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

My guest this week is Alexis Rivas. Alexis is the co-founder and CEO of Cover, which is pioneering a new way of building homes. It’s no surprise to anyone that aspects of our housing market is broken. The market is undersupplied and littered with regulatory issues. The homebuilding 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 future. Please enjoy my conversation with Alexis Rivas. Listen to Founders Podcast Founders Episode 136 - Estee Lauder Founders Episode 288 - Ralph Lauren For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus. Tegus is the modern research platform for leading investors. Stretch your research budget with flexible expert calls you can trust. At a fraction of the cost of traditional expert networks, Tegus customers pay only what an expert charges – with zero markups and no confusing call credits – netting an average 70% savings. Don’t want to conduct a full hour call? Tegus offers the ability to schedule 30-minutes, an offer you won’t find anywhere else. And they don’t stop there. With white-glove custom sourcing for every project and robust compliance measures, including a dedicated 50+ analyst team that vets every call transcript, Tegus ensures your privacy and protection. For a limited time, you can trial Tegus for free by visiting tegus.co/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes (00:03:39) - (First question) - Supply and demand situation writ large for housing in the United States (00:06:34) - Lack of workforce growth to meet housing development needs (00:10:23) - Insight into “lego piece” style construction (00:11:41) - The comparison to automotive manufacturing (00:16:15) - Strategic description of a good “lego piece” from Cover (00:20:08) - Utility continuity comparison between panels versus tradition construction (00:21:05) - Potential criticism from skeptical contractors (00:22:53) - The marginal cost for a typical home buyer (00:25:59) - The role of software in the business (00:28:47) - Insight into support model and “The Last Mile” theory in construction and possible solutions to combat errors during assembly (00:30:46) - Support system integration for inevitable repairs (00:32:17) - The changing reality of initial ideas as projects are completed (00:34:27) - Building factories and streamlining production logistics (00:37:28) - Focusing on constraints and an example relatable to real life scenarios (00:38:37) - The value of moving slow to perfect processes early on versus an all in head first approach (00:40:09) - The scope of ambition over the next several decades (00:41:18) - The evolution of homes and how they could change based of consumer wants (00:43:37) - Vertical capabilities of cover panels (00:43:21) - Types of panels that could be introduced moving forward (00:45:14) - Timeline for Cover expansion into new states (00:46:06) - Advice for upcoming entrepreneurs when building similar business models (00:47:58) - The kindest thing that anyone has ever done for Alexis

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

• 0:00Patrick O'Shaughnessy?

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• 0:35Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal 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 joincolossus.com.

• 1:00Speaker 01

  Patrick O'Neal is the CEO and founding partner of Positive Sum and the CEO of O'Neal 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'Neal 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'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:32Patrick O'Shaughnessy?

  My guest today is Alexis Rivas. Alexis is the co-founder and CEO of Cover, which is pioneering a new way of building homes. 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.

• 2:14Patrick O'Shaughnessy?

  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. When you approach this market, which is obviously enormous and this problem, what stands out to you after your many years of investigating it?

• 2:47Speaker 02

  There's like a 5 million home shortage in the United States. So that's just a huge number. And then on top of that, 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 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. You 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 going to have a lot of debt. On top of that, you add the fact that the construction workforce is aging and dwindling. The average is around 45, which is really older than it's ever been.

• 3:33Speaker 02

  That's a kind of scary situation because 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.

• 3:45Patrick O'Shaughnessy?

  If I think about the 5 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 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?

• 4:09Speaker 02

  There is also a regulatory component to this where to make it specific in, let's say, Los Angeles or in California, you have very restrictive zoning and it's very difficult and time consuming and expensive to get large new projects built with 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. 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 is specifically a very pronounced problem and that's partially on the regulatory side. So in some ways, it is a problem that local cities and states have the ability to solve from a regulatory standpoint. And then of

• 4:54Speaker 02

  course, once the regulatory side is solved, there's still the construction side and the question like, how are you actually going to 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.

• 5:09Patrick O'Shaughnessy?

  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, 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 scene popped to mind, but your comment on the aging workforce of the labor supply side is really interesting. Why is that the case? Because you would think that 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 10 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 force that's made this situation not reach a new equilibrium?

• 5:53Speaker 02

  There's not enough young people going in and saying, you know, I want to be a carpenter. I want to be an electrician. I want to be a plumber or a framer. Part of it is 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 100 years ago than there is today. I think culturally, there's been a very strong shift towards 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 the thing is partially cultural. I mean, even a hundred years ago, it was actually not uncommon for people to just go build their own homes. And you had Sears homes that would be shipped from a catalog and then be, you know, assembled.

• 6:32Speaker 02

  The DIY home that was, you had an instruction set and people would just have some friends over and assemble their homes. I think we've lost a lot of that. I mean, 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, or even a carpenter in terms of how much money you can earn than going to college.

• 7:02Patrick O'Shaughnessy?

  Okay, so let's talk about the potential solution here. And again, I'm going to keep throwing analogies at you just because 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. 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 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.

• 7:41Speaker 02

  Where we see this going is homes being built more like Legos. So you have these blocks, wall panels, floor panels, roof panels that are made in the factory with insulation, with plumbing, with conduits, with waterproofing and even finishes already installed from the factory. Then you ship these on a regular flatbed to the site and you rapidly assemble them. And the key part is like rapidly assembling them on site. I think the factory is where you have the automation. The factory is where you walk in and this looks like an automotive factory, right? We have like robotic arms welding things and it's highly automated mass production. And then you ship them onto the site and that's where people assemble them.

• 8:25Speaker 02

  But they assemble them so quickly that it looks nothing like home building today. I mean, today, just as an example, 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. And the average home in the US actually has 24 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.

• 8:58Patrick O'Shaughnessy?

  If you think about the original insight here, that the way to solve this problem, I think you probably knew coming in that you want to bring more technology, more automation, more scale to this problem where it's not 24 subcontractors, but just as a more standardized process. 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?

• 9:20Speaker 02

  So, growing up, from when I was honestly like seven years old, 10 years old, I loved architecture, design, construction. Like, I drew my first floor plan in grade one. So I was interested in this space. And the more I learned through, you know, working with family and friends that were doing their own renovation projects, their own construction projects, and then through internships and through school, I learned and saw a bunch of mistakes being made. Small mistakes, 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, saw it in Canada, saw it in the United States, and I also saw it in Europe where I had an internship. So I saw these

• 10:04Speaker 02

  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. That's when I started asking the question, why is it like this? At one point, I was thinking about automotive production and cars, and how a car, like a home, 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 than a home, but it's similar. So I was looking at that and realized that a Toyota Camry Was 260 bucks per square foot.

• 10:47Speaker 02

  And I knew of 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. 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 got to be a scale thing, right? There's got to be way more cars built than homes and that would explain it. 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?

• 11:32Speaker 02

  And the more I thought about it, the more building homes in a factory like Cars just 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 worked there, what I realized is that 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 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.

• 12:13Speaker 02

  And 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.

• 12:21Patrick O'Shaughnessy?

  You talk about the materials insights that you've stumbled upon over the years of doing this. You know, there's a lot of two by fours in the prefab 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 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?

• 12:54Speaker 02

  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 is we said, what does the wall need to achieve 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 going to rapidly assemble this and you want the easily serviceable, the resulting materials are completely different from conventional construction. It's not like we said, oh, we want to 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. It doesn't need to be like a hard surface that you can lean against.

• 13:35Speaker 02

  It needs to do well from like a sound standpoint. You don't want a hyper reflective ceiling that's going to ruin the acoustics of a room. Ideally, from an installation standpoint, you want it to be lightweight. You want one or two people to be able to just quickly install it 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. Imagine if every time you had a car trouble, you took a hole saw to the body of your car and like drilled out a hole to like inspect on what's going on inside. 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.

• 14:18Speaker 02

  It sounds absurd to talk about surfacing a car like that, but somehow we've all accepted that that's how homes should be serviced. And we said, there's got to 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. If you want to access all the plumbing or electrical behind it, you can basically just pop it out. It requires some force so that it doesn't pop out if someone's jumping on the roof or during an earthquake. But you can pop it out and see everything behind it and put it back in. You don't need to repaint or respackle anything.

• 14:50Patrick O'Shaughnessy?

  If you think about the Lego piece concept itself, talk through the early learnings and insights there. So you said, okay, we want something that can be sort of mass produced. And I'm sure there's X number of SKUs. 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. But early on, what were you learning about what makes for a good Lego piece? Like, almost at a strategic level?

• 15:16Speaker 02

  I looked pretty thoroughly at the time 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, 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 the Lego block that most of these companies had were these large, basically container, like room-sized Lego blocks where it's an entire room. And the more we researched that, the more we learned that there were a lot of challenges with that. One was just from a factory standpoint, you have this giant room moving through your production line,

• 16:00Speaker 02

  which is hard to move, hard to store, it requires a ton of space. And it looks a lot like conventional construction because you're not going to be rotating an entire 40-foot thing all the time. That'd be very expensive. So access is limited. It's just not an easy way to build in a factory. 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. And when you have room-sized 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-sized panels, you needed a pilot car, basically you need special permits and a pilot car.

• 16:45Speaker 02

  And you could only transport it during certain times of the day because it was often wider than what you could fit on a truck. You know, when you see those trucks with like flags and a front and back, driving down the highway? That's how most of these were transported. 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 to lift it into place. And that crane is like $20,000 a day, which is a lot. That's like 10% of the typical American home. 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 and we said, this is interesting. This is probably not the right sized Lego block. You probably don't want Lego blocks that are entire rooms.

• 17:30Speaker 02

  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 very similarly. There's not a lot of different wall construction. And so we said, well, why don't we standardize that? Why don't we build these wall 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 or thousands of times, and then deliver those to site and assemble them and assemble them to create different homes. So that was the other thing is like, by going to that Lego block, the amount of variety

• 18:12Speaker 02

  in terms of a layout that you can deliver is huge for all practical purposes, infinite amount of customization, despite having the exact same thing leave the factory.

• 18:22Patrick O'Shaughnessy?

  How big are these panels? Just give us a sense of scale for the three types.

• 18:25Speaker 02

  You know, like a wall panel is like six feet by 10 feet roughly, and then we have different sizes, but that's kind of like a typical wall panel. And then floor panels, I mean, they can be five, six feet wide. And then from a length standpoint, it could be five, six feet, or you can go to 30 feet, but you don't need a big crane.

• 18:43Patrick O'Shaughnessy?

  As I think about, again, comparing this to like a 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 water and electricity and all these things can flow through them no matter what? That seems really complicated and hard.

• 19:11Speaker 02

  So early on, that's not what we did. We said, oh, this wall panel is going to have plumbing, so let's add a 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 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.

• 19:40Patrick O'Shaughnessy?

  If there was the world's most talented craftsman, general contractor on the Zoom with us right now, 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 going to keep iterating. You're going to have these panels like here's why this will never be more than 2% of the homes being built, or whatever their criticism would be.

• 20:01Speaker 02

  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, 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 a less than, I'd say 0.5% of homes or maybe even 0.1% of homes are built like this, but where you have an architect, an engineer, a set of really, really incredible craftspeople, and you make really a work of art come true. 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.

• 20:45Speaker 02

  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 someone might say that, but they would be right. Having said that though, we've also built homes on $25 million lots in Los Angeles. And in those cases, the person building it could afford anyone and they chose to go with us because they loved the product and it was really easy. It was way, way less headache. That's the other thing is that even if you want to build something like that, you're going to have to spend a ton of time, hours every week, just seeing that vision through. Whereas with 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.

• 21:28Patrick O'Shaughnessy?

  Can you talk a bit about the area of cost to the buyer on the production side? So I'm curious about margins. I don't know enough about, let's say, the economics of a traditional middle of the road home that's being built in the U.S. 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.

• 21:50Speaker 02

  The median home price in the US is around $430,000. Now that includes land and most of those are in fairly suburban 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 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. 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. That's the approach.

• 22:34Speaker 02

  So when you look at the typical American home, it's about 30% land. So you're looking at in that $430,000 home, you're looking at around $130,000 of that being land. Now, when you go into places that are more expensive, let's say California, that can go to like 50%. Obviously, the price goes up. That's just at a high level, first of all, where you start. What's land? What's construction? And then from there, on the typical home, the breakdown is roughly, I mean, you have the soft costs. So things like permits, engineering fees, architecture fees to get the whole community planned. You have the land development costs. So you have the roads, the sewer network, the electricity network, which is all built by the developer.

• 23:19Speaker 02

  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 when you look at the typical home, it's like labor and materials are both the major cost areas in the typical home. Our focus in terms of how we change that is first moving a lot of the labor into the factory, where you can make it more efficient, you can build tooling and fixtures around it, and then making the onsite installation process really fast to make that labor side significantly less. So that's really the focus. Today, we're starting off with a high-end product. You can use the Tesla analogy, right? We're starting off with the Roadster and we're focusing on relatively low volume.

• 24:04Speaker 02

  And the reason for that is you can iterate quickly, you can learn quickly. You don't have to make massive investment in hundreds of millions of dollars of automation. And then as we ramp production and as we iterate on the product and lower the price and set up the supply chains, we make it available to everyone and we drive down the price. So that's the approach that we're taking from a strategy standpoint because it's really hard to just start off with a mass market price product when you're small. You kind of have to start with something high-end where you can make a margin and then lower the cost over time.

• 24:34Patrick O'Shaughnessy?

  What is the role of software in the business? Obviously, there's an incredible physical component to what you're doing. I want to talk about what the factory looks like in a second here, but I'm sure that there's a really important software layer to all this. And that there's probably a lot of things in the future that will be this interesting combination of material science, production innovation, software and technology layered throughout. Like this is a microcosm of a bigger trend. So what have you learned about thoughtfully integrating and building software into this process?

• 25:03Speaker 02

  So our vision for this from day one was always customization in a way that actually scales. How do we compete not with other prefab companies that have five models? How do we compete with your local general contractor who can build whatever you want from a layout standpoint? So we have these standardized panels, but then there's a question of, well, how do you combine these panels to make a home? And then does that home overall perform the way it needs to? So how do you generate those designs? So that's where the software comes in. With conventional construction, you come up with a floor plan, you go and show that to an engineer. They come back with feedback, oh, this span is too big, or you can do this, but it's going to require this steel I-beam that's going to add $10,000 of cost to the project.

• 25:46Speaker 02

  If you go five feet smaller, you don't need that anymore. So there's this kind of value engineering that is part of the conventional construction process, but with very slow iteration cycles. You have multiple consultants basically interacting with each other. What we've done is we've taken the information about our panels. Panels, the structural information as an example, and codified the rules around those. So you can combine this number of panels for this span in this seismic zone. So we've put all of this information to software and we can generate a design that we know works structurally without having to do pages and pages of calculations manually.

• 26:28Speaker 02

  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. The Lego bricks are preset. There's a fixed set of Lego bricks, but what we're trying to do is make different sets, different Lego sets for each person. Based on their property, based on their needs, their preferences, their budget. What our software does is it takes the Legos and it intelligently assembles them into sets. And it checks that those sets will fit together well, will perform nicely, will have good energy efficiency, will be structurally sound. And then it generates the permit sets for those Lego sets. All the permit drawings are the engineering drawings that even flows down into the production line. All the information that's needed to actually go and build these.

• 27:13Speaker 02

  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.

• 27:21Patrick O'Shaughnessy?

  How do you think about the support model? Or I'm going to lump together two things that popped in mind, the support model and what I'll call like the last mile problem where I've been through this in construction where you get to stuff and there's just like some final little things that need to get customized. And you can do them at the edges, whereas if 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. 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 call a handyman or something like you need someone probably that specializes in this product.

• 28:04Patrick O'Shaughnessy?

  So how do you think about those two potential issues for the company and the product as it scales?

• 28:09Speaker 02

  On the last mile thing, you're right. Like Legos, if you're missing something, you're kind of screwed. So basically we've spent a lot of time, a lot of time. And this is a lot of the headaches early on, basically making sure that we're not missing anything. That the parts are fully engineered and that they will fit together when they show up on site. Otherwise, you're doing all this work in the factory, then you have to go on site, undo all of this work in the factory, fix it, which is way less efficient than conventional construction. That's way, that's what makes this really hard. With conventional construction, you can show up on site and just start trimming things. Maybe things are slightly off in terms of dimensions,

• 28:49Speaker 02

  but you can sand them down, you can trim them, you can fill it in with spackle. And at the end of the day, the home still looks great and works. With us, these panels are these big, not easily modifiable panels that get installed and assembled quickly. But if they don't fit together, that's a real problem. You have to just solve that upstream with the engineering and then the production. It's one thing to have the right panel dimensions on the drawing. It's another thing to actually have those made consistently every time the right way. The manufacturing side of this is very difficult, too.

• 29:21Patrick O'Shaughnessy?

  On the support side, how do you think that will work? Like inevitably something's going to break, a pipe's going to 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 service these homes, I guess, over time?

• 29:37Speaker 02

  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. 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 be able to quickly turn it off, just like they would in a conventional home and then go fix the pipe under the sink. But there's other things from a service standpoint that are more unusual. In most cases, a skilled repairman or general contractor could go and look at this and figure it out. They would, they'd first be taken aback and say like, what's going on? But from a business standpoint, we look at this as an opportunity to get the follow the product past just the handoff point. So we actually, today, we're the first point of contact that our customers call if there's ever an issue and we go out and solve it.

• 30:23Speaker 02

  It's possible for others to solve it, but we actually want to solve it because that way we can learn about how did this happen? Was it something in terms of how it was used? We had a case where someone tried to break into a They didn't get in successfully, but we saw kind of how they had tried to do that. And the door was somewhat 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 go root closet and say, how can we make the product even better?

• 30:51Patrick O'Shaughnessy?

  As you think about now, starting to really have this concept and product meet with real demand and real reality. And I know you're starting to get up there in terms of the number of these things that have been manufactured and installed. This isn't just an MVP product anymore. What are the most interesting things you're learning about the way this works in reality? Whether that's some quirk of customer demand or things they love more than you expected, or hate and yet to change, or unforeseen problems. Once the plan encounters reality, things morph. And so what's been morphing for you?

• 31:26Speaker 02

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

• 32:09Speaker 02

  So we were surprised that actually that was very well received and people really didn't care as long as it was good quality. And on the other side of things, one of the things that's been surprising as this has hit reality is the reality of manufacturing. Going from the idea and, you know, this design and turning that into something real in terms of production, in terms of delivering it. That's probably been the biggest learning. That is remarkably difficult to do. Even things as simple as keeping track of all the parts throughout your process so you don't lose anything. These homes have more than 10,000 parts that go into them. You need all 10,000 to build the home. If you're missing one, that's a three hour delay right there or more, depending on what the part is.

• 32:53Speaker 02

  Three hours at best is what that is. The reality of managing all of that, that's probably been the biggest surprise.

• 33:02Patrick O'Shaughnessy?

  What about factory building? You've mentioned a few times that the perfect version of this story includes parts that are designed to be manufactured well, which is kind of an interesting concept. What does that mean in terms of factory construction logistics? What have you learned there? It sounds like a stupid, basic question, but you just don't meet that many people that are like building factories anymore. So I'm curious what you've learned about it.

• 33:26Speaker 02

  That part thing that I mentioned, that totally applies to the factory too. It's actually more difficult in the factory because you do have parts from multiple homes in there at the same time. Sometimes you might make a mistake and as a result you have to scrap a part. And you need to know that because if you don't, you're going to think you have that part for the next home. And really you've taken it off the shelf and you've used it for the home before it because you've scrapped it. That's a simple example, just tracking. This is not a novel problem for us. Every factory has this problem. It seems simple, but that's like one thing. You've got to build the right culture in the factory. The culture of keeping the workstations clean, making sure that everything is in its place. Everything has a place and it's in its place. We know where all the tools are. These things actually really add up.

• 34:08Speaker 02

  If this operation requires some drilled bit and that drilled bit goes missing because someone went 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, there's a theory of having it set up. And then there's the practice and the culture on the production floor where everyone understands why things need to be done this way and why this part quality matters. That's probably the part that has taken the longest and. We've seen really as we've repeated and built more and more of these, we've significantly improved the speed, but also the quality. This is actually the other counterintuitive thing. Initially, we thought, oh, you know, moving faster would result in lower quality.

• 34:48Speaker 02

  What we learned was that the things that you need to do to move faster are the same things that you need to do to improve the quality, which is standardized and make the process better. So the faster we build, we've learned that quality actually gets even better.

• 35:02Patrick O'Shaughnessy?

  I'm sure you've done tons of studying of philosophies of manufacturing, whether it's Toyota's lean production or something else. What stands out from those learnings and those studies and the way that people have solved these problems in the past? This is like a philosophy question.

• 35:15Speaker 02

  The single most influential manufacturing philosophy has been like theory of constraints. The goal, the class book, the goal.

• 35:23Patrick O'Shaughnessy?

  Can you describe that just for those that aren't familiar?

• 35:26Speaker 02

  It's written as a novel of this story of this plant manager and the plant was about to fail. They weren't delivering good product on time or probably. And then it kind of goes through the transformation journey where there was this professor that taught him how to do manufacturing and remove constraints in the system. And then they'd succeed. So that's the novel, but it's really around this idea that you need to focus on where your constraint is and remove that constraint. And really understand that because when you're focusing on anything other than that, we're really not moving the needle at all. This is always important, but like what you work on is far more important than how well you get it done.

• 36:03Patrick O'Shaughnessy?

  Can you give an example of that? Cause the way that sounds is in a manufacturing process, when you want to maximize output and quality, you always want to zoom in on the thing that is most limiting. The pace of output and quality, almost like a weakest link analysis or something. Is that right? And can you give an example of you actually doing that with cover?

• 36:20Speaker 02

  That's totally right. As an example, early on, we're trying to build more and more homes and go faster. And things in the factory were on and off. It would build a bunch of things quickly and then all of a sudden, you know, they didn't have what they needed to get their work done. And what we realized was the bottleneck wasn't even in the factory. It was in the information going to the factory. They didn't have the information that they needed to build what they need to build. So they didn't know what parts need to go in to what panels and how many of them were needed for each project. The constraint isn't even always in the factory. So we realized like, okay, let's put people on this immediately and do it manually. And then after we were doing it manually, and this was taking quite a bit of time,

• 37:00Speaker 02

  we focused our software engineering team's resources on automating a lot of this so that they could get this information automatically. It would be even more accurate and they'd get it well ahead of time. So that would not be the constraint. That's one example.

• 37:12Patrick O'Shaughnessy?

  If you think about the value of moving slow to perfect some of these processes early on versus I have no idea what your latent demand is. Like if you just said, we're just going to go for max number of homes versus some other measure of success early on. How do you weigh those two things in your mind?

• 37:32Speaker 02

  As long as the constraint is not on site where these are being assembled, that works. If the constraint is being on site, it is way more difficult to solve that because that requires meaningful product changes. So then your constraint is effectively your product. So you want to get the product right before you go and start scaling these. You want your constraint to be in the factory. If the constraint's in the factory, that's a well-known problem. How do you remove constraints in a factory? It's not easy, but thousands of companies have done it successfully over centuries. That's really the focus is making sure that the onsite install time comes down. And just to be concrete, that has been a lot of our focus. And we took it down from 120 days a couple of years ago down to 60 and then 30 days. And that was with a bigger team.

• 38:14Speaker 02

  And then we took it from 30 days with 15 people to 30 days with six people. We're just continuously focused on making the onsite install process easier and easier. Because if you kind of go back to the automotive analogy, the onsite assembly is our automotive equivalent of a general assembly line, where all the different car parts come together and like finally get turned into the home. For us, that doesn't happen in our factory. That happens onsite. So that needs to be incredibly efficient first because you don't want that to be the constraint. Once that's not the constraint, then you focus on the factory.

• 38:44Patrick O'Shaughnessy?

  Can you maybe describe the scope of your ambition? When you think about what success or failure will constitute over the next, you've been doing it since you were seven years old. I assume you're going to do it for a long time. Over the next several decades, what does success and or failure mean? From where you sit today, based on what you know?

• 39:02Speaker 02

  Today, 98% of homes are built conventionally. And about 2% are built with prefab. Success is when we flip that. When most homes are built this way, and as a result, they're significantly higher quality. It's not just about making homes cheaper or faster. These are very modern, really high-end homes, like the kind of details and finishes that you would expect in like a $10 million home. Is what we're building in, right? Like motorized shades that retract into the ceiling. Really nice stuff. We see a future where that's available to everyone. The quality of the typical mass-produced American home, and really just a home anywhere in the world, is significantly higher than it is today. It's a much easier process.

• 39:47Speaker 02

  You don't need three years to build a hundred home community or 200 home community. This can be done in a few months.

• 39:53Patrick O'Shaughnessy?

  One of the cool things is that you're operating at the bottom of Maslow's hierarchy of needs. Shelter is just one of these basic, biggest things that we think about as a species. What do you think about the evolution of the jobs to be done in a home? I've not thought of until just now that the homes you're building probably have the same functions as all the other homes that everyone else builds. They've got a kitchen, some bathrooms, some bedrooms, maybe an office. Do you think that that will change much as a result of your activity? Are you finding different wants and needs from consumers for what their home does for them? That could maybe even get unlocked by this style of building?

• 40:29Speaker 02

  I do think that the biggest thing that this way of building enables that is different is today, people think of their homes as a very permanent thing. They don't want to change. Often, if people are running out of space in their home, they sell their home and they move into a new home because that's so much easier than doing an addition or a renovation or rebuilding it from the ground up. The future that we're building is one where you can start off with your one-bedroom home with an office, let's say. And then as a family grows, you can literally just order bedrooms as you need them. It doesn't need to be this one-off, big. Thing that you kind of have to honestly waste money on before you need it.

• 41:15Speaker 02

  A couple doesn't need, in most cases, a four bedroom home. And most people would prefer not to from a cost standpoint. But the cost of moving is so high that they kind of like upsized for like five years down the road. With our way of building, these are panels that just like they're quick to assemble. They're actually fairly quick to disassemble too. So if you want to add an extra bedroom, you can do that and you can do that way more easily. They're Lego panels, so you can just remove a few panels, attach new panels, grow the home. And to start horizontally, but you can also grow vertically too. Like, 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. That ability to rapidly change homes and then eventually cities.

• 41:59Speaker 02

  I think that's probably the biggest thing that will change. And then the other way around, kids move out, you don't need as much space. You can go sell those panels. There'll be a secondary market where someone will go buy used cover panels and build their home.

• 42:12Patrick O'Shaughnessy?

  Do these things grow up well? Could you imagine? You mentioned cities there, which right away makes me think of much taller, multi-story buildings. What is the vertical capability of cover panels?

• 42:23Speaker 02

  Up to around four to six stories. They work really well, which is more than 90% of construction. Today, we're not building multi-story structures. We're really focused, but from a structural standpoint and from a panel standpoint.

• 42:36Patrick O'Shaughnessy?

  You intend to, like at some point in the future, you'll have multi-story homes.

• 42:39Speaker 02

  Yeah.

• 42:40Patrick O'Shaughnessy?

  And as you think about the same idea of build parts that are built to be manufactured well. Is the same true on the business side? How do you think about making sure that these panels are economic? That there's some capital efficiency in the business? I'm curious how you funded it to this point because it sounds just like an expensive proposition to get things going, get up and running. Are you designing everything with the business and cash flow in mind as well? And if so, how?

• 43:06Speaker 02

  Yeah, I kind of went through an evolution, right? When we started off, we just learned how to build something that works. And then it involves like adding more to that. What does that works mean? So let's make it work, let's make it look nice, then let's make it functional, well, be super energy efficient. Now let's make it economical to build and faster to build. We've gone through this iteration process. Most of the time, when you focus on the manufacturability and making it easy to build. For the most part, if you pay attention to what the materials are, then you're making smart material cost trade offs. The numbers work. You just really have to pay attention to the material costs and then making it easy to build.

• 43:40Patrick O'Shaughnessy?

  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?

• 43:50Speaker 02

  I really love sunlight. I would love a skylight cover panel. From a focus standpoint, I know that's not coming soon and that's fine. But especially if you have a room that has like north facing windows that wouldn't normally get direct light, a skylight can be really nice.

• 44:04Patrick O'Shaughnessy?

  Is there anything else you've learned about just the world of housing and manufacturing and all this stuff that we've talked about? That you found most surprising that you think people might be interested in?

• 44:16Speaker 02

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

• 44:56Speaker 02

  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 that knows how to build a home. That was actually not immediately obvious to us from the beginning. And now most of our team is not from the construction and architecture industry. It's mostly from consumer products, SpaceX, Tesla. We've got someone that had experience at Keurig, also construction. We've got one of the world's top structural engineers. He was like the lead structural engineer for the Apple campus in Cupertino. But the role of the people from outside the construction industry was not immediately obvious to us, but in retrospect, looks really obvious.

• 45:33Patrick O'Shaughnessy?

  As you think about the way that this will roll out, you mentioned you're only in Los Angeles. When do you think me out in the East Coast or near other major cities? What do you think the timeline is for when covers will be available to those of us not in the LA area?

• 45:48Speaker 02

  Expansion is truly a couple of years out. I'm not going to say to East Coast, but expansion beyond LA is a couple of years out because this isn't the type of product where you want to expand and build like five or 10 or 20 even in one city. Every city that we expand into, we want to be building at least 100 or like in that region within a two hour drive, at least 100 a year. As you expand, you basically want to just fill your pipeline and you're likely to be basically production constrained. Your expansion will largely be limited by like how fast you can grow the factory as you go and expand into each place.

• 46:25Patrick O'Shaughnessy?

  Any advice that you would give entrepreneurs or 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 is very different. It's more complex, it's harder. What have you learned about that reality and pitching investors and working with investors?

• 46:49Speaker 02

  The biggest thing is to develop a really, really clear understanding of what drives the business at a truly in-depth level? And what that roadmap to success looks like on your own? And then figure out a way to communicate that to investors clearly. Otherwise they will kind of overlay their own projection and their own idea of what that should look like, which in most cases is wrong because they haven't spent as much time in your specific space. That's probably the most important thing is 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. That's where we're going. We're not cranking out thousands of these.

• 47:31Speaker 02

  The reason for that is that we've been very kind of clear around there are certain technical and operational milestones and efficiency milestones that we want to hit before we scale. And that will allow us to scale at an incredible rate. But we have to hit those first because if you try to scale with something that is not ready to scale, it won't work. And if it does work, it won't work nearly as well as if you actually scale something that is ready to scale. And we've developed those milestones, shared them internally and with our investors and are working towards that path. 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

• 48:13Speaker 02

  that versus a generic set of startup metrics that may not apply.

• 48:17Patrick O'Shaughnessy?

  Yeah, I love that as closing advice. Such an interesting space that you're building in literally. I can't wait to see how this unfolds in the years to come. I ask everyone the same traditional closing question. What's the kindest thing that anyone's ever done for you?

• 48:30Speaker 02

  I won't name them. This is a very, very successful investor. Came to our factory for the first time and spent about three hours with us and basically really challenged our roadmap. Kept asking why, like why? And you know, if something didn't make sense to him or didn't seem completely solid, kept digging. And we came out of that three hour conversation realizing that we were like super far off, but we were far off enough that we readjusted the course of the company out of that three hour conversation. It was a very, not heated, but it was like passionate. He really cared. It was like this intellectual vigor and we changed how we engineered, how we designed, how we planned based on

• 49:14Speaker 02

  that three hour conversation. And I think for a lot of investors, those kinds of conversations are difficult to have. It was, you know, somewhat uncomfortable. Honestly, we hadn't experienced something quite like that before, but it was awesome. It was very generous of his energy and time. That was really quite an important moment for cover.

• 49:35Patrick O'Shaughnessy?

  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.

• 49:40Speaker 02

  Thank you, Patrick, for having me.

• 49:42Patrick O'Shaughnessy?

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