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.
