Every day, founders & operators everywhere are building new technologies and companies that should us optimistic about tomorrow. My goal: champion some of these founders, companies, and industry trends. Join thousands of investors, operators, and founders on the mailing list!!
The context: The United States is in a housing crisis
Over the past year, the typical US home price jumped ~13%, according to Zillow. Even more problematic, by May 2022, economists are forecasting a further increase of ~15%. Meanwhile, the New York Fed is forecasting only a ~3% increase in median household income. The cost of housing is far outpacing wages.
So why is this happening? Put simply, we are in the middle of a housing crisis.
The National Association of Realtors (NAR) estimates that we will need a full decade of record home construction to catch up, or as Lawrence Yun, NAR’s Chief Economist, states, “we’ll need to do something dramatic to close this gap.”
Well, of course this happened. COVID and supply chain issues have made this impossible, right? Maybe it made it worse. But that argument is intellectually lazy. In reality, we have fallen short on building enough homes for ~20 years.
In my opinion, we need to ask more fundamental questions. Many people turn to housing policy (YIMBY vs. NIMBY), but I would challenge people to first think about how we build housing. Let’s talk about that.
The problem: The shortcomings of residential construction in the US
First, let’s look at some ballpark numbers:
Americans spend ~$300B a year on single family homes
Overall construction in the US topped $1.3T in 2018
Construction spend is ~6-7% of total US GDP
Basically, we spend A LOT on construction. Of that spend, a sizable amount (15-25%) is going directly to single family homes. Despite all of this spend, we continue to be pacing towards an even more severe housing crisis.
Even more spending, however, will not fix this. As of recently, the Associated Builders and Contractors reported that housing backlogs dropped down to ~7.7 months. While the drop in time should be celebrated, the backlog was 9.3 months in 2018. This is a persistent problem.
For over 3 years, contractors have barely had enough capacity to start new projects within a calendar year. Of the projects that do start, ~90% end up over-budget or delayed. Only 31% come within even 10% of budget. American building productivity has plunged by half since the late 1960s.
In summary, we are in the midst of a terrible housing crisis. We are already spending billions of dollars to fix it, but it is getting noticeably worse. Even when we do start projects, we are actually not very effective when compared to other industries.
So why are we so bad at this? I would contest that traditional residential construction methods have six main issues:
Expensive and unpredictable budget – Houses are expensive. There is a heavy reliance on labor, and inconsistencies in output, waste, time, etc. lead to highly variable budgets.
Inconsistent quality of output – There are millions of permutations of appliances, plumbing, etc. Skilled labor (e.g., electricians, plumbers), raw materials, etc. are highly variable too. Different tradesmen build things differently (and at different qualities). Overall, these volatile factors make the process, output, etc. wildly inconsistent
High levels of waste – On-site mistakes or guesstimates on supplies lead to a significant amount of waste. Scraps of woods are tossed, or entire walls end up being replaced
Long build times – The average house takes eight months to build. This average is even weighted down by large tract developments. Most houses take even longer! From design to permits to construction, the entire process moves slowly. Building a home is fairly linear. We build the foundation, and then we frame. This increases bottlenecks.
Fragmentation – The average house requires 22 subcontractors to build. Most subcontractors are dependent on one another. There are 22 potential bottlenecks. Between hectic schedules and inconsistent output, the process breeds inefficiencies.
Unscalable – These businesses cannot scale that quickly. Contractors rely heavily on skilled labor, most of which is hard to find. Scaling from 3 houses to 6 houses likely required doubling head count.
Many of these likely feel unavoidable, but that’s the weird part. Construction hasn’t been disrupted at all, but there are fixes to these problems. Cover is doing just that.
The solution: Manufacturing the home of the future
Many of these issues can be resolved by leveraging modern manufacturing principles and practices to build homes.
Pre-fabricated homes are not a new concept. They have been around for years. Companies like Katerra have raised $1.6B from Softbank to popularize pre-fab homes. Pre-fab homes, however, often just try to streamline the same construction process off-site. This is a key reason a company like Katerra went bankrupt (very publicly). All they did was try to take the broken process and try to do it bigger, rather than actually redefine the process.
As a result, many pre-fab homes have A) limited floor plan personalization, B) lower quality, and C) they are quite difficult to ship and assemble.
Cover is taking an entirely different approach by reimagining the entire process from a first principles standpoint. Let’s walk through the three components that make Cover leverages to tackle traditional challenges in residential construction:
The building system
The operating system
Vertical integration
The building system: the future of home design
Let’s start from the bulk of the project: the building. This is critical to understanding the entire process.
Traditional building onsite is typically done with the step-by-step assembly of raw materials. Let’s use wood as an example. The wood comes delivered in planks. The carpenter cuts it to specific standards. The house is framed.
If the carpenter makes a mistake cutting, the wood gets tossed. If the wood comes cracked, it is tossed.
Or maybe the carpenter builds something not to specification, and then it has downstream effects on appliances, etc., so the part of the project needs to be redone.
All of this one-off waste adds up. This is not to say carpenters or tradesmen are not great. Most of them are tremendous. But fundamentally, the uniqueness of each cut, fragmented planning, and variability of hands-on labor drives more waste than a streamlined factory.
Even then, using the same methods in a factory falls short. That is what most pre-fab home builders try to do.
Cover, however, is “redesigning homes from the ground up as a product.”
Exhibit 4: Redesigning the home from the ground up (Source)
Cover has developed new foundational pieces. The best analogy is Lego building blocks. Lego mass produces a finite amount of highly precise Lego blocks. Those pieces can be rearranged to make millions of different creations.
For Cover, they create specific types of pieces. Wall panels. Floorboards. Counters. I have screenshotted their online demo video as an example.
Standardizing & building these pieces is extremely revolutionary, and it will fundamentally change the way we think about homes. In case it is not apparent why this matters, I have outlined the ten key benefits. Let’s walk through them:
Manufacturing
First, the standardization of building blocks enables cutting-edge manufacturing. This is not a new concept. The majority of what you use in your day-to-day life leverages these benefits. Cars. House appliances. Computers.
By leverage manufacturing, many of the variables (e.g., weather, tradesmen) are removed from the on-site equation, and instead, it is replaced with higher capacity, automated tools. This not only drives precise quality on every part of the product, but it also paves the way for mass production and economies of scale.
With manufacturing, Cover can meet the insane market demand by scaling their production. As production scales, the output (units produced) increases disproportionately more than the overhead (e.g., cost of the factory, equipment). This drives the cost per unit down (aka economies of scale). This is critical to solving the housing crisis.
Whereas, on-site production relies entirely on labor (variable cost), so when output increases, so does the cost. The cost per unit stays the same, and in the world of a labor shortage, scaling is likely not even an option.
Operational
Second, the standardized pieces make operations much more simple. In particular, there are huge efficiency gains in budgeting, shipping, and installation.
We will discuss it in the operating system section (next), but having a fixed number of pieces allows for quick budgeting. The cost remains the same for each piece, so once the house is designed, it becomes a quick calculation. No more overages. No more unforeseen budget jumps. Accurate pricing right away.
Additionally, the location of production (the factory) never changes. Traditional construction sources supplies from different vendors to a different construction site every time. It’s a logistical nightmare. Cover, however, sources all supplies to a single location: the factory.
From there, they ship the pieces to the site of assembly, and when they ship, it is the same types of pieces, as well as the exact # produced in the design. This predictability makes shipping via standard trucks actually quite easy.
Once the materials make it to the site, these pieces can be assembled without hammers, cutting, painting, etc. Premium tradesmen are hard to come by. They are of short supply, and they are expensive. With Cover, general labor can help assemble these pieces with basic latches, clips, etc.
Exhibit 7: Assembling Cover with latches and general labor (Source)
Product
The efficiencies of manufacturing and ease of installation immediately make people assume the quality is lower. It is actually the exact opposite. Standardizing these pieces improve the quality for a number of reason. Because of Cover’s manufacturing efficiencies and supply chain, they can holistically design these parts at the highest quality. The versatile characteristics of them allow for highly personalized floorplans and extremely easy maintenance.
Building the entire product end-to-end means that Cover can holistically design the entire home. No more dangling wires. Slightly misfit windows or appliances. Cover designs everything to simplify design, enable a precise fit of all pieces, maximize living experience, and improve energy efficiency (Cover designs are drastically reducing energy use).
Exhibit 9: The energy savings of Cover
Between the manufacturing efficiencies (above) + holistic design, Cover can invest more time & resources into quality than anyone else. For example, Cover uses steel instead of wood. Personalizing steel cuts on a site manually would be near impossible. With a factory, Cover can leverage steel to build their panels. Steel has a better strength/weight ratio, 100% recyclable, and it is very durable.
Exhibit 10: Using steel vs. wood (Source)
Finally, let’s talk about personalization and maintenance. The versatile pieces allow for very personalized floor plans (via the software in operating system section). There are a limited number of pieces, but they make a limitless number of designs.
Because the pieces are versatile, they can also be maintained much easier. If one breaks, no need to tear down the entire wall to redo the wiring… just replace the panel!
Across the board, the building system is the disruptor. It fundamentally changes the way we think about homebuilding, and it provides immense benefits across the entire process.
But Cover did not start there. Let’s talk about how Cover took the customer experience to the next level with their operating system.
The operating system
Start from the beginning of the project: research, design, permitting, and budgeting. These phases can are both challenging and time consuming.
Traditionally, consumers would go through a highly manual process. Find an architect. Find a contractor. Pay for plans to be drawn. Make adjustments. Make more adjustments. Make even more adjustments. All of the sudden, you have a $10K+ bill for just design
Cover streamlines this entire process with their proprietary software.
Exhibit 11: The Cover Software Walkthrough (Source)
The Cover software will walk a consumer through the entire process. Just type in your address, and the software will allow for quick design, adjustments, etc., all in accordance with your local permits.
From there, users can personalize their design with a few clicks. No more email or phone communication with an architect. No more billable hours. Just tap the phone and adjust square footage, change the floor plan, add storage, etc.
Not only is this a great user experience, but in the background, the software actively developing the permits, project budget, and necessary parts… down to the screw.
Once the design is complete, Cover will produce a quote that is full-cost. No more over-budget projects. No more hidden costs. The quote you get is the all-in cost. You will not pay anymore.
Sounds crazy, right? Why cannot others do this? Ultimately, their software can be this effective for two reasons:
A) Cover is a technology & manufacturing company. Don’t just think of them as a construction company.
B) The building system allows for such predictability and precision (see previous section)
So the building system disrupts the industry. The operating system seamlessly ties all of this together for the pre-production process. Vertical integration is the final piece that makes Cover so amazing.
Vertical integration
The final differentiator to consider is vertical integration. Throughout the article, we have talked about how complex home building can be from design to permitting to production. Contractors are amazing at managing this, but there is only so much they can do.
Cover, however, is able to simplify the entire process. Their software simplifies pre-production. Their building system streamlines production and installation. For this reason, the end-to-end process becomes… easy. As a result, Cover can own the entire process, so the consumer only has to work with a single vendor.
Cover doesn’t have to worry about sub-contractors changing schedules. They don’t have to worry about manual budgeting. They reduce any significant building delays.
This allows Cover to manage quality, budget, timeline, and consumer experience. Ultimately, this is how Cover can build a house end-to-end in a month or two. This is how they will scale.
Conclusion
Let’s finally clear something up:
Misconception: Pre-fabricated homes are lower quality with inflexible design options
Truth: Cover delivers 1) a scalable, panelized building system with the highest levels of quality, precision, components, and materials, 2) state-of-the-art software that delivers both the best consumer design experience and the most transparent, accurate budgeting, and 3) vertical integration to deliver an end-to-end superior quality experience...faster... and at a lower cost.
Cover is not only changing pre-fab homes, but they are fundamentally changing the entire construction industry. In my opinion, their new approach to manufacturing homes is the only way we will solve this housing crisis in a reasonable amount of time.
Short-term, they are focused on building backyard homes. This allows them to perfect the process and learn. As they improve, however, I would imagine they will scale rapidly. As they do, their superior technology, approach, and unit economics will make them the most prolific home builder in the United States... by a wide margin.
While their current panelized approach, speed to build, and user experience seem "novel" right now, it will redefine the way we think about homebuilding for generations to come.
Appendix
One pager
Market drivers
Housing shortage - the huge shortage of housing will likely continue to push the price of the median home up. As these prices continue to rise, the need for a quicker solution will increase. In addition, the price will push up, and Cover can likely undercut the pricing even easier. These factors will help the adoption of Cover.
COVID reshuffle - COVID forever changed the working dynamic. Now, most employees can work from anywhere. As a result, there have been huge migrations of people to new locations. People from California moving to Austin, Nashville, etc. This has driven a housing crunch in many new locations, as well significantly increased overall real estate activity. All of these factors will continue to be a tidal lift for Cover
Consumer adoption - The biggest unknown factor for Cover will be whether consumers adopt. There are preconceived notions of pre-fab houses having lesser quality. When Tesla began, Elon Musk created their cars to excel in performance, redefining the way we think about electric vehicles. Previously, people thought EVs had to sacrifice performance. Musk change that thinking. Cover will need to do the same for pre-fab homes, and that is why, in large part, you can see them building current models with top-tier appliances, etc. They are changing the narrative by making Cover homes MUCH better than the average home
Policy - I think policy will be a headwind for Cover in two areas. First, I think generally housing policy tends to be slow. People are resistant to change. Certain areas need improved density, but those same areas are likely in a housing shortage because of limited housing policy *Cough* California *Cough*. The second part is more critical. Construction has a lot of strong unions (e.g., electricians, plumbers). Cover removes the dependency on skilled labor. I would forecast some heavy resistance from unions with strong power (similar to what Tesla has battled).