--:-- Host: Housing, in some sense for me, is like that final frontier of fintech. It's sort of the end goal for most consumers. All of fintech, in some ways, leads to a consumer caring fundamentally about generational wealth. And generational wealth comes from things like homeownership, right? It comes from long-term appreciation. It comes from creating something that's safe and sustainable for you and your family and your family's family. And that's the American dream.
--:-- Host: Part of the problem is that all the old people have all the money. It is like a catastrophic issue right now. If you're getting paid in cash, you might get a 3% salary bump every year, but the S&P 500 compounds at 10% a year. The median age of homebuyers has jumped from 30 to 38 in just over a decade, and it's not getting better.
--:-- Host: Today, you'll hear from Rune Krishna, CEO of Rocket, and A16Z general partner Alex Rampell on why housing has become the final frontier of fintech. We discuss how old people corner the market through asset price inflation while young people get paid in depreciating cash. Why the Empire State Building was built in 110 days, but you can't change a window pane today in less than two years. And the paradox of real estate sites with 50 million daily users that can't figure out how to make money—what Alex calls "Zillow and chill." Plus, how Rocket is flipping Silicon Valley's playbook. Instead of building a toothbrush product and searching for monetization, they're starting with a $10 billion profit engine and working backward to daily engagement through their acquisitions of Redfin and Mr. Cooper. Let's get into it.
--:-- Host: Alex, in 2010, the median age for a home buyer was 30 years old. Now it's 38. Why did that happen and what can we do to change that?
--:-- Alex Rampell: Well, I think part of the problem is that all the old people have all the money. This really is a catastrophic issue right now. Because if you look back, the American dream has been homeownership for a very long time. The example that I'd like to point to is after World War II. Have you heard of Levittown?
--:-- Alex Rampell: So Levittown, you haven't heard of Levittown? Okay. So Levittown—I'm sure you know of Levittown, Varun. This was one of the first tract housing communities. This guy—think about what Henry Ford did for the automobile. How could you buy a car before Ford? These were handmade things that were very, very expensive. And I think it was James Levitt. He actually turned out to be somewhat of a racist, but that's a different topic.
--:-- Alex Rampell: Levittown was the first—I'm going to bring the Henry Ford factory to housing. It's actually a town in New York built, I think it was thousands of homes, sold them to GIs that were coming back. Homeownership was just—you had lots of land. You had a country that was half the size that it is today. Just supply and demand. So you didn't have all the old people with all the money. You had this giant population that wanted homeownership and you had lots of supply that was being built and actually new innovative techniques for building. That's why I like to point to Levittown.
--:-- Alex Rampell: What has happened since—if you just look at the pyramid of who—I kind of think about inflation as being two different things. You've got the CPI, which is the Bureau of Labor Statistics coming up with a basket of goods and services like gas, bread, fish, eggs, butter. They get more expensive, they get cheaper. But then there's this other thing that I would call asset price inflation, which is not actually part of the CPI. Part of the CPI is rent or perhaps the mortgage payment that effectively allows you to live in your house. But asset price inflation is very, very different.
--:-- Alex Rampell: There's a piece we wrote a little while ago showing that the price of housing in the Bay Area has declined passively in the past 25 years. You'd say, "No, no, it hasn't. It's gone up." If you price it in Apple stock and Google stock, right? If you already have one asset—stock, or your parents left you a lot of money and they left you an old house—well, supply and demand. There's only a fixed amount of real estate. There's only a fixed amount of Apple shares. Those have gone up in value relative to the US dollar. These are the people that can buy homes today. They are just predominantly and disproportionately older. And it is really hard for younger people to afford their first house because they get paid in cash.
--:-- Alex Rampell: Most people, if you're getting paid in cash, you might get a 3% salary bump every year. But the S&P 500 compounds at 10% a year. If you're buying with a basket of assets—obviously you're not paying for your house with Apple shares—but if you happen to work at Apple, houses have gotten a lot cheaper in the Bay Area in 25 years. If you happen to work at a company where you have no ownership in anything, you're just getting paid a salary, house prices have gotten a lot more expensive. So there are many reasons why I would answer your question. But I think fundamentally, that's the main one.
--:-- Alex Rampell: Number one is supply and demand—we don't build enough homes. Very different from the Levittown area where it was like, "Wow, we're going to build a shitload of homes." That really happened in the 1950s. So it's supply and demand. And then it's also this asset price inflation, which has really created this tale of two cities for people that have assets and people that do not.
--:-- Host: And is asset price inflation the best explanation for how old people got all their money, so to speak?
--:-- Alex Rampell: Yeah, basically. Especially where it was much easier to build 100 years ago than it is today. This is not about housing, but—Pop, what is it? How long did it take to build the Empire State Building? What do you think?
--:-- Alex Rampell: What do you think, Varun?
--:-- Varun Krishna: Five years?
--:-- Alex Rampell: 110 days from start to finish. I assume today could never happen. If you wanted to change a window pane, it would probably take two years right now. So the other thing is that it's not just that the old people have all the money. That's a problem. But it was much easier to build things when the old people didn't have all the money, but bought a lot of these properties. So now it's much, much harder to build. That's number one. If you could just go build 10 million homes tomorrow, what do you think would happen to the price of homes? Would they go up or down?
--:-- Host: Pretty sure they would go down.
--:-- Alex Rampell: Unless every economist is wrong about supply and demand, the intersection being the equilibrium price.
--:-- Host: And the main bottleneck there being regulatory?
--:-- Alex Rampell: I mean, it's regulatory, but actually it's not always regulatory. It's this term NIMBYism—Not In My Backyard. Imagine that I bought a house and I know that the old people that own the house next to mine, they've made so much money by owning that house because they bought it in 1960. This is actually a true story. My first house I bought was in Palo Alto. I bought it for, I think it was $2.1 million in 2008. Very perfectly timed before Lehman Brothers failed. I figured I wanted to buy a house before the world fell apart. No, that's not true. I should have bought it like three months later because I went down 50% in dollars.
--:-- Alex Rampell: My next door neighbor's—it was a retired Stanford professor. He bought the house, I think in 1960, bigger lot than mine, worth more than mine, for like $30,000. And he wants that $30,000 to turn into more. That's a natural thing. Everybody wants that. If I buy something and it's not a consumable—I don't care about this water increasing in value. I care about my house increasing in value. If you build 10 million houses right next to mine, the house is going to go down in value. So it's NIMBYism. And NIMBYism then becomes regulatory. Then you have people that vote for people that will give them what they want, which is NIMBY. So it's not just evil politicians that out of nowhere say, "We now need to take 10 years to go build something." It's people as well.
--:-- Host: Varun, any reflections, reactions to hearing this? What are your thoughts on how we can increase homeownership?
--:-- Varun Krishna: Yeah, I think Alex is right on the money. The reality is there's just a lot of things that have shifted over the past 20, 30 years around housing. It's cultural shifts, it's higher home prices, it's higher rates. But I read a cool stat the other day that in the 50s, the average size of a starter home was like 985 square feet. If you look at the size of a starter home today, any guesses on what that is?
--:-- Alex Rampell: What is it? I have no idea.
--:-- Varun Krishna: It's almost 2,500 square feet.
--:-- Varun Krishna: So our expectations culturally around what a home is have fundamentally changed. But you also have these other generational dynamics too. People today are settling down a little bit later in life. Alex talked about affordability, but some people want to buy, they just can't clear that affordability hurdle. There are other things that I think will improve as we think about the future. The cost of building a home has got to come down. I think things like robotics, 3D printing, advancements in material science will help with that. But that's a little bit further out into the future.
--:-- Varun Krishna: The nice thing about this AI revolution is it's not just that it will help us with all the traditional use cases you see today around ChatGPT and what Anthropic is doing and agentic AI. It's more like applied AI in the context of robotics and advancements in 3D printing material science. But I think our culture has fundamentally shifted a little bit. The expectations around a starter home have shifted. Then you have to attack the problem from the other way. That's where you need a little bit more of a paradigm shift in the technology space as well.
--:-- Host: If you had to predict over the next five to seven years how the process of homeownership changes, the stats that we shared around homeownership, what do you expect?
--:-- Varun Krishna: I think there are a couple of things that would change fundamentally. I think you'll start to see the applications of AI be a little bit more geometric in nature. It won't be that a computer is smart at the knowledge worker type jobs, but it can handle manufacturing, building, and more sort of process and workflow and physical tasks. Alex has a great analogy around bit problems versus atoms problems that I think Idris is very famous for pioneering. So I think you'll start to see that. I think that will significantly change the manufacturing environment in general.
--:-- Varun Krishna: The other thing you'll also see is that today, part of the problem with the homeownership dynamic is that the reason it takes so long is there's just a lot of work. Providing your data, providing your documents. It's a gigantic qualification process that involves these complicated terms like underwriting and qualification and money movement. But why is it so easy to walk into a grocery store and buy a chocolate bar with a credit card, and yet the process of buying a home is just a slightly more complicated version of the same thing? I imagine in three to five years, a lot of that workflow gets hyper compressed. A consumer's financial readiness and their qualification criteria is just something that happens in real time.
--:-- Varun Krishna: I think that's kind of exciting because the amount of effort to know whether you qualify for something as expensive as a home purchase can be significantly compressed. Then you start to see more leapfrogs in technology where the process of building, manufacturing, servicing a home kind of come down. If we get that right, we can start to see—and this is something that I think the administration is rightfully focused on—how do we get more new homes built at a faster rate? To Alex's point earlier, how do you get more inventory on the market, which would create more price pressure so that even if mortgage rates are elevated or high, at least the cost of the home can come down. I see these intersection points starting to influence the process, hopefully for the benefit of that consumer.
--:-- Host: Alex, anything you'd add to that?
--:-- Alex Rampell: Yeah, I think the technology thing—that's why I was kind of quickly ChatGPT-ing to refresh my memory on Levittown. This was the first planned suburb in 1947. All these returning GIs, and it's like, "We need to build housing for all of these people that came back." Remember the famous picture post-World War II, where the GI is swooping this woman down and kissing her? What did they do after that? They got married, they bought a house, they had five kids, and hence the baby boom. Well, they needed to live somewhere, and apparently it was a 985-square-foot house. A lot of these were constructed so quickly. The technology wasn't bad at all. It was like, "Let's go bring the Henry Ford factory to housing." That was Levitt & Sons, William Levitt. Again, they did some bad stuff. They famously had something where you could not rent or sell to somebody who was not white. That part, obviously bad. But the good part was we are going to build just a shitload of homes, and we're going to do it in a smarter way.
--:-- Alex Rampell: If you have an assembly line for homes—and by the way, Lennar and others do a version of this when they decide to go buy a giant tract of land and go develop it. They don't just build one house and then finish that and then build the next house. It's really cool watching these communities get built because it's like, "Okay, today is foundation day." Boom, boom, boom, boom, boom. They just do all of these things. "Okay, today is framing day." Boom, boom, boom, boom, boom. These things go up very, very quickly.
--:-- Alex Rampell: A lot of home building—and Varun, I agree with you, it's the atoms versus bits thing. It's just really hard to construct things, but we do have solutions to this. Modular housing is not a pipe dream. You can do this. There's this very cool, famous Chinese thing—it's almost like a meme—this woman showing off her RV home. "Look, shower. Look, this." It got very popular on TikTok, YouTube shorts. But you can do this.
--:-- Alex Rampell: I think you have three main things. You need to make it as easy as possible for people to buy the house. I've never done this before. I buy a house once every lifetime. What do I do? All I know is that I pay my rent every month. I know how that works. I'm scared of this process of homeownership. Where do I buy? Do I get outbid? Do I get a mortgage? This sounds so complicated. I'm going to keep renting. The biggest thing—so many people that rent do want to buy. This is not surprising. Would you rather—the American dream is to own a house. You currently rent. Do you want to be part of the American dream? Everybody's going to say yes. How do you make it as easy as possible? Making the process of buying as easy as possible. Making it as affordable as possible.
--:-- Alex Rampell: Under the affordability, it's probably the financial side, which is mortgage. The United States is actually quite unique in that most countries don't have 30-year term mortgages to repay your principal and interest. Sometimes you'll have shorter duration. But you have the financial side and then you have the construction side. I know more about the financial side than the construction side. But both of these—if you make it cheaper, guess what? More people will want it. You're going to open up this aperture.
--:-- Alex Rampell: The other thing I would add—I gave a presentation about this a long time ago. I never thought it would be popular to have a presentation on homeownership and housing and all these things that are happening. Somehow that was a popular little video that I made. I think there needs to be less of a binary between either rent or own. That was it. A lot of these innovations that have popped up—what is Airbnb? You have this piece of real estate. What do you do with it? Again, you can rent it or you can own it. You only have two options. No, no, no. You can rent it for a month, or you can buy it and save money, or help make your payments, or have a second source of income. The Olympics are coming to LA in 2028. You have a little apartment near the stadium, go rent it out for a month. That's an innovation that has actually made homeownership more affordable.
--:-- Alex Rampell: We were an investor in a company that was helping do rent-to-own. You rent, but you're basically setting on fire your rental payment every single month because it does not help you in any way in terms of getting ownership in a house. What if you could get a house that you have the right to buy later? Which, by the way, would actually bring down housing costs as well to a certain extent. There's a saying by Warren Buffett which I love: "Nobody pays to wash a rental car." That makes sense. Why would you wash a car for Hertz? You're returning it. If you know that you're going to buy your rental, you'll probably take better care of it. If you take better care of it, the landlord doesn't have to worry about as many things, and then the cost goes down. There's a lot of in-betweens that I think technology and, more importantly, entrepreneurship can help drive. But you need a regulatory environment that allows it.
--:-- Host: Are you excited about the fractionalization experiments or these other forms of financial engineering? Do they solve real problems? Are they feasible?
--:-- Alex Rampell: Can you define that?
--:-- Host: People sort of—there's some startups that have been trying to say, "You can own part of a home. We can just increase the amount of people that own part of a home."
--:-- Alex Rampell: Yeah, I mean, there's the blockchain stuff that doesn't really make sense to me. I'm a big fan of crypto, but crypto exists. If you're trading things that are purely digital, works great. If you're saying I'm going to represent something that's physical, where I need to assert my ownership—if somebody's living in my house illegally, that's called they broke into my home. I call the police and I say, "I live here. Eric broke in, kick him out." You can do that. But if I say, "No, no, no, on the blockchain it says that Eric—" No, no. The guys with guns enforce the laws and they look at who owns the property based on the county recorder's information. Should it work that way? I don't know. That's how it works. So that stuff, I'm not sure.
--:-- Alex Rampell: But yeah, we're an investor in a company called Point that allows you to sell part of your house. You have a lot of people that are house rich, cash poor. That's another thing that doesn't make sense. If I have $50,000 in credit card debt and a 620 FICO, but I bought a house in 1950 and I own 100% of it—that doesn't make sense. I shouldn't have to sell my house so that I can pay off my credit. Why don't I sell 10% of my house? Stuff like that—to take a binary of either rent or own, or either all my house or none of my house—you can get a little bit more creative around the edges by giving people more options.
--:-- Host: I want to segue and go deeper into mortgage. Alex, you've been investing in fintech for a long time and building companies in this space. How has the space viewed the mortgage tech space? How has mortgage and fintech worked together?
--:-- Alex Rampell: Well, I think what's really interesting about mortgage is I'll kind of tell a story by background. Here's my little parable or story. I get to college. I don't have a credit card. I went to Harvard, and there's a store called the Harvard Coop. It's a co-op, but it's called the Coop. That's where you buy your textbooks and everything else. So I want a credit card. They're like, "Apply for a Harvard Coop credit card, and you get a T-shirt." I was like, "Ooh, I want a T-shirt. That sounds great." So I applied for this card. I had a, I think it was $75 credit limit. A lot of credit that was extended to me. It was a bank called First USA, which eventually became something else, which eventually became something else, which I think eventually became Chase.
--:-- Alex Rampell: So I got my card and they gave me a free t-shirt. Why did they really want me as a customer? They didn't think I was a supermodel and they wanted to put their t-shirt on me. Why did they give me the t-shirt and the card? They were kind of betting on—we talk about this a lot—there's CAC and there's LTV. The customer acquisition cost was a t-shirt. The lifetime value is not how much money I'm going to make for them at 18 when they only extend me $75 of credit. The lifetime value is if I stick with that bank, eventually I'm going to make a very, very valuable transaction.
--:-- Alex Rampell: Banks make money on net interest margin. They take deposits, they make loans. What kind of loan might I as an individual take out with this bank that would generate a lot of value for them? Probably a mortgage. So the key inflection point for a bank or a lot of financial services companies is—I now have Eric or Alex or Varun as a borrower. I'm going to make a lot of money on them, but I can't just show up at the 23rd hour. It's actually a good segue for a lot of the cool stuff that I think Rocket and Varun are pushing for with some of the acquisitions that they've made. I can't just show up at the 23rd hour and say, "Hey, I've never met you before. I've never given you a free T-shirt. You have no financial relationship with me whatsoever. Here's a mortgage." You're like, "Nah, I'm going to get it from the guy that gave me a T-shirt before. Or I'm going to get it from my real estate broker."
--:-- Alex Rampell: The lifetime value—it's funny, in finance, LTV normally means loan to value. The value of the house is $2 million. I got a $1 million loan. That's 50% loan to value. But in most of startup land, when we talk about LTV, we talk about lifetime value. The majority of lifetime value for a consumer, even an 18-year-old, is going to happen probably 15 years later in the future when they buy a house. That's such a valuable inflection point. Or when they get a HELOC. It's a financial product where you are taking a large loan responsibly. You're going to pay it back. But the amount of money made at that point in time is so much higher than when you're an 18-year-old kid getting a free T-shirt with your $75 limit credit card.
--:-- Host: Varun, what would you add to this intersection of mortgage and fintech?
--:-- Varun Krishna: There's a great movie that came out, I think it was around 15, 20 years ago. It's called *Thank You for Smoking*.
--:-- Alex Rampell: I don't think I've ever seen that one.
--:-- Varun Krishna: David Sacks produced it. There's this one line that popped into my head where she kind of scams him and gets some information out of him. He says, "Why did you do this?" She thinks for a second and she says, "For the mortgage." That line has always stayed with me. I've been around fintech for a long time. I was at PayPal, I was at Groupon, I was at Intuit. When people think about fintech, they think about personal loans, payments, investing, taxes, money movement, a lot of these kinds of businesses. But one thing I've learned from talking to a lot of consumers is all of those are a means to an end.
--:-- Varun Krishna: Housing, in some sense for me, is that final frontier of fintech because it's sort of the end goal for most consumers. Alex said it really well—when you think about renting, renting is part of a funnel that is a continuum toward buying. All of it to me leads to housing. Housing is so important to the economy. It's 20% of the GDP, a $5 trillion market. It's very complicated. It's fragmented. It's got a lot of moving parts.
--:-- Varun Krishna: The mortgage process itself is also really interesting. You have the concept of a loan. You have an originator that underwrites a loan and brings you to the closing table. Once it's closed, you have the mortgage note itself and that gets sold off to the secondary market. These GSEs—government-sponsored exchanges like Fannie and Freddie—use that to free up the capital and maintain liquidity. Then you have the mortgage servicing rights, which is where you have an ongoing relationship with the mortgage as a consumer because it's typically the biggest transaction any consumer is going to make in their life. You manage your payments, your property taxes, your escrows.
--:-- Varun Krishna: What I think is really interesting is that all these parts and processes have evolved to be very disparate. You have the home search and real estate experience where you use websites like Redfin or Zillow to go through that part of the journey. Then you have the mortgage process where you apply for financing and credit. You go through title, you go through appraisal, and then you close. Then you go into servicing. These are all completely different parts of the equation, which is why that LTV to CAC thing is so important. Typically when you value a business in fintech or really any consumer business, you think about LTV to CAC. What's the lifetime value of this relationship relative to the customer acquisition cost? The problem with housing in general is that these parts of the funnel are all disparate. A consumer essentially flies out of one funnel and into another funnel. The economics are not great given how big of an industry it is and how big of a transaction it is.
--:-- Varun Krishna: That's something that really fascinated me. All of fintech in some ways leads to a consumer caring fundamentally about generational wealth. Generational wealth comes from things like homeownership. It comes from long-term appreciation. It comes from creating something that's safe and sustainable for you and your family and your family's family. That's the American dream. That's what we've thought about. But the economics of the business are incredibly disparate. That's why for us, a lot of it has been around integration. It's about more vertical integration. It's about connecting these parts of the experience because we think we can build a better experience, create a lot more efficiency and therefore lower the cost, and completely change the economics of the business as well and create something that is a bit more of a new species.
--:-- Varun Krishna: Mortgage is a really interesting business. I'm relatively new to it. I've only been two years or so in this space and in the industry. But it's fascinating. It is so big and so fundamental to the economy. It is so important to consumers from a long-term perspective. And yet there's so much opportunity to modernize it, transform it, improve on it. These are all the things that are exciting to me.
--:-- Host: Let's get deeper into Rocket and go into both its history and its future. On the history side, if I understand correctly, the broker model used to dominate and then there was a transition to direct lending, and Rocket is one of the big beneficiaries there. Why don't you give some of the history of how the model evolved and the story of Rocket?
--:-- Host: Yeah. Rocket, first off, has been around for a long time. This company is 40 years in the making and that's a generational thing. We've been around for a long time and we've grown. We are one of the largest employers in Detroit. We started by really transforming the mortgage experience from the beginning. I think we were the first to put mortgages on the internet. We were the first to put them on a mobile phone. We are now the first to really embrace the AI-driven version of the mortgage experience.
--:-- But a lot of this is that it is hard to build this kind of an experience at scale. The mortgage process is complicated. You have to build pricing, licensing, and hedging infrastructure that works on a day-to-day basis. Every state, every county has different lending requirements, different regulatory requirements, and a whole suite of different types of products: FHA, VA, 30-year fixed, adjustable-rate mortgages. The compliance requirements change sometimes day over day, week over week. It's a gigantic workflow engine that we've built over the past 40 years.
--:-- We are licensed in all 50 states, 3,000 parishes. We have this mindset of continuous innovation, continuous evolution, and we're great at what we do. It's why we have the most trusted brand and have become the largest mortgage company and lender in the industry. But I'd also say that we're very restless. One of our values is "obsessed with finding a better way," and that drives thousands of our team members to do more disruptive things and continue to transform the space.
--:-- I have the fortunate benefit of being a new CEO. I've been in the role for two years. I'm the first outside CEO in the company's history. But it's a very special company. There's so much potential for us to do more. We are quickly evolving from being a mortgage company to a homeownership company. That means we're not just creating innovation in the mortgage space, but we're really transforming homeownership. It's not just about the financing aspect. It's about the search and the real estate aspect. It's about servicing. It's about making a 30-year bet on consumers who are making 30-year bets on us.
--:-- Our grand vision is to evolve to be a homeownership company. That's why some of the decisions we've made around acquiring Redfin and Mr. Cooper are fundamental to that thesis. We have a long legacy of building great products and experiences for our consumers. That's how we built a brand. That's how we built our presence. We have thousands of team members who are super passionate about what they do. We have a very loyal talent base working for us.
--:-- We turned 40 this past year and we had a celebration for our long-tenure team members. We had over 500 team members who have been with the company for over 20 years. Wow. That's pretty cool. I've been in Silicon Valley for some time, in Southern California and Seattle. You don't have a lot of companies that have that kind of loyalty. That's something we really appreciate. Innovation happens quickly, but it takes a lot of dedication and passion to actually create something special. You have to put a lot of time into it. Sometimes you spend the first two years of experimentation realizing what works and what doesn't. In your third year, you figure it out. In your fourth year, you find better product-market fit. In your fifth year, you figure out distribution.
--:-- What I love about Rocket is that we have a lot of folks here who have been here a long time and will run through walls for this company. That loyalty and dedication is something that makes us what we are. It's something we're betting on to transform us into the future as well.
--:-- Alex Rampell: Yeah. Alex just hit 10 years at Andreessen Horowitz, and I was similarly inspired at the company picnic seeing a bunch of people who have been here. I got a gold watch. If you're here for 10 years, you get a gold watch. It has a nice little engraving on the back.
--:-- To add to what you were saying, a lot of companies in Silicon Valley are like, "Okay, I use this product every day, and the company can't figure out how to make money." Then you have this other type of company where it's like, "I make so much money, how do I get the person to use me every day?" Not because I just want somebody to, but because I want to add value every day.
--:-- This is what I found so compelling. This is not part of my day job at Andreessen Horowitz. I invest in a lot of proptech companies and fintech companies, and I have an extracurricular activity, which is Rocket. Part of the reason I find it so interesting is this: Rocket made, I think, $10 billion in net income in 2021. Because rates go down dramatically. People are like, "I'm paying 6% for 5%. I can refinance to 2.5%. I'm going to do that. I'm going to save a lot of money." Rocket was at the epicenter of that.
--:-- But you don't refinance your mortgage every day. You don't go buy a new house every day. These are not daily active use products. Meanwhile, in Silicon Valley, you have all these daily active use products. They're like, "How do we make money? We can't figure it out. People use ChatGPT every day. Are they making money? No, they're losing a lot of money."
--:-- It's very rare to find the more unique of those two. Is it, "I have a product that people use every single day, like a toothbrush?" Larry Page had a rule at Google: we will not launch new products unless they pass the toothbrush test. You have to use it every day. Hopefully you brush your teeth every day. On the other hand, you have companies where they don't pass the toothbrush test, but that's not a qualification for success. $10 billion net income.
--:-- How do you take this very valuable thing with a real business model, perfectly run, very profitable, and add more products and services that add more value to the consumer? You go to the dentist twice a year, that's it. Is there a way to interact on a more regular basis? That's where things like mortgage servicing come in. You get a bill every month. That's an engagement. What do you do with that?
--:-- There's a story Tony Hsieh used to tell about Zappos. Zappos was one of the very few companies that decided to take customer support and turn it from a cost center into what he called a "love center." Really engage the consumer. There was a famous story where a customer support rep sent a woman flowers because something bad happened to her. You don't expect that. Normally it's like, "I hired McKinsey and they said I could cut two-thirds of my people. I could put people in this IVR and save $4 million a year." That's how a lot of companies treat sending a bill or doing customer support. As opposed to looking at it as an opportunity to upsell something, not in an evil way. It's like, "Hey, we have a monthly communication with you. What should we do?" The answer can't just be, "We're going to drive down the cost to zero, have robots do everything, and you're going to hate us." It's a real interesting opportunity if you're engaging somebody every month.
--:-- You start off at the profit center. That has been solved. That's a really hard problem that entrepreneurs who come into our office every day face. It's like, "I'm going to figure that out eventually, but right now I have a product. I've got a toothbrush, but I have no idea how to make money on it." The other way of doing this is a 40-year-old company. Varun's been there for two years. You have a real profit engine. How do we turn it into a toothbrush?
--:-- Host: So let's talk about how you guys are doing that or thinking about doing that. You made a wave of acquisitions, high-profile public companies. Talk about the strategy of how this all fits together and what you're trying to do.
--:-- Varun Krishna: At the end of the day, we want to redefine the category itself fundamentally. Our thesis is very simple. If we connect more parts of the ecosystem, we can build a better experience. We can pass that value on to the client in the form of lower costs and less friction. We can build fundamentally different economics around the business and drive growth.
--:-- When you think about funnels, mortgage in some sense is one of the world's most complicated user funnel products. When I was at Intuit, TurboTax is another example of a funnel-centric product. Our strategy is simple: we want to serve clients across the entire journey of homeownership. Not just the financing and mortgage aspect, but also at the top of the funnel, the home search and real estate aspect. And at the bottom end, the servicing aspect where they have a lifetime relationship.
--:-- We've made two acquisitions in service to that. The first is Redfin. Redfin is the most visited real estate brokerage site in the U.S. They have relationships with 50 million monthly active users. These consumers use the Redfin app and website to search for homes every single day. What I love about Redfin is they have an amazing mobile app. Most of those 50 million users use the product daily on a mobile phone. They have that really nice, rich interaction. They also have a network of thousands of real estate agents that we now employ, as well as a partner agent network.
--:-- That represents the start of a homeownership experience. Some people start with the mortgage and financing. Other people start with the house, browsing, voyeuristically scheduling tours, exploring the home. Those 50 million relationships help us build a top-of-funnel relationship.
--:-- The next thing that's really important is that we want to connect that to financing, and then connect that into the servicing experience. That allows us to build more relationships with clients so we can serve them with products and services. Once you're in a relationship with Rocket and you have a great experience with home search, real estate, mortgage, and servicing, the beautiful thing is that you create loyalty. When that client is ready for their next homeownership transaction, it doesn't have to be a new purchase. It could be a home equity loan. There are trillions of dollars of home equity trapped in consumers' homes. There's a lot of equity you can use to generate cash flow. To Alex's earlier point, what are they doing today? They're racking up more credit card debt. It's probably better to take more equity out of your home. What better way to do that than with the provider you already have a relationship with?
--:-- The big realization that led to these acquisitions is that these relationships are part of a super funnel. They're not a singular experience. If we can do a good job integrating those parts of the experience, we can create a better relationship with clients. We can create more loyalty. We can be their lender for life. That's the fundamental thesis.
--:-- With Mr. Cooper and Rocket, we have 10 million clients in our servicing book. Those are clients we have a lifetime relationship with. That's one in six mortgages in the U.S. It's massive scale. It's massive distribution. There's a saying: first-time founders really think about product-market fit. Second-time founders start to focus on distribution. We have created a pretty amazing engine around refinance and purchase. The question is how do we get more distribution? That's the thesis behind these acquisitions.
--:-- The last thing I would say is if you believe the world is shifting into this AI world, one of the fundamental things you need to make that successful is access to more data. That data allows you to build better models. Those models give you a better experience and a better understanding of consumer behavior. It's a simple thesis: connecting more parts of the experience that are naturally part of the consumer journey. Making it more seamless. Less points of data entry. Less waiting and wondering. Faster turn times. Better rates. Lower costs. Better fee structures. Earning loyalty over the lifetime of a consumer relationship.
--:-- These acquisitions are a direct accelerant of our core strategy. We're excited about them. It's early days. Two big public company deals. The overall company is growing by approximately 60% in terms of size. We now have more national presence. We have locations in different parts of the U.S., which has the ancillary benefit of attracting more talent to the company. That allows us to be more innovative and grow and scale. That's the core thesis.
--:-- Host: Is it accurate to say you're trying to vertically integrate as much as possible?
--:-- Varun Krishna: I think there are two things. One of the things I've learned when it comes to large-scale M&A is you want to be very intentional about when you are integrating and when you are accelerating. I'll give you two examples because the way we look at Redfin and Mr. Cooper are a little bit different around integration versus acceleration.
--:-- The word "acceleration" is really important. Sometimes what companies get wrong is when they acquire a company, they try to assimilate them too quickly. Or they don't assimilate them quickly enough and aren't intentional about why they're doing what they're doing.
--:-- When you think about Redfin, it's a very successful brand with a very loyal group of consumers. One of the things we talked about was that the Redfin brand is super important. Consumers have a lot of affinity to that brand because they built a great product. As we think about the integration of Redfin and Rocket, we wanted to strengthen Redfin. We did not want to assimilate Redfin too quickly. We wanted to preserve the brand. We wanted to increase the focus on traffic, on demand generation, to invest in the real estate strategy we have. It helps us build that top of funnel. We don't want Redfin's brand to disintegrate. We don't want consumers to lose that affinity. If anything, we want to make it stronger. We have deliberately decided to make Redfin stronger by allowing it to operate a little bit more autonomously. That's very intentional.
--:-- When you think about Mr. Cooper, the biggest synergy is the integration of the origination mortgage business and the servicing business. We want to bring those two things together so we can recapture and create more relationships that go between origination and servicing. Mr. Cooper looks a lot more like Rocket. They have an origination business and a servicing business. With that company, we are going to rebrand. We are going to call it all the Rocket platform. We are going to fuse the organizations more closely together. That is a much more intentional approach around integration versus acceleration.
--:-- We've studied what has made acquisitions successful and what has made them not successful by looking at patterns and practices. We want to be very intentional. To answer your question more directly, integration is our number one focus across the company. We have very specific goals. We have very specific owners. We've organized around it. We've invested in specific milestones around the synergies. We want to get this right. This is a big bet we're making. These acquisitions are billions and billions of dollars in value and they're very important to our strategy.
--:-- Mr. Cooper is almost half the size of Rocket. Redfin is about half the size of Mr. Cooper. When you look at it in totality, it's quite a substantial addition to Rocket. It is a very important priority for me, for our board, for our leadership team. I'm also excited about the talent. When you think about the Rocket leadership team and the organization now, we have many of the best and brightest in the industry. We have folks steeped in mortgage, servicing, and the technologies around it. We've also hired leaders like Alex who are now on our board and represent the future state of the art in fintech and tech in general. We have a new CMO and a new CTO who come from industry, not mortgage. We have a very balanced leadership team. These acquisitions are going to strengthen that significantly.
--:-- Host: Vroom, we were talking offline about the importance of companies being balanced in their business model. Why don't you explain what that means?
--:-- Varun Krishna: One thing that is interesting about companies, especially in regulated environments or environments sensitive to macroeconomic dynamics, is that their business and profitability fluctuates. In good times, like low-rate environments, they print money. In other times, they tend to struggle. They flow a little bit with the wind.
--:-- One thing I'm really excited about with our company, especially with these acquisitions, is that we are now incredibly counterbalanced. We can survive and thrive in any market rate or economic cycle. The reason is that our origination and servicing businesses counterbalance each other. When rates rise, the value of our servicing portfolio continues to increase and we earn recurring revenue on an increased servicing book. When rates fall, we can originate more mortgages and refinance and create new opportunities for that same servicing book.
--:-- The cool thing about Rocket is it's one of the only companies, and I would argue the only company, that is super counterbalanced in the housing industry. It has the ability to survive, thrive, and grow market share in any market or interest rate environment. That is tremendously exciting when you think about a company in a multi-trillion dollar industry with single-digit market share, where there's a lot of consolidation and opportunity to disrupt and transform experiences with artificial intelligence. Having these different assets put together in the same place makes us very unique.
--:-- Alex Rampell: There's a concept in math called a Fourier transform. If you have any function, if you have a line, every business's revenue and profit should look like this. If you look like this, everybody's happy. If you look like this, everybody's not happy. A Fourier transform is basically you can decompose any function into a bunch of sine curves. If I have a line that looks like this, it might be composed of 50 things that look like this, but to Varun's point, they kind of counterbalance.
--:-- A big mistake entrepreneurs often make is, "I have a business that is a sine curve. Let's kill it. I don't like that business." No, no, no. Most businesses are in some way cyclical, even if you don't think of it that way. Just add another sine curve that has a slightly different period so it counterbalances.
--:-- The banks have actually done this. JP Morgan is the most valuable bank in the world. They have a bunch of sine curves. Should they get rid of their investment banking business even though in 2022 it was not profitable? No, but they're going to make a lot of money sometimes. It's feast or famine. Let's add wealth management because we get 50 basis points on a trillion dollars every single year. Let's add retail. They have so many different product lines. If you have a curve that looks like this and then you have the exact opposite curve, you combine them and you get a straight line. You want straight lines because they're predictable, but your business under the cover is typically not a straight line. It's composed of overlapping sine curves in such a way that you hopefully get a monotonically increasing straight line.
--:-- Host: You were talking about how there are money-printing machines and Silicon Valley startups that have toothbrush tests but don't have a money-printing machine attached. Rocket has been able to acquire a demand machine in Redfin and others. Why is it so hard in real estate if you own the place where people are searching every day to build the money-printing machine next to it?
--:-- Alex Rampell: There's so much latency. Zillow is a good example. A lot of people use Zillow. It actually doesn't make that much money because it's a lead generation machine for agents. That's how they make money. The vast majority of their revenue comes from you doing a search. But you're not even doing a search with purchase intent.
--:-- We've talked about Google a lot on many podcasts. Google makes lots of money and it's a freemium model. 99% of the time you're searching for, "How do I kill this annoying fly that keeps buzzing around our pot?" Then 1% of the time it's, "I want to go buy a fly swatter." That's purchase intent. There is a fly in our studio, Varun. That's what I'm referencing here.
--:-- 1% of the time there's purchase intent. Whereas there are people who have done this with looking for homes. It's like, "Oh, I'm going to spend all night looking at homes I cannot afford in a weird part of the world I'm never going to visit." Why do people do that? I don't know. It's fun. It's aspirational. I like looking at homes. "I heard Sheryl Sandberg sold her house. Let me look at that house. I heard Sharon Stone this. I heard Liam Neeson that." You're not going to buy Liam Neeson's house, but you're still curious. You go look at it.
--:-- The purchase intent tends to be low. There are some search engines that are very tightly coupled to transaction. Real estate is not always that way for two reasons. Number one, there is this entertainment value. Number two, there's a lot of latency. I was looking at homes when I couldn't afford one when I was a little renter in Santa Clara having just moved here. I couldn't afford a house in Palo Alto. I would look at homes all the time. There was purchase intent, but with years of latency. Versus Google, you don't use it that way. It's like, "I want to buy a fly swatter." I type in "fly swatter," I see 50 search links pop up, I click on one, and I buy. Maybe I'll buy tomorrow. There's much more near-term proximity.
--:-- That's part of the reason why you've got a DAU product and that does not necessarily mean you just bolt on a monetization engine and it works. Particularly where the monetization engine is... that almost undersells how hard it is to build a monetization engine. Mortgage, I've had to get fingerprinted in God knows how many states. We're doing this Mr. Cooper deal and I had to send ink fingerprints to the state of Virginia. Every single bank account I've ever had. It's just so complicated. I wish it weren't that way, but it turns out it's very complicated to add on and bolt on the monetization engine.
--:-- By the way, it's very hard to build one of these daily active use products. Because you have a little bit more voyeurism in the field of real estate, it's not necessarily like I have very near-term proximity to purchase intent. Why hasn't Zillow done this? I'll tell you what. It's really, really hard. And they're addicted to the current business model of selling leads to agents.
--:-- Varun Krishna: I would just add that winning in housing is not for the faint of heart. I don't expect that an early-stage company in a garage is going to be able to deploy. There's such an activation energy required. The regulations vary by state. Products are fragmented. The distribution is hyper-local. You have the cyclicality where the volume swings with rates. Lenders have to scale up and scale back. You have banks stepping in after the financial crisis. You have the secondary market with originators, aggregators, and servicers. You have a bunch of legacy processes, manual docs, appraisals.
--:-- You also have all kinds of other things. You have employers that have to verify income. You have banks that have to confirm your assets. You have insurers, appraisers, title companies, and spenders. Everyone uses different timelines and systems. It's friction and fragmentation. Part of it is just the amount of activation energy required to decide to do that. It's not for the faint of heart. That's one of the things I love about what we do. We have decided to overcome that activation energy. And guess what? It took us 40 years.
--:-- It's sort of like, why is it that credit card networks have such a dominant presence in the market, the big ones?
--:-- Host: The visas, the MasterCards, the Amexes. And why is it that you have a bunch of neobanks that are creating your credit cards, but they're not taking significant share? The simple answer is, it took them a long, long time. It wasn't something that just happened where there is this virality and network effect where suddenly these things grow.
--:-- Some of the things are just the simple fact that the easy way is the long way and the long way is the hard way. There is no sort of easy way. And so that's something that I think gives us a little bit of a first mover advantage. It's not something that we take for granted, but just the amount of serious fragmentation, the amount of disparate technology and systems, the incentive models around the different players are all at odds with each other.
--:-- Varun Krishna: And we look at that as a good problem because we've overcome some of that activation energy. Now you have technology and AI, you have automation, you have the ability to compress turn times, lower fixed costs, connect the different pieces of it and just build a more connected journey. But that's where I think it's a good problem to have, but it's also one where we have an opportunity to do significantly more, given we've overcome that activation energy.
--:-- Host: That's a good note to wrap on. Guys, thank you so much for coming on the podcast.
--:-- [Thanks for listening to this episode of the a16z podcast. If you like this episode, be sure to like, comment, subscribe, leave us a rating or review, and share it with your friends and family. For more episodes, go to YouTube, Apple Podcast, and Spotify. Follow us on X @a16z and subscribe to our Substack at a16z.substack.com. Thanks again for listening, and I'll see you in the next episode.]
--:-- [As a reminder, the content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any a16z fund. Please note that a16z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see a16z.com/disclosures.]
