them. You need all ten thousand 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.

32:54 Three hours at best. Is what that is. The the reality of Managing all of that. That's probably been the biggest surprise.

33:02 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.

33:11 Which is kind of an interesting concept. What does that mean in terms of factory? Construction Logistics. What have you learned?

33:18 There It sounds like a stupid basic question, but you just don't meet that many people that are like 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 than the factory because

33:32 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 it part. And you need to know that because if you don't, you're gonna think you have that part for the next home and really you've taken it off the shelf and you've used it for the home before it.

33:46 'Cause you've scrapped it. That's a simple example. Just tracking Like this is not a novel problem for us. Every factory has its problem. It seems simple, but that's like one thing.

33:55 You gotta Build the right culture. In the factory. The culture. Keeping the work stations clean, making sure that

34:01 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 Drilled it. And that drill bit goes missing because someone went

34:14 To use it somewhere else. That can just stop that production line. There'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.

34:23 There's the 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

34:35 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 another counter to the thing. Initially we thought oh, you know, moving faster

34:46 would result in lower quality. What we learn. 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 standardized and make the process better. So the fast we build

34:58 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.

35:09 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. It's been my theory of constraints. The goal.

35:21 The class but the goal. Can you describe that just for those that aren't familiar? It's written As a novel. Of the story of this plant manager and the plant was about to fail.

35:31 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 succeed. So that's the novel. But it's really around this idea that

35:45 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.

35:55 We're really not moving the needle at all. This is always important, but like What you work on is Far more important than How well you get it done.

36:03 Can you give an example of that?'Cause the way that sounds is in a manufacturing process. When you want to maximize it. output and quality. You always want to zoom in on the thing that is most limiting.

36:13 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.

36:26 And Things in the factory were on and off. It 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

36:35 What we realize 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

36:45 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.

36:53 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, it'd be even more accurate. And did get it well ahead of time.

37:09 So that would not be the constraint. That's one example. If you think about the value of moving slow The perfect

37:17 Some of these processes early on. Versus I have no idea what your latent demand is. Like if you just said, We're just gonna go for Max number of homes versus Some other measure of success early on.

37:29 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.

37:38 It is way more difficult to solve that because That requires Meaningful product changes. So then you're constrained effectively. Your product.

37:46 So you wanna get the product right. Before you go and start scaling these. You want your constraint to be in the factory. If the constraints in the factory, that's a well known problem. How do you remove constraints in the factory?

37:57 It's not easy. But Thousands of companies have done it successfully over centuries. That's really the focus is making sure that the onsite install time comes out. And just to be concrete there. That has been a lot of our focus.

38:07 And We took it down from a hundred and twenty days a couple years ago. Down to sixty and then thirty days. No with a bigger team. And then we took it from Thirty days with fifteen people.

38:17 We've just continuously focused on making the onsite install process. Easier and easier. Because if you kinda go back to the automotive analogy. The on site assembly.

38:27 Is our automotive equivalent Of a general assembly line. where all the different car parts come together and then finally get turned into the home. 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.

38:40 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?

38:49 Success or failure Will constitute over the next You've been doing it since you were seven years old. I assume you're gonna do it for a long time. Over the next several decades. What does success and or failure mean?

39:00 From where you sit today based on what you know. Today, ninety eight percent of homes are built conventionally. And about two percent are built with prefab. Successes when we flip that. When most homes are built this way.

39:14 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 in homes like the kind of detainish

39:25 Yeah, you would expect like a ten million dollar home. is what we're building in, right? Like motorized shades that retracted to the ceiling. Really nice stuff. We see a future where that's available to everyone. The quality of the typical mass produced

39:38 American home and really just home anywhere in the world. Is significantly higher than it is today. It's a much easier process. You don't need

39:47 three years to build a hundred home community or a two hundred 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.

40:02 What do you think about the evolution of the jobs to be done in a home. I've s not thought until just now that The homes you're building probably have the same functions as all the other homes that ever everyone else builds. They got a kitchen, some bathrooms, some bedrooms. Maybe an office.

40:15 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.

40:26 They 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

40:34 Today people think of their homes as a very permanent thing. That I don't want to change. Often. If people are running out of space. In their home.

40:44 The 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

40:57 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

41:05 Order bedrooms as you need them. It doesn't need to be this one off Big Thing. But you kinda have that.

41:13 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.

41:20 For a cost at point. But the cost of moving is so high. Yeah, they kind of like Upsize for like five years down the road. With our way of building

41:28 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 many panels.

41:43 Grow the home. And to start horizontally, but you can also go vertically too. Like oh let's add a second story. Let's take the roof panels and move them up. And then you know, add the interstitial panels as an example.

41:54 That ability to rapidly change Homes and then eventually cities. I think that's probably the biggest thing. Yeah we'll change.

42:02 And then the other way around. Kids move out, you don't need as much space. You can go sell those panels. Let's be a secondary market where someone will go buy used cover panels and Build their home.

42:12 Did these things grow up? Well Could 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?

42:23 Up to around four to six. Stories They work really well. We're just More than ninety percent of construction.

42:30 Today we're not building multi-story structures. We're really focused, but from a structural standpoint and from a panel standpoint. You intend to. Like 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

42:44 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. Are you designing everything with the business and cash flow?

43:03 in mind as well, and if so, how? Yeah, that kind of went through an evolution right when we started off was just learn how to build something that works. And then it involved like Adding more to that. What does that work mean? So

43:15 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.

43:29 For the most part, if you pay attention to what the materials are. Yeah, you're making smart. Material cost trade offs? The numbers were. You just really have to pay attention to

43:38 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.

43:50 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.

43:57 But especially if you have a room that has like north facing windows that wouldn't normally get direct light. That's kinda like 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.

44:11 That you found most surprising? Do you think? People might be interested in. One of the things that we've learned Fairly early on.

44:18 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.

44:27 So he kind of more of the tech world. And I came more from the architecture world. And as we started building cover. One of the big realizations that we had was that the team that we needed to build

44:39 Was Yes, we needed people that understood architecture and construction, but we Needed far more people who understood. Manufacturing. And

44:46 Automotive production and aerospace production. the design, engineering and building of large skill Physically complex. Products.

44:56 Because If you're trying to build a home Like a car? Turns out that you actually want someone who knows how to build a car. More so than even want someone.

45:04 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 architecture. industry. It's mostly from Consumer products.

45:15 SpaceX. Tesla. We've got someone that had experience at Curig. 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 Cubertinos. But

45:27 The role of the people from outside the construction industry was not immediately obvious to us, but In retrospect, looks really obvious. If you think about the way that this will roll out. You mentioned you're only in Los Angeles. When do you think

45:39 Me out in the east coast or near other major cities. What do you think the Time line is for when Covers will be available. To those of us not in the LA area.

45:49 Expansion is Truly A couple of years out. I'm not gonna say to east coast, but expansion beyond LA is a couple years out. Because

45:55 This isn't the type of product where you want to expand and build like five or ten or twenty even in one city. Every city that we expand into We wanna be building At least a hundred. Or like in that region.

46:07 Within Two hour drive. At least a hundred a year. As you expand. You basically want to just

46:14 Still your pipeline. And You're likely gonna 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.

46:25 Any advice that you would give entrepreneurs We're 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 a For people that fund early stage technology companies.

46:39 Is very different. It's more complex, it's harder. What have you learned about that reality and pitching investors and working with investors.

46:49 The biggest thing is To develop a really, really clear understanding of What? Drives the business. at a truly in depth level.

46:57 And what that roadmap to success looks like on your own. And then figure out a way to communicate that to investors clearly. Otherwise. Debujar. Overlay their own projection.

47:07 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.

47:16 That's probably the most important thing is like 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.

47:28 That's where we're going. We're not cranking out. Thousands of these. The reason for that is that we've been Very kind of clear around

47:35 There are certain technical and operational milestones and efficiency milestones. That we wanna hit. Before we scale. And that will allow us to scale at an incredible Right.

47:45 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 it does work, it won't work nearly as well. As if you

47:55 Actually scale something that is ready to scale. And we've developed those Milestones share them internally. And with our investors. and are working towards that path.

48:05 We'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.

48:14 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.

48:25 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.

48:34 Came to our factory. For the first time. And spent about three hours with us. And basically really challenged our roadmap.

48:42 kept asking why, like why. And you know. If something didn't. make sense to him or didn't seem completely solid. Yeah. Digging.

48:51 And we came out of that three hour conversation realizing that we We're like super far off, but we were far off enough. That we readjusted the course of the company. out of that three hour conversation.

49:02 It was a very important Not heated, but it was like passionate. He really cared. It was like this intellectual vigor. And

49:09 We changed how we engineer, how we designed, how we planned. Based on that. Three hour conversation. And I think for a lot of investors

49:19 Those kinds of conversations are difficult to have. It was you know, somewhat uncomfortable. Honestly, we hadn't experienced something Quite. Like that before.

49:27 It was awesome. It was very generous of his energy and time. That was really Quite an important moment. 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.

49:40 Thank you, Patrick, for having me. If you enjoyed this episode, check out Join Colossus.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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