Top 4 Takeaways: 20VC Interview with Kaz
(with bonus EOY price target courtesy of 20VC)
Even though it was really only a 25 minute interview, there were so many good nuggets in terms of how Kaz is thinking about the business (helps that he talks fast!) - wanted to share my main takeaways and reactions for OIL readers.
Spreads are Coming Down and Growth is Back Baby!
“By the way, if you do that, you end up with adverse selection… like the market eventually clears properly. And if you think for a very long time you're going to have 20% margins buying homes cheaper than someone else, you're just straight up dumb”
Commentary:
My biggest takeaway from the whole interview is that Kaz and the new management team are set on decreasing spreads and, as a result, reigniting growth. Specifically, he’s not anchoring towards any macro bet (although that will likely help) but simply the idea that adverse-selection at 20%+ spreads makes the business untenable.
I think he has a very good point. One thing that wasn’t mentioned much under the previous regime is just how slowly some of the homes sold and how flow-through of initial spreads to contribution margins was actually pretty bad (certainly less than 1 and maybe even less than 0.5)
My guess is that adverse selection was likely a big driver here in that Opendoor just ended purchasing more and more lemons as they tried to play it safer and safer; especially if they weren’t using AI to make step-function improvements to their pricing algorithm.
In the short-term, I believe this is very bullish for the company as it will guarantee an increase in volumes and revenues, potentially even in the seasonally slower late-Q4 and early-Q1 periods. Guidance will be an absolute game-changer in the upcoming Nov. earnings call and I personally can’t wait to see what the new management team has in store. The sad irony is that the company is currently in such a shrunken state that the ramp-up opportunity is actually enormous.
In the long-term though, scaling up their balance sheet again will leave the company more vulnerable to macro and housing cycles. I think managing this growth will require an eye towards risk and, more importantly, a new paradigm of how they monetize customers on the “platform” (see point 2)
The final question is whether this pivot is already priced in given that the stock has gone from $1 to ~$9. Honestly, I’m not sure but my gut says probably not fully. The street likes to at least wait for guidance before giving even partial credit and no doubt many funds are on the sidelines waiting for November to see what the ramp could really look like.
Opendoor is a Tech Company Again!
“Opendoor is a software company that happens to have some assets. I think there's an asset light model here that could work incredibly well to the asset heavy model that can work incredibly well and we'll have literally all of them…
…I fundamentally believe you must judge companies based on where leverage comes from…The leverage from Opendoor will come from software. We will build excellent software products for buyers and sellers of home and owners of homes. And we will attach services to those.”
Commentary:
This quote from Kaz truly signals a return to thinking about Opendoor as a “tech platform” for real-estate. The Amazon analogy is back and bigger than ever. This makes sense coming from a product / tech-first leader and is really just a return to the original company’s roots and identity. This narrative is also great from an investor’s perspective as it shifts Opendoor from being a capital-intensive “iBuyer” to a first-class “tech-company” - deserving potentially of tech multiples.
Even after just a week at the helm, you can tell Kaz’s intensity in shipping and leveraging AI (see shipping MCP’s internally so quickly). This bodes well for the company’s ability to build a high-quality “mouse-trap” that really is a differentiated product and experience in the market (Robinhood anyone?)
However, I think it’s also very likely Kaz and the team will run into the realities of running an ops-intensive “real-world” business. Hopefully, despite the new management and inevitable employee-turnover, the company doesn’t repeat the same mistakes of the past (eg. getting ripped off by GC’s, squatters, safety and scams, massive home mis-pricings, losing track of homes, forgetting to list homes, etc.)
I think the tension here will be building good enough products and experiences that truly start to move the needle on consumer behavior in real estate. The existing muscle memory for Americans when thinking about buying or selling is still to find an agent first - could it be instead to visit Opendoor.com?
“How’d you move?” “Oh, I Opendoor’d it” - that’s a $100B+ company right there.
Opendoor Will be About Owning the Long-Term Customer Relationship
“This is why people who sell used cars aren't awesome people typically. Because they have to make all their money in that one half hour. Whereas if you make my money, your money in the long run from a long lasting relationship with the counterparty, you have an incentive to do right by each other. And this is actually a key differentiator.
"What we will do, we will create a network for buyers and sellers… where they will have a long term relationship with us over a series of products we will launch. Some of them will be free just because they're good. Some of them will not be and we'll make money on them.”
Commentary:
I thought this was a great explanation of the paradigm shift in Opendoor’s value proposition. Instead of trying to “squeeze” as much out of the customer in a single transaction, Opendoor’s aim should be to create a “delightful” experience that draws consumers back again and again to the platform.
This was always an issue in terms of how to “monetize” a customer given that most people only move every 5-7 years. I think the answer has always been to layer on additional services so that Opendoor is top-of-mind for anything home-related.
Refinancing? Renovation? Renting? Price Consultation? Selling? Buying? First place people should be going to is Opendoor.com
Agents Will Have “A Place”
“There's a structural issue that we need to think through which is that transactions and relationships that have many intermediaries are typically not great ones… Now do I think there's a place for experts to help either side? Yes, in some cases, but not in all cases. So I'm not dogmatic about this.
"Now if some of those buyers and sellers want to have someone else help them, great. I'm fine. I help my mom set up her Amazon prime account… shouldn't get a worse experience from Amazon because of that.”
Commentary:
Kaz walks back a little what Keith has said about fully disintermediating agents, but not by much - essentially equating them to glorified “tech support.” Pretty revealing I’d say in terms of future dynamics / conflicts at play. I would caution the company that agents will resort to dirty tactics if they feel like their livelihood is threatened (definitely part of the Opendoor 1.0 learning curve)
It may be that Opendoor and agents are “frenemies” in the short to medium term with Opendoor still looking in some ways to monetize their lead flow (ala some “Key Agent-like” program). Not sure if that’s still on the table but that would make a lot of sense as part of the asset-light business.
In the long-term though, it’s clear where Opendoor is heading and we’ll simply have to see how things shake out in the industry: an unstoppable object meeting an unmovable force.
Final Takeaway:
Opendoor (v3) is truly returning to its roots as a high-volume / high-market-share / high-turnover “Amazon” for real estate. This time they have macro and AI / tech tailwinds behind them plus a renewed team and retail support but no doubt the journey still won’t be easy.
Kaz is swinging for the fences and we’ll just have to see what he bats.
BONUS: EOY price targets from 20VC
There was a fun section (at the end of the video) where Jason and Rory give their price predictions for $OPEN by end of year.
Harry: Opendoor today is sitting at about $9.30 a share today. End of year - December 31st - it's $9.30 today, where's it going to be?
Jason: I got $24… The way I do venture investments, I just do a line… Kaz is pretty damn good. The memers like them. As near as I can tell from Twitter, I'm going $24.
Rory: I think that's great. I mean somewhere between $9 and $24. I think it keeps going up. I think it has extraordinary heart and I think this guy is so smart and talented. They'll make noise, move momentum and I think in the near end the stock will appreciate because you can make the story feel big.
I’m just going to say I think it's a brutally hard business over the next three to five years. You want to believe in that vision of being able to help people in the most important financial decision of their lives. I just think it's an extraordinarily hard business because there's a huge amount of arcane detail on every house and everything's a special snowflake. So I hope I'm wrong because he seems like a great guy. I just think it's a hard thing to build massive enterprise value in.
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Well there you have it, even despite Rory’s skepticism, he and Jason both admit that the (short-term) momentum and narrative is just too strong. No one wants to stand in front of this train… $OPEN to $24 by end of year?
