What’s the best way to build a house? For years, the answer has been to send an endless stream of
people to a build site for basically a full year. But now, home construction is moving
into factories and the entire process is about to get a whole lot more efficient.
Prefab housing is nothing new though and it’s actually falling in popularity. In 1958,
10% of new homes were prefabs, but that number has shrunk to just 2% today. Looking at the data,
you would be crazy to think that investing in a prefab home builder would be a good idea,
but there’s something weird going on here. Three of Elon Musk’s early investors, Gigafund, Valor
Equity Partners, and Founders Fund just poured $60 million dollars into a prefab home builder
by the name of Cover. So what do they know about prefab home building that the rest of us don’t?
All three of those firms worked with Elon on SpaceX, so it seems like something structural must
be changing in the homebuilding market to finally unlock some disruptive opportunities. In order
to get to the bottom of this, I called up Alexis Rivas, the founder and CEO of Cover and arranged
to meet him in Silverlake to sit down for a chat. As we talked, I realized that his entire strategy
for disrupting the homebuilding industry can be summed up in 3 broadly applicable ideas. Let’s
start with what his company does: “I’m Alexis and I started Cover to fix homebuilding. Cover
is redesigning the entire homebuilding process from the ground up. We design, we engineer,
we permit, we manufacture, and we install homes.” Even though Cover takes a full-stack approach,
the product they sell is pretty straightforward. It’s a small, but well designed building that
fits right in your backyard. Although you could live in a Cover unit full time,
they’re most often used as guest houses, studio spaces, or rental units. And funnily enough Alexis
actually lives in a unit that his company recently built, which goes to show you how much he stands
by his product. But you’re probably thinking to yourself, backyard homes are such a niche product,
how is this going to revolutionize housing? That’s a good question, and there are a few good answers.
First, it’s always a good plan to start small when you’re building a new startup. Before SpaceX could
build Starship, they had to build the Falcon 1. And before Tesla could ship the Model 3,
they had to build the Roadster. By focusing on smaller, backyard homes, Alexis and his team
have been able to tune their production lines for maximum efficiency. And this is one of the
key reasons why Alexis has been so successful with Cover: he has a huge vision, but he started small.
There’s another reason why this initial strategy is working so well for Cover though. They operate
in California, and California has a unique set of regulations that make it incredibly easy to build
these types of structures. “There are California state laws that were passed that allow you to
build a backyard home on any property. If you have a single-family home in California, you can build
at least an 800 square foot backyard home if you have the physical space. As long as you
have the physical space, you’re allowed to build that.” Some of the biggest startups of the past
decade have been built by taking advantage of new regulations and underutilized assets. AirBnB
obviously helps homeowners get more value out of the square footage they already have, and Cover
just helps homeowners add more square footage. And this isn’t even an unregulated gray area like the
ridesharing market was 10 years ago. The State of California wants to encourage more building, and
passed new laws to make it happen. California, and particularly Los Angeles, has been in a massive
housing crisis for years now. In 1960, Los Angeles was zoned to hold up to 10 million residents,
but by 1990, the city had capacity for just under 4 million people. High rents, congested roads,
and homelessness can all be traced back in some part to the difficulty of building new housing,
but fortunately that’s changing. Now obviously Cover isn’t going to solve everything overnight,
but their approach is worth paying attention to, because it’s incredibly scalable. “All these other
products: cars, furniture, our computers, they are all made in a factory. And because they are
made in a factory, they are abundantly available, high quality, low cost. And that’s where I said
“why aren’t homes built that way”. So I actually went to work for a pre-fab home company, thinking
that they had the solution to the problem, and what I learned was that, yes, they were building
homes in a factory, but they had basically just taken the conventional construction process and
moved that exact same process into the factory.” In order to understand what Cover is doing,
and how it’s different from typical prefab homebuilding, we need to talk about the different
types of pre-fabs. First is what they call “manufactured homes” and this is what Alexis was
talking about. The house is built using completely conventional techniques and then it’s just
shipped to a plot of land and dropped down on a foundation. This has a number of problems though,
mainly actually shipping the massive home once it’s built. Delivery requires a massive
flat-bed truck that can only drive on designated roads. Most residential streets in Los Angeles
are far too narrow and windy for this to be an option. Additionally, the main benefit
of this construction technique is that there are no weather delays while you’re building,
since everyone is working in a big warehouse. But LA only gets a few days of rain per year.
The second type of prefab home is actually just a mobile home, but there are a number
of problems with this approach as well. Because mobile homes are technically vehicles,
they have to adhere to motor vehicle regulations which adds an additional layer of complexity.
Even though some mobile homes are incredibly well built, they just can’t deliver a high level of
quality that matches most free-standing homes. Alexis passed on both of those strategies before
settling on Cover’s ultimate solution. It’s called “panelized housing” and, if I’m being honest,
it’s basically just like legos. Individual panels are built in the Cover factory and then easily
assembled at the build site. This approach solves all of the aforementioned problems. Since Cover is
just shipping panels to the build site, they don’t need to worry about narrow streets. Honestly, it’s
incredible that they were able to build this unit where they did. Just flying my drone around to
film the place was hard enough, it would clearly be impossible to deliver a fully-constructed
house. Panels are clearly the only viable option. And because Cover is focused on building these
modular panels, they can sink tons of time and resources into designing the perfect panel,
which will then be used on all future projects. They can also organize their entire factory to
produce these panels at scale with precision and efficiency, which drives down the cost.
Customers can still choose different layouts for their particular unit, but the vast majority of
the work is already optimized before the project even starts. “At a high level there's kind of
two key parts, we’re building homes more like how cars are built, right, on a production line. But
unlike cars, every property is unique, people have very different ways of living, right some people
want 2 bedrooms and an office. There are just a lot of different ways to configure a home. So
customization plays a much bigger role in homebuilding than in most mass produced
products. And so we looked at that and we said, most of the other companies that were trying to
solve this problem they basically had a model approach, where you had 10 layouts and you had
to pick one. Whereas we said, no, we’re going to develop the ability to do custom in a way that
scales. And so there’s the production line part of it, but there’s also the software part of it. And
that software part of it enables the customization at scale.” All this has let Cover cut their build
time dramatically, especially when compared to traditional building methods. “This structure
was built in 33 days, 18 months ago we were building these in 120 days. We took our install
time from 120 days down to 30 days” But build time actually isn’t the most compelling thing
about Cover though, it’s the pricing transparency. It’s pretty much common knowledge that anytime you
try to build anything, there are going to be cost overruns. Whether you're building something from
scratch, or just remodeling, most contractors will under-quote you in order to win the job
and then slowly let the cost creep up throughout the project. When you’re halfway through,
you’re unlikely to stop just because the cost went up, but the fear of cost overruns
stops a lot of people from even trying to build in the first place. And this is the biggest
pain-point that Cover alleviates for customers, they take all the guesswork out of budgeting.
Once customers fill out a simple form on the Cover website, data about the property is automatically
analyzed to determine what can be built. If things look good, the Cover team then starts
to work with the customer to figure out exactly what they want. And even though the Cover units
are highly customizable, the prices they quote are solid: “When we show you your custom designs,
right, before you buy it, we actually know exactly how those are going to be built down to the bolt
and that’s because we have software that does full 3D models, we know exactly how much each
part costs. And so we can give you a guaranteed up-front price. Kind of like buying clothes or
furniture, you just know what it’s going to cost you.” This cuts to the core of why Cover is so
interesting to me. It’s super common for people to think that they should absolutely maximize
around a single feature of their business, like creating the most customizable house possible,
or conversely, creating the most standardized house possible. In reality, the best strategy
is often somewhere in the middle. Alexis focuses on delivering just enough customizability to keep
customers happy, while standardizing everything that no one cares about, like how pipes and wires
are laid out inside of walls. Shipping container homes are the worst offender when it comes to this
over-standardization mentality, but they still get a ton of attention, so we need to talk about why
they are so flawed. On paper, it sounds great: instead of building the external structure from
scratch, you can just buy a used shipping container and start making modifications.
In practice though, shipping container homes come with a ton of terrible drawbacks and in some
cases, can even be dangerous. The first reason shipping containers don’t make good homes is
the size. A standard container is 8 feet wide, 8 and a half feet tall, and 20 feet long. Now,
standard ceiling heights are 9 feet, so losing 6 inches might not sound bad, but you can’t just
move into a shipping container and call it a day, you need to add flooring and insulation,
which reduces the space significantly. You also need to cut holes in the container for windows and
ventilation. This reduces the structural integrity though, so then you need to add more framing,
and pretty soon you’re building an entire house inside your shipping container just to create a
structurally sound living space. And don’t forget about insulation: metal is a terrible insulator,
so without proper insulation you’ll be freezing in the winter and boiling in the summer. All of
that is manageable, even though it adds cost, but the real problem comes from what happens in the
shipping container before it gets converted into a home. See, while you can usually figure out what
ports a shipping container has visited, it’s a lot harder to figure out what was inside the
container. Companies usually keep that information private in order to safeguard their operations.
You don’t want pirates finding out how valuable a particular shipment is after all.
But the problem is that a lot of shipping containers are used to transport toxic chemicals,
like pesticides, and these can leak while on the high seas. The risk of exposure to toxic chemicals
left in shipping containers is such an issue that the State of California actually made it illegal
to build houses using shipping containers that had been used more than once. Now, you can guarantee
that your container is 100% safe by just buying a new one, and that’s what a lot of people wind up
doing. But at that point, you’re basically just using a shipping container for the aesthetics.
And that matches up with what people say, just listen to this quote of someone who built a
shipping container home: “Why did you decide to build your house out of shipping containers.
I really like the industrial look” It’s totally fine to like a particular style and go out of your
way to build a custom house that fits your taste, but wait until you hear the price of this place:
“The container house is up around $450k” To be clear, Cover is not building a cheap product.
Their smallest unit starts at $93 thousand dollars, and larger units can be over $300k. But
Alexis openly admits that he’s trying to build the Tesla Roadster of housing right now. It’s going to
be a premium product, but it will inform future designs that will eventually be dramatically more
affordable. “That’s exactly why we started off really focused on backyard homes, it was in order
to have a shorter iteration cycle, learn more with smaller structures, and iterate quickly. So we’re
constantly rolling in improvements to every single one we build. And the way we kind of balance that
short-term with long-term mindset is that the improvements that we’re rolling in,
are the types of improvements and learnings that we can apply not just to backyard homes. So we’re
focusing on the long-term technology, while doing it in a form-factor that makes sense for the
short-term.” And here’s our second key takeaway: don’t chase trends. Alexis has been working on
Cover for years now and he might have been able to build some hype around shipping containers because
most people still think they are a good idea. But that would have been a dead end. Cover would never
be able to adapt any of their learnings from building shipping container homes into larger
projects because the fundamental premise is so flawed. There’s one more reason why this project
in particular has attracted so much attention and it comes back to that idea of iteration.
At this point, nearly everyone has read Elon Musk’s original “Secret Plan” blog post where he
outlined Tesla’s long-term plan. They would build a high-end sports car to fund the development of a
sporty four door family car, which in turn would fund an even cheaper third model. That post was
written in 2006, a full decade before the roll-out of the model 3, and it laid the foundation for a
new wave of startups tackling big problems. And Alexis is clearly taking a page out of Elon’s book
for Cover’s long-term plan: “We’re starting with a high end product, low volume, high price. Then
investing in process and investing in engineering. Lowering the cost and then ramping up production.
And doing that a couple of times before being at $100 bucks a square foot, where it’s accessible
to everyone, and production volumes of hundred of thousands of homes per year. So it’s going from a
small backyard home (high end), then developing slightly lower-cost, entire single-family homes,
with multi-story capabilities. And then from there going to multi-family and continuously lowering
the cost through tooling and engineering.” This is why those investors who backed Elon
Musk more than a decade ago are now backing Alexis, he’s planning for the very long term.
Every day that Cover spends improving upon the design and engineering of their core panel
will directly impact their ability to deliver affordable housing in the future. And eventually,
they could even be building full apartment complexes: “We’re just building panels, so
going from a backyard home, to a full home, to an apartment building is really just going from 10 to
100 to 10,000 panels.” -15:50 I have one more key takeaway from my conversation with Alexis though,
and it’s about the value of just rolling up your sleeves and getting started. Alexis does have a
degree in architecture, and he’d even worked in the industry before he founded Cover, but
the experience that taught him more than anything about building was during his prototyping phase.
“The first prototype, we actually still have it in our parking lot. It was a small, 110 square foot
basically office. It’s just a room, it has three windows. Big sliding door, some storage. We
learned more building that one structure, that our entire architecture school.” That’s
a really important lesson, hands-on experience is incredibly important in entrepreneurship,
so get out there and build something. And if you want to help Cover build the future of housing,
they’re hiring. This video isn’t sponsored or anything, but I like Alexis and it sounds like
a fun place to work. After all, it’s basically just playing with legos.