April 9, 2020
Brendan Wallace: All right, so Max, thanks for joining. Max is the CEO of States Title, one of Fifth Wall’s first investments. And Max, can you just start off by telling us what it is that States Title does.
Max Simkoff: Sure. States Title is focused on delivering an instant title and closing experience as part of closing a mortgage. The mortgage process is unnecessarily complex and filled with a massive amount of friction, frustration and expense – also a lot of paperwork still today, and States Title manages most of what is typically called the closing process. We underwrite title insurance using a predictive algorithm that we’ve created and then we do all the closing tasks involved with closing the loan, so everything from setting up the escrow to dispersing all of the funds to printing the loan docs, getting signatures, recording the mortgage, paying the transfer taxes. And so in a nutshell, what we do that’s unique is we’ve used machine intelligence to remove most of that friction, frustration, and also now we’re removing a lot of expense – and our ultimate vision is to be able to make the entire closing process for a mortgage happen at the tap of a button.
Brendan: Got it. And Max, how would you describe your business right now, like April 9, I feel like we actually have to list days right now?
Max: Yeah, you might want to ask me again in an hour and I’ll give you a different news drift.
Brendan: Ah, April 9 at 9:15 a.m. now.
Max: OK. We’ll take notes hourly.
Brendan: How’s business right now.
Max: Look, business overall for us is going well. There’s a couple aspects to this. One is that we made a conscious investment since the beginning of the founding of the company to invest heavily in rolling our solution out first for the lender market. So all of the innovations that we’ve delivered around instant title and closing, we really went all-in on refi, which seemed like a very weird thing to do given that we went to market with our first product in early 2018, which is when many people thought that was going to be the low point for interest rates and we would see them gradually tick back up. And so our ability to deliver a differentiated experience there and offer instant title and closing for refi and some of the more recent technology investments we accelerated have put us in a really good position there because the refi market continues – even in the current situation – to be quite healthy.
We do have a large part of our business, though, that is retail-distributed through the title agency that we acquired from Lennar. And even though a lot of that retail business has also shifted to refi, we still have a pretty good portion of that that is purchase mortgage-focused, and as can be expected, that volume has dropped precipitously just in the last few weeks. So that’s a part of the business that we’re expecting to see continue to decline pretty significantly – likely for an interim period of time. You could call it stubbornness or luck but our focus on refi as the flagship part of the business where we’re releasing all the newest technologies, I think has left us in a pretty good position.
Brendan: And Max, one of the themes we’ve focused a lot on is the digitization of basically every real estate transaction process. And so, as you read the press today, you see a lot of information about virtual viewings, digitization, and doing remote notary and everything. And I guess one of the questions I have is, do you see this as kind of just a moment in time like this is just pragmatic that people are doing this or is this a wake up call to some extent for the industry?
Max: Yeah, I’d say it’s beyond even a wake up call: We are witnessing an unprecedented overnight shift in the very structural foundation of the real estate market. And I’ll give you a couple examples: One of the most difficult parts of the mortgage process to get right is the closing and one of the biggest obstacles to doing that for the last hundred years has been the involvement of a notary in closing a mortgage. And this has always been a personal pet peeve of mine. I don’t really understand why we still use notaries for mortgage closings because we have much more modern day technology.
And there is this thing called remote online notarization as a concept, which is basically having a notary do a notarization session over webcam using digital technology – it allows you to close the mortgage without any paperwork. And for the last 10 years, state by state, there has been legislation that has been gradually moving its way through state legislatures and getting approved, and as of four or five weeks ago, there were maybe 15 states or so nationally who’d approved remote online notarization statutes.
In the last week, we’ve seen an emergency order from Governor Cuomo make remote online notarization legal overnight in one of the most important real estate markets in the country and there is now a federal bill that’s making its way out of committee sponsored by Senator Warner and Virginia to make this legal nationwide overnight – and it will happen, it’s only a matter of days now.
This eliminates five years of regulatory inertia to allow digital closings to happen, and so I think it’s not a fad – this is not a point in time thing. The fact that the collective national psyche has been negatively impacted to the extent that it has and the horrible toil that this health crisis is taking on this country’s economy mean that all of the old school inertia and people being wedded to paper-based processes, they’re being stripped away almost overnight. And it’s creating necessity that’s driving innovation that’s going to be here for good.
Brendan: And I imagine part of that is obviously on the legislative and regulatory side. Just expediting processes and being more permissive and being more tech-forward to allow companies like yours or anything that enables remote closing of any real estate transaction to work. On the other side of it, you have the private sector and I’m curious, from your perspective, what would be the advice you would give maybe two different audiences? One would be residential brokers, like if you owned a residential brokerage today, what should you be doing for your business to future proof it in light of what just happened?
Max: The advice would be that you have to now live in a world where every aspect of everything you do must be digital… from the way that you market and source leads to the way that you show homes to the way that you manage the title and closing process to the way that you deliver access to the new homeowner, right? This concept of showing up at a closing to wet sign all of your documents so you can get your physical keys – that is going to become a thing of the past. People don’t want to do that, it’s not safe to do that, and it’s also not efficient.
The good news for residential real estate brokers is all the technology to enable them to do that is here. We do not need to develop some game-changing new technology platform or some new solution to enable them to have a complete and digital flow to do their job from anywhere, to service any clients and do everything from market homes to get them to see homes, to get them to purchase or sell a home.
Honestly, it’s possible to do that without ever meeting a client, that is the world that we’re gonna live in. And so my advice to residential real estate brokers would be to accept that as a given, not as an optimal way to run a business that maybe some people will do. It’s going to be the necessary way that many, if not most brokers do business – not that long after we’re done with this.
Brendan: And Max, obviously, you’ve been a part of one of the biggest strategic transactions. Obviously, Lennar – one of Fifth Wall’s LPs [limited partners] – and you consummate this amazing partnership and transaction to accelerate your business. So I’m curious if you were to look at the homebuilding industry broadly, what advice would you give them right now?
Max: I’m biased because of our partnership and so I would summarize my answer: Homebuilders should do what Lennar is doing. And let me be more succinct, I would say homebuilders should do what Lennar started to do. Honestly, they embarked upon this journey several years ago now and they’ve been picking up a lot of steam behind it just in the last year. But much like the residential real estate brokers, you have to look at the whole process. How are you marketing homes to potential buyers? What does the digital lead generation experience look like?
It’s no longer about having salespeople engage with people in buying centers. It’s finding leads online and converting interest to opportunity in a digital pipeline and then mining those leads and getting them converted to opportunities to close sales and having everything from your own mortgage operation – if you have a captive or a partnership with an adscale mortgage operation – be fully digital, enable that process to have instant pre-approval, instant underwriting of the loan, instant closing, instant title, everything fully remote, fully digital, right? Again, it’s clear where we fit into that process because of this partnership that we built with Lennar.
Brendan: For what it’s worth, I’d say we’re seeing a huge bifurcation as to how corporates have reacted to this. To some extent, there’s the Luddite view of tech’s falling apart, why should we be investing in tech, all these companies are young and too high-risk. On the other side, you have people really leaning into what Lennar did back in 2017, which was to map out this vision of a one-click close, how can you effectively digitize every component transaction that goes into closing a home? Can you identify new companies into which you can structure strategic partnerships and make investments? And you really have this constellation, which creates synergies in how they’ve obviously built their business, and it’s actually, I think, really accelerated your business as well. What we’re seeing is a huge division in how corporates are approaching that. To some extent, there’s people who are seeing this as a time to sit this out and to some extent people are really leaning in.
Max: Yeah, I think it’s always helpful to look at examples of companies that were started during a downturn. And it used to be that you could look at companies that were started in 2000 or 2001 and there aren’t a lot of them that were started that really survived the first wave, but those that did were really strong. I think there’s now a lot of more relevant, more recent examples of companies that were started during the financial recession that were primarily digital businesses. The best example of these that I like to give is a company called Okta.
Okta does what’s called identity management. This is a great example of where they looked at the proliferation of enterprise software applications in software-as-a-service, and during the financial crisis, they basically asked, how do we start a capital-light business that provides the most advantageous digital layer to all of the enterprise software that all of the enterprises are going to use when we come out of this.
And I think the co-founder of Okta has probably told this story, but he pitched like 25 venture funds on this idea in 2008 or 2009 and he got 24 nos. Hard nos. Not like, ‘oh, this might be interesting, let’s have another meeting – it was like first meeting as a disaster. And, they finally got it. Yes, now it’s lucky that that yes was from Andreessen Horowitz.
This is one of Andreessen Horowitz’s first deals that they ever did and they led the Series A, but you look at the shareholder value accretion in that business that happened exponentially just in the last three or four years as a result of them starting scrappy, having a fully digital business that was going to adapt to the transforming landscape of an industry that would be forever changed by that period of time. And, Okta is – last I checked – a $14 billion market cap business off of an IPO that was probably two and a half years ago a $2 billion market cap, right?
By the way, I fully believe Okta will be a $50 billion dollar market cap business probably inside the next several years. And so I just think that that kind of mindset is – obviously hindsight is 20/20 and it’s easy to look back through the lens of time and say: ‘Of course, that was a great time to start a capital-efficient business that was going to take advantage of an industry that was transforming its foundation overnight. That’s exactly the kind of opportunity that the real estate industry is probably gonna see like 100 of in the next 12-18 months.
Brendan: If you were to look at this from the flip side, right, so from the perspective of startups, it feels like the kind of luster of the extremely fast growth, low margin loss-making businesses, and it feels like some of the growth two years ago is gone. And there has in some ways been a retrenchment towards the more stable, proven businesses that are either profitable or have a trajectory towards profitability.
So do you think the psychology of founders will change as well in terms of how they think about engaging with incumbents and corporates? Obviously, you from the very beginning, have focused on: ‘How do I build an organization that is partnership-ready with the biggest incumbents in the real estate space, specifically homebuilding and the financial sector?’ Do you think you’ll see more partnerships from the startup community because founders get the merits of this?
Max: I hope so. I think we’ve got the right trends moving in the right direction, which are namely that it’s going to be harder for founders to come by capital. They will need to find more lean business models, and again, we’ve found a fantastic success model in this with Lennar as one of the best ways to make your business capital efficient and de-risk your go to market success is to partner with an incumbent, right? It’s like there’s a mutual symbiotic relationship: We bring a forward-thinking, innovative, new creative, technology-driven operating model to the table. They bring over 100 years of industry experience, significant distribution channels, and an intimate understanding of where the real structure of the problem lies that we’re trying to solve.
And again, especially in this market, I don’t know why more founders wouldn’t want to go that route, and I think there was some stigma attached to it, particularly over the last four or five years where capital was just so freely available and venture investors who are not sector-focused like Fifth Wall, they were throwing so many other things at founders that were, quite frankly, I think distracting – like creative deal structures that enable them to spend more money, specialized service models to help their portfolio do things that they didn’t have enough time to pay attention to. That stuff all gets stripped away and now it’s kind of old-school – but what matters is the business model.
And when I say the business model matters, I mean gross margins, right? What I’m really excited to see is that I think founders are going to focus less on creative interpretations of metrics, community adjusted EBITDA, or whatever the metric was that Groupon used in their IPO. I’ll never forget it was some kind of adjusted gross margin that found a way of adding back COGS – like a significant amount of COGS – I think you’re going to find founders now that say: ‘What is our gross margin and can we have the most capital-efficient customer acquisition model possible?’ Which I think is uniquely enabled by partnering with corporates, and I think a lot of those companies are going to build the best businesses out there.
Brendan: Yeah, and I think you’ll probably also see this kind of blending of what was previously characterized as private, generalist venture capital in corporate venture capital, meaning I do think the corporates that are taking this seriously are viewing this as an existential moment in time, right, where they have the ability to do in two years, or even in six months in some cases, what would have taken five years to do. And as you said, there’s regulatory tailwinds behind that, there’s consumer preference tailwinds behind that, there’s capital markets tailwinds behind that. There’s a lot of reasons why at the moment, it feels like now is the right time for corporates to embrace this change.
Max: Totally. Corporate VC as an overall category, it’s funny how much people talk about what it’s going to be, right? Is it going to develop this way or that way – but it’s here and it’s gotten larger as a category and it’s starting to demonstrate real success in a lot of areas. So, this is an investment model that is getting better. And if it’s done the right way, it is – again, it’s a controversial thing to say and I don’t mean any offense to generalist VCs – but if you specialize your investment paradigm around deep domain expertise and market knowledge, and then you de-risk investments with well-structured partnerships with the very stakeholders in the ecosystem that can kingmake companies, if that’s done correctly, it’s just far better than a generalist VC model, right? But it has to be done correctly.
Brendan: And in the case of Lennar and broadly the homebuilding industry, there’s not that many companies that kind of emerged as the winners within the real estate transaction space. You could almost plot them and they were almost knowable in 2017, right? And we were obviously huge advocates of States Title and Hippo and Blend, and many of the companies that have come to partner with Lennar. But I think there is almost this view that it’s not knowable. You can’t know, you can’t predict the future, you can’t predict the winners. But I’d say, one, that’s the wrong premise, and the second thing, it completely misses the point that there’s this opportunity to kingmake for these businesses.
Max: And also, though, I don’t agree that it’s unknowable. I think, again, this is where I think we’ve gotten distracted over the last several years. It’s easy to get distracted by companies that get the most press, but the metrics are kind of hazy. But when you find companies that are getting the most press and their metrics are good and they’re delivering quarter over quarter, I think it’s actually fairly easy to see which companies are going to kingmake.
The distance between winners, fast followers, and casualties – and we talk about this a lot in our sales presentations – we talked to mortgage lenders and were like: ‘Hey, we’re delivering instant title and closing because consumers expect instant experiences, period. This isn’t about a mortgage thing – they expect instant entertainment from Netflix, they expect instant food delivery from Instacart, they expect instant everything from Amazon.
Brendan: It almost feels like that’s the thing that I think many corporates could miss, is that this is obviously a unique moment in time where we’re all quarantined at home, but it’s the psychological shift in consumer preferences that I actually think a large part of which will be durable and be persistent that are just going to radically change these archaic business models, and you had an amazing stat about food delivery before we get on the call actually…
Max: It’s like I say – and I’m probably going to butcher it – but it’s something like two percent of frequent grocery consumers used Instacart five or six weeks ago, and now it’s like 17 percent or something.
Let me give you another example that, again, I’ve been using as I talk to mortgage lenders because we talk to a lot of mortgage lenders who are like: ‘I know, but it’s not that easy to make it instant and do this or that,’ and I’m like, listen, you know, I got sick three or four weeks ago and I needed to see a doctor, and given the current situation, I did not want to have to go into a doctor’s office, right?
And so I downloaded the app for Sutter Health. So just keep this in consideration for a second. There’s a regional health system in Northern California that most people in the United States have never heard of, and they have an app that I downloaded. And when I download that app, I made an appointment to see a physician’s assistant that I saw 30 seconds later on a video visit. They diagnosed all my symptoms correctly, had a prescription cut and sent to my pharmacy down the street that I could pick up five minutes later. And that’s health care, right? That is the new normal.
People are going to expect that coming out of this. So if you’re in a business where you think that your consumers aren’t going to expect that whatever experience you offer, they’re going to want it instantly, on-demand, from anywhere, from any device – you’ve got your head in the sand.
Brendan: Anecdotally, I set my parents up for the first time with Amazon. I think that they viewed Amazon as this big, amorphous, confusing thing – they didn’t know how to use it. And I wrote it down on a notepad, and so they now have it next to their computer. And they were literally just shocked by the idea that they can click on something, and in three clicks, it would arrive at their door. And you want to be so curious about it, just looking at retail, for example. Of all U.S. retail, roughly, online represents they estimate between 10 and 15 percent. So the vast majority of retail is actually happening offline, but we know that online has been taking market share from it.
I wonder, if you looked at how many people on average make their first Amazon purchase in a given year and how many people in the last six weeks made their first Amazon purchase? My guess is it’s probably years, like the numbers for 2025, just happened in 2020. And that, I think is going to have consequences across every part of the business. It feels like every broker that’s doing a digital transaction right now, they’re going to realize, ‘Oh this has been around for a while, I can’t believe I didn’t use this,’ and there’s almost been this leapfrog effect of, now the technology is so good, that what they’re adopting for the first time isn’t some experimental solution. It’s a durable long-term solution.
Max: And it’s a necessity. Again, the customer experience demands it. The clients of the modern day real estate broker are – just like every other human on this planet – going to be mentally scarred from this experience. You’re going to see it in their unwillingness to shake someone’s hand, even after we are long past this. And when the very nature of human behavior changes, to expect a level of convenience and safety that may need to be activated on-demand at any point in the future, it will force the industry to adapt.
Well, Max, thank you so much for joining. Obviously, it’s odd that we’re connecting over Zoom, but thank you so much for doing this.
Max: Yeah. Thanks for having me.