Qualia CEO Nate Baker - real estate's digital infrastructure layer

Nate Baker is the cofounder and CEO of Qualia, the leading real estate closing platform which powers millions of real estate transactions a year. He’s also the cofounder of Fractal, a business incubator that has launched over 150 vertical SaaS companies. In this episode of World of DaaS, Nate and Auren discuss: AI impacts on real estateHousing supply politicsThe “super app” real estate trend Vertical SaaS myths and playbooks Looking for more tech, data and venture capit...

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Auren Hoffman?

  Hello data nerds. Welcome to World of DAS. I'm your host, Orin Hoffman, CEO of Safegraph and GP of Flex Capital. Discover more episodes, get weekly data as a service news at worldofdas.com. That's spelled world of D A A S dot com. Hello fellow data nerds. My guest today is Nate Baker. Nate is the co-founder and CEO of Qualia, the leading real estate closing platform. They've got millions of real estate transactions every year. He's also the co-founder of Fractal, which is a business incubator. It's launched about 150 vertical SaaS companies. Nate, welcome to World of DAS.

• 0:39Speaker 01

  Thank you for having me, Orin. Very excited to be here.

• 0:42Auren Hoffman?

  I'm super excited. We're friends. Just full disclosure for the audience, I'm an investor in Qualia, a very happy investor in Qualia. How would you rate the state of digital transformation in real estate? Are we in inning two, inning nine, or where are we at right now?

• 0:58Speaker 01

  Real estate's always been cast as the laggard in moving to some modern software. I do think it's the other way around. I've recently been working on a history of title insurance software, which is our niche. And I've been interviewing a lot of the founders of our competitors who started usually like 20 to 50 years ago. And the thing that I've learned is that a lot of them were actually pioneers in bringing the internet or early computers into this industry. And it's because real estate, particularly the part of it we focus on, this back office stuff, is so data intensive and so workflow, document, accounting intensive, that it actually fits well with what

• 1:41Speaker 01

  computers can do. If you look at Fidelity Title, which is the massive player in our space, they got where they did in large part through being the first vendor in the space to actually have a consolidated back office software system, which is pretty cool.

• 1:56Auren Hoffman?

  So you think real estate, when I compare it to other industries, at least in my like limited real estate, I wouldn't say it's at the very bottom, but it's definitely not anywhere near in the top 50%, at least in my limited experience.

• 2:11Speaker 01

  If you think about Zillow, they were pretty early to having a really good consumer mobile experience, really good home discovery. So I would push back. I think real estate actually was pretty quick to modernize and gets a bad rap.

• 2:25Auren Hoffman?

  That's fair. What areas do you think real estate are still underserved by software or by technology?

• 2:32Speaker 01

  The fundamental problem with the real estate transaction, which is what we focus on, is that you actually have dozens of people involved in any given transaction that are all local and are all selected by different people on each transaction. And so what you end up having is a deal team of a dozen people that have not worked together before. And as a result, you have a mess and no single player can decide, here are the vendors we're going to use. And as a result, we can move quickly through it.

• 3:03Auren Hoffman?

  It's like a coordination problem, essentially?

• 3:06Speaker 01

  Yes, it's a massive coordination problem. And if you think about it, it's kind of a three-legged stool between the real estate agent, the title agent, which our customer, and the lender, loan officer. Real estate agents are just bad software customers because they are very churning. They're like consumers. Lenders are so hard to sell to big legacy organizations. And so you actually have to get all three of them on the same page to modernize.

• 3:32Auren Hoffman?

  It's like the lowest common denominator. Whoever is the least good, if one person requires a fax, they all are doing faxes.

• 3:38Speaker 01

  Totally. And then they also deal with accounting, they also deal with a appraiser. And so it just adds all this stacking complexity. Our philosophy has been, okay, build for the title company, which I think is the most underappreciated part of the transaction, and build a common coordination platform from them that they can give to the whole ecosystem. So that's where we've been building.

• 4:01Auren Hoffman?

  I know you focus on residential, but in the commercial, is it better? Where does the commercial sit?

• 4:08Speaker 01

  We do commercials, what we've done, a lot of buildings you would know have transacted on the platform. In commercial, if you're selling Safe Graph, you're gonna have the attorneys working on it, you're gonna be reading all the docs, and if there's a software system behind it helping, it's just less important because it's not about automation and efficiency, it's about you getting the transaction details right. And so that's more akin to commercial real estate and why I would say software provides much lower value as a percentage of the deal.

• 4:40Auren Hoffman?

  Just because the dollar is so much bigger.

• 4:42Speaker 01

  It's more bespoke every single time.

• 4:45Auren Hoffman?

  This NAR ruling that came out a few months ago, for people who are not familiar, it'd be great for you to walk us through the ruling, and then what does it mean for the residential real estate market?

• 4:54Speaker 01

  There was basically an antitrust case that said NAR and a bunch of real estate brokerages had been conspiring to inflate buyer commissions. And basically, what has happened over time is that the seller, when you list the home, you will market a particular buyer commission, and that gets locked in way earlier in the transaction. And so it's hard for the buyer then negotiate that.

• 5:19Auren Hoffman?

  I list my home and I say, okay, I'm gonna give 5% to brokers, 2.5% to the buyer agent.

• 5:26Speaker 01

  Totally. And what's difficult about this is if you market, we're gonna pay 0% to the buyer, as agent, the buyer's agent is less likely to bring people to see the home for obvious reasons. And so that was a real problem, and they succeeded through this antitrust case in changing the rule, and there were a bunch of big fines paid by NAR and a bunch of the big brokerages. We were actually working on a story about this, started marketing a blog post recently, and we pulled the data to look at for commission payments, day by day, across the entire country. How does it change? I think it was July 1st or August 1st where the ruling went into effect, and everyone was expecting some change.

• 6:08Speaker 01

  And if you look at the data, it's a perfectly straight line, no change, which is surprising everyone.

• 6:15Auren Hoffman?

  So July 1st through, you and I are talking in mid-November, no change at all during that time. But I wouldn't have expected it to change right away. I would have expected it to take some time before I like gotten people's mind and psyche and stuff.

• 6:30Speaker 01

  In the industry, this has been something people have been preparing for for a long time. They've been talking about it constantly. A lot of people are saying, oh, we're going to change what we do business right now. But I would have expected, the reason we're doing the analysis is that there would have been some change or some group at the edge that was moving things around. That's not how it's working at all. And it's super interesting. So you could potentially see some new business models from new entrants or Zillow changing things up or these big aggregators changing things up.

• 7:00Auren Hoffman?

  Classically like Redfin, they would just rebate the thing to you.

• 7:03Speaker 01

  Yeah, exactly. And so I think you will see attempts at it over time. But that just brings us back where we were. The last 15 years in real estate has been a constant story of someone coming in and saying, we're going to do this completely differently. We have a completely different commission structure, a different model. And then hitting their head against the wall for five years and then doing it basically how it's been done.

• 7:28Auren Hoffman?

  What are the most common rates that people pay their brokers in real estate today in residential?

• 7:34Speaker 01

  Two and a half percent.

• 7:35Auren Hoffman?

  Two and a half on each side, so a total of five.

• 7:38Speaker 01

  Yeah.

• 7:38Auren Hoffman?

  Maybe at a larger, you can negotiate that down.

• 7:42Speaker 01

  I'm sure you've talked to investment bankers and the more important transaction you're doing, you don't really get to negotiate the fee down very much. They were like, oh, you should pay us more because of how important this is.

• 7:54Auren Hoffman?

  Interesting. There've been a lot of evolution in business models in real estate. We've got Zillow, we've got Compass, we've mentioned Redfin. Where are all these companies headed?

• 8:04Speaker 01

  It's interesting. It's changed a lot over the past few years. If you think about Zillow in particular, they went through this story from being just a marketplace for consumers and real estate agents trying to help drive consumers to real estate and partners and help consumers find a home to. Okay, we're gonna do iBuying. We're gonna actually buy your house. We're gonna do the whole thing, soup to nuts, all in one.

• 8:29Auren Hoffman?

  That was a brief experiment, in a way.

• 8:32Speaker 01

  It was a brief experiment, but it was an extremely expensive and large-scale experiment. The founder rejoined the company. They said, this is the future of what we're doing. We're 100% focused on this. And they did, to their credit, do that. They're now building what they're calling the super app, trying to make it so you can buy your home, kind of all in one, not have a bunch of different point solutions. And they're really trying to vertically integrate much more. And this has been the story with most of the big brokerages, or a lot of them, own title companies that are customers of ours. And what they're trying to do is vertically integrate this consumer experience. iBuying was right in the sense that it is a better transaction experience for the seller.

• 9:15Speaker 01

  You are not having to deal with all this nonsense. They learned a lot about the type of consumer experience you want to provide. And so that is the thing that everyone's doing right now, is saying, how do you bring title and closing into this? How do we bring mortgage lending into this? That you can take your encompass consumer through this whole channel, where they just have a nice white glove experience and they don't have to be flipped over the fence to a random partner. And so that's where the future of these businesses are. And if you pay attention to their earnings calls and stuff like that, a lot of what they do is talk about attach rate of these new products that they're introducing, because it's an important driver of their economics, as well as the future where they think the transaction experience will go.

• 10:01Auren Hoffman?

  As a consumer, I've always thought Zillow as a buyer, not as a seller. Is that wrong?

• 10:08Speaker 01

  I think they're trying to do both, to some degree. Like, you're trying to say, how much is my home worth? If you think about the Zestimate, one of the most successful marketing campaigns ever, a lot of that was targeted at sellers.

• 10:22Auren Hoffman?

  At least current owners, just trying to understand the value of your home.

• 10:26Speaker 01

  Yeah, what's my house worth?

• 10:27Auren Hoffman?

  What's my neighbor's house worth, or something, yeah.

• 10:30Speaker 01

  Exactly. Buyers and sellers are the same people. Usually when you move, you move from one house to another. It's a bit of a mix between the two.

• 10:38Auren Hoffman?

  I would have thought iBuying today would have been a bigger piece of the market than it is. And it does seem like a way better experience for the seller and potentially better for the buyer, because they could make the needed repairs quickly, they could do a few other things. So it could be a little bit more move-in ready and potentially get fees lower. Maybe they don't need agents on either side of the transaction or something like that to get the fees lower. Why has it not grown? Or maybe you're going to say, again, you're wrong, or it is growing super fast.

• 11:12Speaker 01

  It's not. Everyone at the time when Open Door was really getting this going and Zillow was going, this is an existential threat.

• 11:19Auren Hoffman?

  I know that people at Open Door are super smart and they built a good business to their credit, but it's still only a very tiny percentage of the market.

• 11:26Speaker 01

  I think they would be the first to say it hasn't gotten to the scale everyone thought it could. I think the fundamental issue is that homes ended up being a more complex asset to value than they expected. And they expected it to be quite complicated. But there's really a tremendous amount of personal preference that goes into which home you're going to buy. I think that combined with rates going up and the cost of carrying houses for as long as they have to, to make the transaction happen, just fundamentally caused issues with the whole concept.

• 12:02Auren Hoffman?

  A zero interest rate environment, it's much easier to make it work because you have real costs if you have to carry it. And then, of course, the higher the rates, also probably the longer the transactions take in general, because people have to go get mortgages, et cetera. So you've got this double compounding thing that happens there.

• 12:18Speaker 01

  But again, I think they were on to something with this vertical integration, making the transaction much smoother. Everyone is now trying to say, how do we do that? But without the tremendous fixed costs.

• 12:32Auren Hoffman?

  Redfin's been around for a while. It still seems like they're also this little nichey product. It was such a cool idea. I mean, I don't even remember when it launched. It was a long time ago. The first person who told me about it was actually Travis Kalanick, who told me about Redfin 20 years ago. And he was buying a house in San Francisco and he used Redfin. I never heard about it, just so he can get the 2% back on it. It still seems like a very nichey type of thing.

• 12:59Speaker 01

  And this goes back to the point on the real estate agent commission structures. It's been so resistant to change over the years. And every single new model that comes in is really not succeeded to that large of a degree. Like, that business is big, it's a big public company, but it's not done what they wanted, which is fundamentally changed the real estate commission structure. I think a lot of what that goes back to is that people typically find their real estate agent through a referral, like an introduction from a family member, a friend. They're not typically finding it through all these marketing channels. That just makes it sticky versus how the business has always worked.

• 13:39Auren Hoffman?

  If there was some sort of change in the market, would that help make changes in some of these structures?

• 13:45Speaker 01

  I think to a degree, people are demanding a better experience, but it hasn't been as dramatic as you would expect. You would think that a sophisticated tech-oriented buyer would be more and more demanding of, hey, I want to sign my paperwork online, which our software and others can do. I don't want to go see the title company. I just want to be done. I don't want to go talk to a real estate agent. It's just not how it's worked in practice. And I think a lot of it is that it's an emotional process. The new CEO of Zillow wrote a fantastic letter when he just accepted the job. And a stat he included was 50% of home buyers cry during the process of buying a house. I don't know what sort of NPS that is, but that's really not ideal.

• 14:30Auren Hoffman?

  They cry because it's bad or they cry because they're so happy they found something?

• 14:34Speaker 01

  Because it's bad, because the process is miserable, it's stressful. Some of that is just fundamentally unavoidable in that you're moving your lives.

• 14:44Auren Hoffman?

  Because they lose a bid and they thought it was going to be their forever home or something or?

• 14:48Speaker 01

  Yeah, or something ends up being way more expensive than they thought. The foundations has a problem, whatever it is. There's big things that happen and I think a certain part of the real estate agent's job is just emotional support around moving you through the transaction. And no matter how automated you get it, there's still that emotional component of it.

• 15:10Auren Hoffman?

  If you're buying a home with your spouse, it's not just one person. There's two people and they might not always know what they're optimizing for. So it's not like you can like put it in an algorithm. I'm weighing the school's X, but I'm weighing the walkability Y or something. The agent has to suss it out through some conversations over time or by showing you something and you might not know. I mean, most people, when they're buying a home, especially first time buyers, they don't really know what they want.

• 15:35Speaker 01

  And pulling it back to your earlier question about where are opportunities in the industry? It's much harder to build stuff for real estate agents because to your commercial real estate point, software is just less of an important consideration for them. It's about finding customers and then it's about handholding them through this process. They're less concerned about automation. So that's where the title company has this perfect sweet spot of huge amount of workflow complexity, documents. They're just being dumped with tons and tons of regulatory stuff that they have to deal with, accounting and all that. So it's the perfect sweet spot for building software.

• 16:15Auren Hoffman?

  What about companies like Compass? How have you seen them evolve over time?

• 16:20Speaker 01

  They really got a lot of their growth going through acquiring real estate agents, paying big commissions, building a book of business, building a big brand. And now I think they're much more focused on like the rest of the tech ecosystem, profitability, driving great margins. And to do that, it's about this vertical integration experience. So their customer in a lot of ways is a real estate agent. And then they're trying to say, what is the suite of products I need to give to this real estate agent? Do make them want to come here and work with me? And I think that's very different versus a Redfin where the customer is more the end consumer. And they're trying to optimize that price point as much as possible.

• 17:00Auren Hoffman?

  What about like the MLSs, these multiple listing services, systems? They've got to interact with the listing agents. They've got to interact with one another. Some of them are very large, some are very, very, very tiny. How do you see that evolving?

• 17:15Speaker 01

  What's effectively happened is you get a layer on top of them, which is the companies we've been talking about. They're quite entrenched.

• 17:23Auren Hoffman?

  Some of them get acquired by the other ones too. Even if they're nonprofits sell themselves or merge into bit like Southern California is like one big MLS.

• 17:32Speaker 01

  It's unique to the US market, how this works. But I think at this point, it's such a large industry. It's so entrenched. It's unlikely that you have this dramatic flip overnight in terms of a different market structure. And I think the people who could actually flip it, the Zillos of the world, they like how it operates today. And they've figured out how to work side by side with it in a way which helps their business.

• 17:56Auren Hoffman?

  No good interview would be complete without talking about AI. Where do you see like AI playing in this real estate infrastructure layer over the next few years? Is it just being able to like process the documents faster?

• 18:09Speaker 01

  If you think about the cost to do a transaction, originate a mortgage, it's just gone up explosively. Four or five X over the past 15, 20 years.

• 18:18Auren Hoffman?

  Or is it just because you just need more documents or you have to pay the people more?

• 18:22Speaker 01

  The cost doubled coming out of Dodd-Frank. So there's a lot more oversight on the banks. Financial crisis caused a lot of regulators look very deeply at real estate, fairly enough. That work is, I think, very automatable. A lot of the document generation. If you think about the role of vertical software in particular, a lot of it is to manage the state of a transaction or some sort of process and also to encode the logic of an industry. So with our business, we have to deal with every single county in the country, every single state. We maintain all these documents and all these different really custom workflow rules

• 19:04Speaker 01

  across the whole country, which is annoying. But once you've done that, you have the structure of the industry encoded in some significant way. And then we also have tools for interacting with vendors and partners for the title company. So I think those are really the component parts you need to achieve automation. I really think the missing part so far has been how do you communicate in an automated way where you're taking information and then putting it in an unstructured form? Do you have some sort of email, call, some sort of message through an app? And then do the inverse of that where you're pulling in county tax documents or you're pulling in different emails from the seller and pulling that into a structured way.

• 19:48Auren Hoffman?

  There's a lot of like PDFs that people have that you have to parse through too, right?

• 19:53Speaker 01

  Totally. And it just used to be the case, this is like a very risk intensive industry. It's an insurance. It's people's life savings moving between different transactions. It's really important to get the details right. And historically, the accuracy just was not good enough to automate a lot of this, or at least be kind of the assistant type offering. And now it just is good enough where you can have these tools in the loop where you have more of the human as the reviewer and you're just pushing work to them, pushing review process to them. The work is shifting dramatically. And coming back to the first point I made is title and the real estate transaction are actually early adopters because

• 20:36Speaker 01

  the problem set we're dealing with is so squarely in the wheelhouse of what computers are good at. And I think that this is continuing now. But I'd say in five years, the work looks fundamentally different for all the back office mortgage, title insurance in particular, and hopefully that flows into material change in pricing. But at the very least, it's going to flow through into a big change in the expense line.

• 21:03Auren Hoffman?

  I guess there's two benefits to the consumer. One is that the mortgage will be cheaper. Either you get a better rate or you'll just have less fees involved. And then the second is presumably you'll get an answer much faster. Right now, it just takes a really long time for most people to get an answer.

• 21:19Speaker 01

  I think that fundamentally changes as the marginal cost falls tremendously. It's true in basically every type of workflow, document, accounting intensive industry. The vertical software platforms, if they can build fast enough and actually deliver, have a good head start on being the delivery mechanism for all these incredible tools that everyone has invented over the last few years. When you're thinking about a B to B use case, which is our use case, the price point of the L O Ms and all the stuff that we want to buy from OpenAI or whoever, it looks great versus these consumer applications. We're not talking about making a million calls a minute or whatever.

• 22:02Speaker 01

  You can actually just default it on, put it as widely adopted as possible in your software. And so I think that's where a lot of these tools are going to be very successful delivery mechanisms.

• 22:14Auren Hoffman?

  You guys have built like one of the more successful vertical SaaS companies, definitely in real estate. But you stayed like super vertical. I know that was part of your intention on day one. What are some of the advantages of being so vertical?

• 22:29Speaker 01

  It's obvious who your customer is. That's like a underappreciated fact, but I imagine like building a data business is hard to know. I know that this customer is a customer, but I don't know who the next 500 are. Sometimes you have to go find the use cases and all that.

• 22:45Auren Hoffman?

  If you're building like a CRM for dentists or something.

• 22:49Speaker 01

  Yeah, you know, dentists are your customer.

• 22:51Auren Hoffman?

  And then the question is, do I go make a CRM for mechanics because they already have a CRM? Or do I go like deeper with the dentists? And you've kind of chosen almost to go deeper with the dentists in a way.

• 23:03Speaker 01

  And I would say this is actually a bit of a change versus a few years ago, where I used to believe that you start with the title company and you really build a more of a network effect around the title company and you sell more to the lender and the real estate agent. What I've realized is that you can actually just continue going way deeper into your existing customer base and build more and more and more and more stuff. And it's so much more efficient. You don't screw it up because you know the customer really well. You know what they need is improves your net retention across your whole suite of products. It's the way to do it. And just another point on that, when we started, the sum of all of our competitors' revenue altogether,

• 23:47Speaker 01

  probably on the order of $60 million. That's quite small.

• 23:52Auren Hoffman?

  It's hard to know your TAM.

• 23:54Speaker 01

  It's super hard to know your TAM and we're obviously much bigger than that now. And we've been able to grow the size of the pie substantially. And our competitors, they're doing better than when we entered the market, which is interesting to me as well. And it just turns out that vertical SaaS is a good business. And you're actually able to layer a lot more value over time, independent of the new entrant. Vertical SaaS is a good business. I think it's harder to tell the story of tomorrow, you're going to be a hundred billion dollar business. But we've always optimized for how do you reliably build a good business? And not take any crazy risk and just keep plodding along.

• 24:35Auren Hoffman?

  You're also going after market, these title companies that are very sticky. They're often fairly regulated in their markets. Many of them have been around for a very long time. They don't change that often. So it's very different than going after like real estate agents, which is like changing all the time. And very, very different type of market there.

• 24:56Speaker 01

  Yeah, they're much more just local institution that works with all the real estate agents in that area. There are 15,000 to 20,000 title agents in the country. So it's not like it's a super concentrated market either. At least at the agent level, you have a ton of different people doing this business. You do often see real estate agents, builders and lenders starting new title companies.

• 25:19Auren Hoffman?

  Okay, so it does happen.

• 25:21Speaker 01

  Yeah, I would say maybe in aggregate, there's like a 5%, maybe 3% going out of business rate across the entire industry. So you do see some turnover where the total size is roughly constant.

• 25:33Auren Hoffman?

  But that's still 3% to 5% a year. A restaurant would be something like probably 12% to 15% a year or even higher. You're dealing with a fairly sticky, especially when you talk about, these are mostly small businesses. For small businesses, it's very, very, very sticky.

• 25:48Speaker 01

  Unlike a restaurant, there's not as much in terms of hard costs. So you can scale up and down a bit better. An interesting stat is today, there's less than 4 million home purchases happening a year. In 2021, there were almost 7 million home purchases in that year.

• 26:06Auren Hoffman?

  Almost 100% more or 70% more purchases. It's totally, totally what there is today. I didn't realize it was that dramatic. Is it because of the rates?

• 26:14Speaker 01

  Yeah, it's rates. And there were a similar number of refis too, even a little bit more. And so if you look today, you're talking about 5 million between purchase and the small number of refis that are happening today and 15 million units three, four years ago. A lot of people don't appreciate how dramatic the swing has been over the last three, four years. In all these transactional real estate businesses, they just got crushed because volume went down by two thirds. And so it's been hard for a lot of them to keep moving and growing through that.

• 26:51Auren Hoffman?

  We're still all eating burritos at a similar rate than we were before. That doesn't change. Okay, that's interesting too. I didn't appreciate that. You've got a side hustle of creating an incubator. I'm super fascinated with incubators. Before you started and helped start Fractal, did you go into the history of other incubators? Did you start to look at, here's the ones that have been successful, here's ones that haven't been successful?

• 27:15Speaker 01

  I think across the board, incubators are not that successful. And I think the reason for it is they have very wide focus and not like a very specific mandate. And the businesses they're starting are not highly similar to one another. And so what Fractal did was basically say, we're going to build a company like Qualia, but in Every single one of these niche markets that look somewhat similar. Think rehab clinic software, scrapyard software, this type of stuff where there's money flowing around, boring back office workflow, at least that's how people think about it in tech. But in reality, there's like a very complicated industry that has a ton of value in it,

• 28:00Speaker 01

  that you can actually go build better tools for people. And then taking the same philosophy of building a platform, not a feature, building network effects, building tools to help people, going into market where there's a lot of principal agent problems in the distribution channel, where you have just complex needs, local regulations, state regulation that you help people deal with. And oftentimes you start in these niches, you build something and then it's like, oh, there's an opportunity to layer that next incremental product offering. And I think we've, as an industry, been learning that vertical SaaS, we can just keep doing this and doing this. And so, yeah, that's been an interesting build.

• 28:41Auren Hoffman?

  Two incubators that have been successful that come to mind that are like that, not exactly that niche, but flagship pioneering, they started Moderna. They've very much been very, very, very focused in that biotech world. And some of that's very expensive, seeing like labs and other types of things there. And they've been able to stamp out some super successful companies because they've been like very, very, very narrow in their focus.

• 29:07Speaker 01

  I used to work at ABC as well, which has this very successful similar type of program. It is interesting, there's always this tension between do you build a bunch more businesses in a particular niche? Or are you building five businesses a year that are Moderna? If you can do that, that's a great outcome. Our view is that vertical SaaS today looks a lot more like a construction project in terms of risk profile than it did 20 years ago, where it looked like a fundamental technology question. People know what you need to do, you need to build this workflow platform, you need to build a layer, layers on top, embed fintech stuff, consumer portal, client portal, marketplace. We have all that stuff and that's the playbook now. And so we felt like you can kind of reproduce that in other areas.

• 29:53Auren Hoffman?

  Do you remember this incubator Light Bank, which was around like 20 years ago in Chicago? They got really good at selling to small and medium sized businesses. They just figured out, okay, here's how you create a sales team to sell to these folks. And then let's start random businesses. They started like an office supply business that sold to them. They had multiple companies that went public. Eventually, one of the companies they started was Groupon, which was basically just selling to local restaurants and stuff. For whatever reason, didn't have a flagship pioneering. But part of the problem with them is that well, Groupon just became so successful that I think it just kind of ended up eating the incubator. And CEO of the incubator ended up becoming the CEO of Groupon.

• 30:35Speaker 01

  That's definitely a challenge. In our case, it's a lot of different businesses, a lot of vertical SaaS companies. They all have dedicated CEOs, CTOs, outside capital investors. So it's a little bit less that centrally managed style. A bit easier to scale just in terms of count of companies.

• 30:52Auren Hoffman?

  You're almost the classic, we always talk about these dual threat CEOs. You're running a company full time, but on the side, you're also a creator, investor, et cetera. How does one help you do the other?

• 31:04Speaker 01

  Qualia basically is the quintessential vertical SaaS company. I love the Tidemark materials. I don't know if you read that. Dave Dwan's Vertical SaaS Knowledge Project is incredible.

• 31:15Auren Hoffman?

  He's a super sharp guy.

• 31:17Speaker 01

  We're basically trying to do all the stuff they talk about. Integrate through the value chain, consumer vision products, vendor marketplace, financing, embedded fintech offerings. I think figuring out how to build that layer cake is the essential question of building a successful vertical SaaS company. Having the discipline to stay super focused on the thing at hand rather than chasing other end markets, which I have done previously many times. And it generally doesn't work. Just stay super focused on that customer. There's a conventional piece of wisdom that people give, which is, I think it's from zero to one, where they say you should go after markets that don't have competition. You should go find

• 31:59Speaker 01

  the super niche thing. I disagree with that pretty strongly. I think you should, particularly in vertical SaaS, try to go after markets where there are strong incumbents. If there's no software in a B2B setting, it's probably the case that people don't value it and that they don't need it. That's another thing that we've learned through this process is you have to go after markets where there's existing need.

• 32:21Auren Hoffman?

  Interesting. Now, I understand how you being CEO of a vertical SaaS company will make you a better investor and creator of other vertical SaaS businesses. How's the opposite work? How is being creator and investor in other SaaS businesses help you become a better CEO of your company?

• 32:39Speaker 01

  So if you look over the last 12 months in our business, we've grown the fintech banking partnership part of our business tremendously. I was really underappreciating how material that could be previously. And I think spending a lot of time with early-stage founders who are thinking about where they're going to build the ACVs, it made me realize I need to take a much deeper look at this. And it's been a big deal for our company. And I don't think it would have happened otherwise.

• 33:09Auren Hoffman?

  Okay, interesting. A couple of personal questions for you. What is a conspiracy theory that you believe?

• 33:16Speaker 01

  I actually think that homeowners and local policymakers are intentionally keeping home prices high.

• 33:24Auren Hoffman?

  This is like the NIMBY stuff and other types of things?

• 33:27Speaker 01

  It really is. To get to pre-pandemic levels of affordability, and this is from Fannie Mae, so 2016 to 2019 housing affordability, we need one of the following three things to happen or some combination. Incomes would need to go up by 60%. Home prices would have to fall by 38% or mortgage rates would have to fall four and a half points to 2.35% from 6.78% on the average 30 year today.

• 33:56Auren Hoffman?

  Seems like the last one is the easiest one.

• 33:58Speaker 01

  Yeah, but I don't feel like the mortgage rates are about to go to 2.3%. They've actually been going up for the last month. I think people are really mad about housing affordability and very justifiably so. It's gotten so much worse. I think there's obvious policy stuff we could be doing, but people don't want to do it.

• 34:16Auren Hoffman?

  Why don't the rents always follow the buying patterns? It seems like sometimes they're very decoupled what you could rent a house for versus what you could buy a house for.

• 34:26Speaker 01

  I think they generally do follow at some level. In Austin, where I'm at today, as an example, there's a tremendous amount of multifamily coming online. That probably plays into that equation where you can't buy some of these multifamily apartment building units, but there's a ton of units. But I think in general, they do fall at some level.

• 34:46Auren Hoffman?

  In some ways, it's in everyone's best interest to just keep the price high. Or maybe not everybody, but it's a lot of people's best interest to keep the price high. What I don't understand is in many cities, renters significantly outnumber the owners. So I don't understand why an owner wants to keep the price high, but even the owner, like they might not, because a lot of owners want to upgrade. So they want to go from a two bedroom to a three bedroom place. So even they don't always have like the incentive. They want to keep their own price high, but they want to keep the other prices more reasonable. So you really only want to keep the price high if you found your last home, you're never moving again and you're just going to like keep it till you die or something.

• 35:21Speaker 01

  But I think in practice, it's not really how it's played out. Like I think people are usually voting to not put a giant tower up next to their house or to build denser housing.

• 35:32Auren Hoffman?

  That would affect their particular home, but not affect all the homes in the area. And so then they were like, oh, my home will go down by 20%, but all the other homes will still be expensive. So therefore I have worse purchasing power vis a vis other things.

• 35:45Speaker 01

  You're seeing it play out. One other really interesting market stat from the last few years is that the number of homes purchased annually that were built by home builders went from 10 to mid 30s percent of all home sales over the last three, four years. And the reason for that is people don't want to give away their 30-year fixed that they locked in a 2.5% 30-year fixed at. And so there's been a pretty significant change in the composition of home sales as well. If we're easier to continue building, that might help out.

• 36:19Auren Hoffman?

  This is super cool. All right. Last question we ask all of our guests. What conventional wisdom or advice do you think is generally bad advice?

• 36:26Speaker 01

  I think it's bad advice to build software with no competition.

• 36:32Auren Hoffman?

  Competition is your friend in a way.

• 36:34Speaker 01

  Competition is what you want. You just want to be better than the competition. In practice, basically, every company is only good at one thing, maybe two things, and they're just terrible at almost everything else. I remember right when we started Qualia, a massive company, billions of revenue, announced they were doing a project that we thought was competitive with us. And we were like, this is an existential problem. It just wasn't. You need to have an end market where people are clearly voting with the dollars that they have a problem. And if you don't go particularly in a B2B setting, build against to beat existing bad companies, then there's just no chance of actually getting distribution.

• 37:16Auren Hoffman?

  Interesting. Oh, this is great. Thank you, Nate Baker, for joining us at World of DAS. I follow you on LinkedIn. I also follow you in person as well. And I definitely encourage our listeners to engage with you and follow you. This has been a ton of fun.

• 37:30Speaker 01

  Thanks for having me, Orin. A lot of fun.

• 37:33Auren Hoffman?

  If you're a super data nerd, go to worldofdas.com. That's D-A-A-S, worldofdas.com, and sign up for our weekly data as a service roundup newsletter. Thanks for listening. If you enjoyed the show, consider reading this podcast and leaving a review. For more World of DAS, and DAS is D-A-A-S, you can subscribe on Spotify or Apple Podcasts or anywhere you get your podcasts. And also check out YouTube for videos. You can find me at Twitter at Auren, that's A-U-R-E-N, Auren, and we'd love to hear from you. World of DAS is brought to you by Safegraph. Safegraph is geospatial data for physical

• 38:15Auren Hoffman?

  places. Check it out at safegraph.com. And by Flex Capital. Flex Capital invests in data companies like those we talk about at World of DAS. Check it out at flexcapital.com.