Operators Ep 29 Transcript

Delian:

Hi everyone. My name is Delian, and I'm a principal at Founders Fund, a venture capital based in San Francisco. This is Operators, where I interview non-VC, non-CEO, non-founder operators that make the startup world go round.

Delian:

Today, I'm interviewing Dod Fraser, VP of Capital Markets at Opendoor, which he joined right after the company closed their Series C. Prior to joining Opendoor, Dod was an associate at TPG and Perry Capital.

Delian:

I hope you enjoy the show.

Delian:

Dod, thanks so much for coming to the podcast. Excited to have you on today.

Dod Fraser:

Glad to be here, thanks for having me.

Delian:

So typically in these types of conversations, before diving into the very interesting work that you're doing at Opendoor, including all the... Honestly I feel like half our portfolio that you're advising. I always like to rewind and start early on in people's careers, which is you joined Lassarat as an analyst back in 2003.

Delian:

Was it the plan to always after college to get into finance? Or what led to that originally?

Dod Fraser:

Yeah, I actually I was Pre-med in undergrad and I fell off the wagon, got interested in economics and then out of school, I actually worked at Silver Lake early on. Got a taste for what finance was. Enjoyed that, and then from there made the jump to Lassarat to do the classic analyst program to get that core skillset.

Dod Fraser:

But finance, this was an interesting one. I went to Lassarat, I was there for two years, but then actually left Lassarat to go back to Columbia to do a Post-bacc Pre-med program, because I was like, "You know what? Banking is not for me." And then I fell off the wagon in Pre-med a second time, and actually joined Perry Capital at that point. Then I was like, "Ah, this is really fun. I'm enjoying this," and stuck with that for six years.

Dod Fraser:

So I oscillated a lot in those early years, back and forth, in particular towards medicine, which would have been quite a different path.

Delian:

I was going to say, what caused the constant hopping off the bandwagon of medicine? Was it just, "I'm not in for the 15 year grind of med school before I can make any money and get massively into debt? Or, was it the day-to-day of actually, I just don't like thinking about people's bodies all day?

Dod Fraser:

I did not like banking, I have to admit. That was not the most fun for me. A lot of good training there, but you come away with a couple of core hard skills, but that longterm path wasn't for me. And what medicine was something that I always enjoyed, like the people and the connections you get out of that, but the world of medicine, going back to this Post-bacc Pre-med program, I interned at a hospital, spent a lot of time with doctors.

Dod Fraser:

The world of medicine had really changed from when my grandfather was a small town doctor, GP. He was the town doctor. That didn't exist any more, so that same personal connectivity just wasn't... Well, what I wanted out of it, and so that plus going to work at a summer intern at Perry showed me a completely different side of finance. More the investment side, and I really enjoyed that.

Dod Fraser:

So the parts that I didn't love about banking were gone, and it was just pieces that I really enjoyed. And I decided to stay there for six years so I was there for quite a long time.

Delian:

Yeah, tell me a little bit about Perry. I don't know much about the Fund, just like the structure of it, the size of it. Sounds like you worked across a variety of different groups while you were there, the distressed capital, PE, the multi strategy fund. What was let's say, day one, where did you focus? And then how did that shift over time, and what were the parts of it that were most interesting and most attractive to you?

Dod Fraser:

Yeah, Perry was a $15 billion multi-strat fund, so think of Och-Ziff, or Farallon. Actually the three of the founders, Dan Och, Richard Perry and Tom Steyer, all were analysts together at Goldman. And then they each set out at the same time in the late '80s to start their fund.

Dod Fraser:

So multi-strat funds, and at the time a partner from Lassarat had been hired to build out a special fit illiquid private equity investing practice, and he was actually the guy who hired me at Lassarat. And so when he jumped ship, he was like, "I need people. I can't hire from Lassarat, but you're in this Post-bacc Pre-med program. Can you come work for me?", because he could hire me. And so I said yes. And then I stayed in it.

Dod Fraser:

The fun part for me about that role was really the variety. Our mandate was, we could be anywhere in the Capital structure, so credit, pref equity, full on equity, that's owning businesses, and any industry. And that broad mandate was both fun for me, but also was ind of eye opening to see, especially because everything went up to Richard. Like going to Richard and explaining the business. Seeing how Richard approached with the same framework, he could apply his investment philosophy to really any industry or any part of the Capital stack and seeing those common these and picking those out, was fascinating.

Dod Fraser:

It was like you'd go into these meetings and within five minutes, he'd stop you and be like, "Okay, here are the three things I care about. Answer these three questions." And it was almost always three. And you'd start to answer them. If you had good answers, it's like, "Okay, I'll do the investment." If you didn't have answers you'd go back and do the work and inevitably, 90% of the time, that was one of the three things that killed the deal and stopped it in its tracks.

Dod Fraser:

It's just the ability to see through the noise and get to those core nuggets of here are the big risks. And usually if you'd knock off those big risks, he'd assume that you got the rest of the underwriting right, and you could move forward. That breadth and variety, actually it was fascinating to... And I still draw on it today.

Delian:

Given the timeframe you were there was right before the real estate crash and then going through it. What was it like working at a... Was there distressed credit that you guys had to go through that was at the trough of this? What was it, I guess, like working through capital markets during such a volatile time?

Dod Fraser:

Yeah, so we looked at everything that was distressed in the subprime space. We had a very large CDS position on, so we had a lot of money there, and then we were buying distressed portfolio assets. So we bought four and a half billion in condo assets, actually near [Hometown 00:06:32] was 30% of the portfolio. We bought a lot of the condo towers that were under construction in Miami at the time because they'd been seized by the FDIC.

Dod Fraser:

And so we just were constantly looking for either platforms or hard assets we could latch onto. Platforms that could help us aggregate distressed assets, and so backing the equity in those platform plays, or buying them directly. I actually was only planning to be there for two years and then go to business school. Got into business school, deferred a year, subprime crisis [inaudible 00:07:01] me, it was such a fascinating time to be in that seat and watching the world change and shift, that I really ended up staying there, as I said, for six years.

Dod Fraser:

It was a fascinating time and we were one of the few funds that had capital that was very sticky. And we'd actually raised a dedicated fund too, that was private equity style. So it was our decision to invest that capital, whereas a lot of people were retrenching. We had the ability to still deploy that capital which was just a lot of fun and just fascinating to see the markets unfold as they did.

Delian:

Before that, was that an area that you were particularly focused on? These distressed hard assets? It sounds like it was sort of a mixed fund. Do you feel like part of the reason why later on it seems like you've now obviously focused on real estate ton over the past decade now? Was part of that because of the distressed subprime crisis and seeing the opportunity there? And is that what got you excited?

Delian:

It sounds like you were going to go to business school, but got excited by that crisis. Is that what spared this interest in the world of, in particular, RE, EO and hard assets?

Dod Fraser:

So, one of the things... We looked at aircraft. We were going to buy metal, we looked at containers. We did all these fun things, but the common thread throughout most of the investing I did at Perry was, businesses that did have hard assets, because you could underwrite the downside.

Dod Fraser:

And so yeah, given the timing, the massive opportunity in population assets was residential real estate or commercial real estate, like condo as an example. So I ended up spending a lot of time investing in those assets, so I did develop a expertise there, and that actually carried through to why I ended up joining TPG, actually, after Perry.

Delian:

As you say, before we dive into the TPG days, was it obvious, let say when you're buying up these half-built condo buildings in Miami, did it seem obvious that there was actually just this significant arbitrage where it was like, "Look, we have sticky capital. Everybody else doesn't, they're retrenching and prices are clearly just way, way off par. And by the way we'll be downside protected because this isn't just some random stock, it's a hard asset, an actual building that we can actually recover."? Or, did it actually feel like, I don't know, palpitating adrenalin where everyone's like, "We're actually taking a bet that no one feels, or everyone is saying is absolutely crazy, but we really believe in."?

Dod Fraser:

It was definitely the former. In that we were able to buy them at a discount. And at the time of our underwriting, we bought 101 condo towers at one time, and some of those we bought for 20 cents... Like one market, I won't be specific about the market, we bought for 20 cents on the dollar. 20 cents of costs.

Dod Fraser:

So the part that actually was misunderstood a lot of the time and this particular portfolio was actually most of the condo towers, they were built. So there actually wasn't a lot of construction risk. It was just sale risk. So then it really came down to, "Okay, what is the right, stable, longer term sale price, and what's the absorption? How long does it take?"

Dod Fraser:

So those were the two things we had to underwrite, and actually it was fun. It was Richard Perry, Barry Sternlicht and Kelvin Davis, who ran TPG Real Estate at the time. And it was the three of them and us doing the underwriting and a lot of these powers they knew personally. So it was a really fun, interesting underwriting. And in the end, to your question, we were buying them at a sufficient discount that we felt comfortable we wouldn't lose money. How much money, especially because it was a competitive process, how much money we would make was actually a big unknown.

Dod Fraser:

But we did feel comfortable we were getting in low enough, in particular in the riskiest markets, where we were buying at really low percentage of the cost, at least on an allocated basis, we felt good we'd make money and in the end, we did. It turned out to be a really successful deal. It took a little longer to sell some of the assets than we thought, although interestingly, Miami was one that came ripping back.

Dod Fraser:

And there were a lot of buyers that came in, and that significantly exceeded our expectations, which was at the time [crosstalk 00:10:59]-

Delian:

Who would have guessed that again, 13 years later, Miami would rip back yet again, during the COVID crisis?

Dod Fraser:

Exactly.

Delian:

Turns out people, no matter what, no matter how dire things are, people want to be on the beach.

Dod Fraser:

Absolutely.

Delian:

And [inaudible 00:11:12] happy to do so. So yeah, how did you end up switching over from Perry to TPG? What was that like, recruiting process? Was it again, somebody from Perry that got [inaudible 00:11:19] in TPG that you followed along with? Was it just this RE expertise and they were really looking to deploy significant capital and you had expertise in that? Or, how did that come about?

Dod Fraser:

Yeah, actually that deal I was just describing was a three way deal between Starwood, TPG and Perry. So I got to know the team, got to know what they were building. My wife is from the area, so we always wanted to make a move west, and the team, the special sit side of TPG at the time, which is now Sixth Street, was just getting started. And they had one of their three investing verticals was asset investing.

Dod Fraser:

They were building out that team. I'd gotten to know them, it seemed like an exciting time to help build up the platform. I was the 50th person of the whole entity and really the second person and ran US asset investing for the time that I was there. And we had two platforms focused on buying residential real estate and small amounts of commercial real estate, and then we also did a number of consumer asset trades.

Dod Fraser:

So my skillset, what I'd been doing at Perry dovetailed perfectly into what they were in the process of building out, so it was fortuitous timing.

Delian:

And it sounds like you and your wife wanted to move out to the West Coast at some point, but was there any even thinking at that time of, "Oh, there's this whole technology industry that's out there, and maybe there will be some opportunity." Did you apply my finance skills to the world of technology or was it just completely by chance you ended up in the Bay Area, that at the time, was going through this huge, let's say, boom of startups that were getting founded there?

Dod Fraser:

I had always been very... I did Basic programming early on, like actually language Basic when I was in seventh grade. I'd always been interested in programming. My brother at that time, had just moved out to start his company. He has a business called Fivetran that he started around the same time. So he had just moved out the yeah before, and so we just... It was definitely in the background there of this is another are of interest of mine, but I didn't really have a specific game plan to get into it.

Dod Fraser:

And this seemed like a very easy step because it was a clear extension of what I'd already been doing, and then once we got settled and we just figured out what that next phase, if there was a next phase.

Delian:

And it feels like during your time at TPG was the very first time that technology startups started to "get fat" per the fat startup framework, i.e., started to rely on debt as oxygen. Were you analyzing any of these things where there was like early days of Lending Club and some of the other "fat startups" really first started off purely in the financial services? Were you starting to track the fact that "Oh, there is starting to be this capital markets type role that obviously didn't exist in the days of pure software companies and the only types of capital they would raise are VC capital, i.e., the CEO raising it, versus obviously the Lending Club's of the world, is a very different type of capital stack."?

Delian:

Was that something that was on your radar that you were seeing given that you were in that sphere?

Dod Fraser:

Yeah, no. We were looking at backing those early startups and basically being the balance sheet for them. So absolutely aware of it, looking at it. We were deploying enough capital... We were very happy with the distressed investing we were doing, so admittedly most of my time did still skew towards that, but we especially towards the end of my time at TPG, had really started to look in some of these newer business models at the time that needed capital. So yeah, it definitely was on my radar. Making the jump took... There's a whole other story around how I made that jump.

Dod Fraser:

I was certainly aware of it, just hadn't really... It came up unexpectedly, the move.

Delian:

Interesting. Can you maybe describe how TPG assessed these types of, let's say, opportunities to be a part of the balance sheet vis-a-vis everything else that could be done? Was this totally net you of, "Oh, my God. This is completely wild that these companies are now relying on debt so much."? Was it like this is just going to be like 1999 again? It's going to be like pets.com, just burning through money like crazy. Why would we want to do that as a debt provider, versus just actually having equity in at least getting some of the upside?

Delian:

How did you guys actually think through some of those early startups that were coming up? Did it feel like a totally net new thing or a repetition of history?

Dod Fraser:

Well, in all those cases, they were dealing in assets that weren't necessarily new assets. So you could underwrite and you could benchmark against other things in the world today, or other investments we've done. So the concept of giving them debt capital against these assets, we could underwrite the assets. I think the big unknown actually was that what was the discipline on their side around originating those assets and were they good assets or bad assets?

Dod Fraser:

And that was the unknown part, because you didn't have the same track record. And so that actually was the hardest part for us to get comfortable. We were looking at one consumer platform that had been around for 20, 30 years. They lost money in one year of the subprime crisis doing credit card lending. They were just hyper consistent, same business model for decades.

Dod Fraser:

That track record gave us a lot of comfort. And so I think the shortness of the track record was the part that really made it harder for us to... And that really comes down to, "Do they have good underwriting standards?"

Delian:

Right. And how would you even asses that as that an external provider? Would you actually dive into, "Okay, let's compare this, XYZ started providing these personal, unsecured lines, vis-a-vis a Wells Fargo providing unsecured lines. Let's look through traditional underwriting schemas, here's what they're looking at. And basically let's make sure the startup is going through a similar underwriting process."

Delian:

Give us a sample of the book. Let's go through, gauge it and feel like we are comfortable with the level of risk we're taking on? Or, how would you as an external party actually go through and assess that underwriting?

Dod Fraser:

Yeah, I mean at a high level, there's tow things you spend your time on. One is look at the data they have. So look at the track record. The assets they've originated, and the bench market, too. Okay, they're originating this consumer unsecured loan. Let me go find data that I can then look at the same cohort curves and basically look. So for a six-month old cohort, are they underperforming or outperforming versus an industry standard securitization or otherwise?

Dod Fraser:

So there's the data piece of it, not to oversimplify it, and that's really coming down to, "Okay, what's the loss rate? What's the delinquency rate? What's the severity on the delinquency, so what does that mean in terms of losses?" That's one piece. The second piece though is the point you raised there, which is underwriting the process. Like what is their process? Who are the people that are doing it? How similar or different is it to when we've underwritten of the similar or same asset classes? Are they good or bad? Who have they hired to do it?

Dod Fraser:

That's more qualitative, but actually given the short track record, you have to weigh that pretty heavily in assessing the risk that you're taking and in the end, that's the place where a lot of them were falling down, from our perspective. At least they weren't hitting the bar we wanted, or I wanted to proceed.

Delian:

You'd actually compare the curing curves of XYZ tech company vis-a-vis the curing curves of Wells Fargo and be like, "Okay, well it's not clear how this portfolio will perform over the next five years, but at least in the first three months, it is not performing according to what we would ideally hope for."

Dod Fraser:

Yeah, exactly.

Delian:

And so then walk me through... So you're at EO TPG for roughly three years. And then came across this opportunity with Opendoor. How did that come about and what was the thinking around taking a pretty orthogonal hard left turn in your career at this point? You had been in, I don't know, "pure finance" for almost a decade. To go from that to operating at, I imagine at the time it was on the order, correct me if I'm wrong, 30, 35 people, somewhere around there, but pretty damn small.

Dod Fraser:

I think-

Delian:

Less than that?

Dod Fraser:

It was pretty small. Actually the first conversation with Eric... So well the introduction... Eric's the CEO and founder of Opendoor and it was around 15 or 20 people when we first got introduced. My brother was in YC, not to bring back my brother, he was in YC, Eric had a YC company. Eric was presenting at one point, George came up to him after the presentation and said, "You're doing something in residential real estate, my brother does something in residential real estate. You two should talk." So he made the connections. He gets credit for that.

Dod Fraser:

Then from there, we met for coffee, and they laid out their plan and their strategy and what they were doing on the funding side. And it was like, "Okay, well here's how I think about step one, step two, step three." This is how your capital structure will evolve over time. And like, "Great, thank you." And off they went.

Dod Fraser:

I forget if I met Keith at that time. I think I met Keith on the second go around. So we had that first conversation. I was still at TPG, and then about six months later, we talked again, and it was clear that there is, especially at the time, because this concept of the fat startup, as you called it, was very new. There is a specialized skillset there and there is this gap between how Silicon Valley operates and how East Coast lending operates.

Dod Fraser:

And those two really didn't overlap, despite TPG being based in San Francisco, there is this information gap where they just talk past each other, two ships in the night. And so that second conversation was where we started talking about joining and it was right around the time the company was closing the Series C. Literally, the day Eric and I were talking about, we were going through the motions.

Dod Fraser:

He was checking his phone constantly, he's like, "Sorry, I'm waiting for money to clear." That was the day the series that he was funding, and he was waiting for the check to hit. So basically, the decision tree for me was really threefold. There's three parts that really intrigued me, and anyone I've hired over the last six years probably has heard this from me.

Dod Fraser:

The first was Eric had this incredible vision for Opendoor and the clarity of that vision, to this day, it literally that pitch that he told me six years ago, is the same as it is today. So the vision for Opendoor was... And his dedication and commitment to it, it was tangible.

Dod Fraser:

The second was product market fit. We, at the time, we were converting around 20% of customers, I think, "Wow, that is crazy. 20% of customers of this itty-bitty company are saying, we were one market at the time, saying yes to this offer." If you look at that number that publicly, the other one like 2019, it was 34%. That number has only gone up, clearly. But it is an extraordinary conversion.

Dod Fraser:

So it's very clear customers wanted this product and the product market fit is there. And then the third piece was more personal, around what I could do, which is, "Yes, capital markets is something where, that was 10% of my job at Perry and TPG, but it was something I had the network, the connections and the understanding of how that world operated."

Dod Fraser:

But for me, the fun part about Opendoor actually, was the breadth of what I could do, because over the years... I mean week one, I got handed accounting, and then I got handed FP&A, and over the years, I brought up our partnerships team, a whole bunch of platforms for us as a company, which has been really fun. And our mortgage business, our title business, going, actually talking to Keith about those as a board member, and all of that was really fun for me.

Dod Fraser:

And it was, despite going into one company which I, like my big fear about working at one company, was it would be too small, versus, as I talked earlier, I love that generalist role. But working at one company with the breadth of roles has proven to be very fun and the part that I've most enjoyed actually is just working with different people and finding the right people for the right seats.

Dod Fraser:

That's been the most fun for me, and it was something I did get a bit of at TPG, but not as much of the day-to-day. So anyway, I kind of answered in a roundabout way your question. But it's been a fun ride and the three things that really brought me here are still true today.

Delian:

You kind of mentioned that they handed a lot to you when you first joined. And you also mentioned that Silicon Valley and TPG spoke past each other despite being in the same city. Can you walk me through one, what was the capital stack at the time, when you joined? I know that there's this early set of debt that came from SVB basically, alongside that initial round of financing. Had that already been expanded upon when you joined? And so, what was it when you joined? How did you think through, "What is the roadmap for...?" For sure, accounting [inaudible 00:24:33], we can chat about and mortgages, et cetera, but I feel like that is a segment of startup problems that maybe many more people can solve, than capital markets, you have one of the very rare skills is if you can both do the mortgage and the title and the partnerships and also the capital markets, which I think very few people have.

Delian:

So what was the status of it? But then, also what was the process of, let's say, making the two sides speak the same language, which I assume was mostly, maybe a crack in the whip on Opendoor to figure out how to understand TPG and how to speak their same language? I would love to hear that.

Dod Fraser:

Also, where we were at the time was, you're right. We had a line with SBV and that was about it, or that was it. And so the roadmap, I'd even told Eric that six months before, is you can start with those lines, but then pretty quickly you can get to uni tranche lenders that will give you a line, up to 80, 85, 90 cents, and they'll fund that whole part. But those would be the TPG's of the world, like that type of capital.

Dod Fraser:

Then what you pretty quickly want to do is migrate, as soon as you get to the right scale, to the bigger commercial banks, the Goldman's, the JP Morgan's, the Credit Suisse's of the world because their cost to fund is so much lower. But that comes with lower advance rates, so instead of for $100 home, instead of getting $80, you only get 60, or $70 from them, and you'll be able to move that up over time, so then you also need to add to that mezzanine financing.

Dod Fraser:

So we basically went through those stepping stones and we've gone through it over the last six years, but that was sort of, in my mind, the landscape, which is Silicon Valley being great at the beginning, but wouldn't hit the scale or cost to fun that we needed over time. Then it's about moving from those uni tranche facilities to the senior plus mode, to securitization. There's this roadmap that we've been on for six years now, and we're still on it.

Dod Fraser:

And so that was, in my mind coming in, that was sort of the path. And admittedly before I joined, I called a couple of my friends at these banks like, "Am I right about this? This asset should be very finance-able." And everyone agreed. And that actually is, to your second question about how do you get the two sides, the East Coast and West Coast to work together? And the thing about these banks or even the alternative asset managers, what they love to be able to do is latch onto, "Okay, you're giving me this asset with this risk, and it's very similar to this other asset I already finance." And if you can make those analogies and clearly articulate to them, "This is my business, this is the asset that you're going to own, and by the way it's, in Opendoor's case, it's very similar to single family rental."

Dod Fraser:

Basically, those warehouse facilities you have with single family rental is very similar. We're actually shorter duration and its listed homes. You don't have tenants in the house. You just have this listed home, so it's a better risk than single family rental and that has worked and we continue to use that today.

Dod Fraser:

So creating those analogies actually is, I think, the important bridge and, to your point, having sat in the investor seat, being able to pitch the business in a way that they understood. Early on, we would have... Eric would come in and for lender meetings, and he would do basically the equity pitch for Opendoor. Then we'd have a second separate deck. He hated the formatting.

Dod Fraser:

Second separate deck of here's how the lender... Take these slides and bring them to your credit committee. And that was the part where I was helping bridge the gap between the two sides, because they could understand the vision, which again Eric is truly exceptional at, and paired that with, "Let me explain the underlying asset that you're going to be financing." And it helped them have the knowledge they needed to then go to their credit committee and explain it clearly.

Delian:

And then maybe to flip the table a bit on your prior former self that would have critiqued this, with a relatively smalL SVB debt line. I would imagine there was limited performance history. At least there's relatively fast turns on these assets. I assume there's "cure and curve" occurs pretty quickly and you can run through a couple of transactions. But both, let us say the transaction volume isn't necessarily super large, it's not an infinite number of data points, but then also obviously, the operating history of the company was quite short.

Delian:

So can you talk through how did you get people around this? You've mentioned the analogy towards making it like an asset that people appreciate, but I assume at the time these debt providers weren't really ever buying listed homes. I can't imagine that that was a model that other people had one, maybe you would know.

Dod Fraser:

No, they hadn't. Definitely not. Yeah.

Delian:

And then second, maybe just talk through, I think I understand it pretty well, but it's just the risk levers and how people stack up their debt writeup, when you talk about 60 cents of the home purchase comes to the debt provider, well that protects their downside because the home needs to tank by north of 40% for the debt dollars to ever get lost. So can you talk through a little bit of what are the levers that you could use get those early lines that made those debt providers comfortable with the risk that they were taking on?

Dod Fraser:

So in terms of the first question, there were a bunch of conversations where it was just a binary no. It was like, "Your track record's too short, come back to us when you have 2,000 homes." And I won't name the names, they did come back. They're lenders for us today. But they're like, "You don't have the track record." So that piece was just binary for some. You just needed to get through that question pretty quickly because if it was too early, fine, move onto the next.

Dod Fraser:

That was layer one. If you got past that, then to your question on how do they box the risk? How do they differentiate the risk? There's a couple... The biggest probably is the time is the risk that you're dealing with in any asset. And as you have more time, you have more risk. So what we've done is, we've set up all of our facilities where there are the advance rate goes down over time.

Dod Fraser:

And so they have less risk over time. And that allows them to get comfortable with the fact that yes, you're dealing with this newer company, but if my advance rate is going down, I won't put absolute numbers on it, because that we don't disclose, but I know I'm getting less exposure to this risk over time.

Dod Fraser:

So to your point, if you line that up against the subprime prices data, which is the best example where you have real data, they could go to their credit community base and say, "We mathematically haven't seen a way to lose money here." And so that was a helpful way of boxing the risk, especially early on.

Dod Fraser:

And so that probably is the single biggest factor that they were able to use, to get their credit comfortable that this is a new asset class that they should be willing to lend against. The listed part was more about the... As a lender, you always think of the downside. So the downside is, you have to take back these assets and sell them. So in most cases, rental, fix and flip, the business we did, non-performing loans, you take back this asset, but you can't just go on and sell it, you've got to figure out what to do with it.

Dod Fraser:

You've got to figure out how to get access to that home to then list and sell it. And what we were providing them was literally that end state, the ideal end point of, "We have this complete home. Doesn't need more work. It's on the market today. All you need is a broker to liquidate." So it's very easy to liquidate the home and the balance sheet was the thesis.

Dod Fraser:

Now we had the... Well, COVID came last year and there was a proof point of, "Do the homes actually sell?" And we sold over 90% of our inventory in five months, which by most standards is incredibly fast. So we said for years that would happen, and admittedly during COVID, I was talking to our lenders every week saying, "It's happening, it's happening." And it did unfold in the way we hoped it would or expected it to.

Delian:

And I think one of the other complexities of managing this capital stack is that it only becomes more and more layers and stratification of the risk over time. Early on, it's just like SVB, XYZ dollars of line, that's it. Next time you get TPG, et cetera, on board. Next time you get TPG plus somebody and then you start to stack, stack, stack, and then by the way, each of these individual parts of the capital stack also have these decay curves on how much they're willing to front it, and also, by the way, the company's continuing to operate, and by the way, there are covenants on the deck with how much equity capital you need.

Delian:

And so you're balancing VC equity fundraises with this. Can you talk about just, I can't even imagine how one person or even how you would create a system to balance all of this stuff at the same time where it's like, this is unlike just having a hedge fund where you're going out, raising money from LP's or something like that. You're balancing the actual operating and VCs need to fund this stuff as well, and I feel like part of the trick is also getting the debt term sheets lined up but then you know that we don't have enough equity to fund the covenant. But then you take those debt term sheets and then show them to the equity investors and say, "Hey, here's why Opendoor is going to work great, because look at these debt term sheets that we have in the future." And then you kind of are doing this delicate balancing act of, you kind of need both sides in order to close either one of them, but you kind of have this chicken and egg, but then you kind of do them both at the same time.

Delian:

So I would love to hear how you balance that all in your head, and how you solve that chicken and egg problem.

Dod Fraser:

The solution's a lot of gray hair, actually. I get picked on for my gray hair and it definitely shows. There were a lot of very stressful moments in those early years, where those two things came to a head at the same time: equity and debt. No, I think the best way to counter that is just to have excess capacity. You want to have enough capacity to not have to worry about the lender being the constraint. That was really, I joked early on... Eric asked me, we did weekly sprints in [inaudible 00:35:00] and each team had to have a theme. And I was like, "Well, my theme is, do not run out of money."

Dod Fraser:

And for years, he kept changing it. It'd be like scalable debt facilities. But now it's like, "Do not run out of money." Capital markets should never be the bottleneck. So with that in mind, you plan ahead and you overcapitalize. You raise more equity than you think your base plan requires. You have more lending facilities than you think and early on, disappointing some lenders. The pace of utilization was much lower than they expected early on, because we had this excess capacity.

Dod Fraser:

So I think those over capitalizing businesses like Opendoor, is really important because it does two things : one, from a [inaudible 00:35:42], you never know what happens, or will happen, COVID being a prime example. But it also, especially on the equity side, having extra equity gives the lenders more comfort on the business. So you will get more lenders interested in the business because you have more equity capital. And they will actually charge you less for that. And they will give you higher advance rates. Like more debt against your assets.

Dod Fraser:

Even though all of our facilities [inaudible 00:36:06] is non-recourse. So they don't look to the parent, they only look to the assets. But they know that what they're focusing on for the parent is will the parent exist? Will the parent be there to solve these assets because the worst case for every lender is to take back assets. So that's where if you have plenty of equity, they're like, "Parents got plenty of run-way, I don't need to worry about in the near term taking back these assets. But let's really just focus on the asset risk and price for the risk and you can price it tighter because that parent is a source of strength, effectively."

Delian:

You've done a decent amount of advising across our portfolio in a couple of different startups. I'm curious, how do you decide which ones to work with? Have you primarily only focused on ones that are of a similar, let's say asset class, as you understand it? Have you stretched into others? And then maybe more broadly, because you have this very unique perspective, honestly there have been not that many "fat startups" that have been anywhere near Opendoor's level of success. What do you think is the future of fat startups looks like in the Silicon Valley technology ecosystem? Do you think that Opendoor's success has now opened its door, sorry, to more and more fat startups succeeding?

Dod Fraser:

You can look at the prop tech fundings base today. It's pretty extraordinary. So I think yes, there's absolutely... But I think that's more about the industry. That's more a statement about the industry that it is about needing to use balance sheet. So I think on the advisory point, I do think that figuring out how to have the East Coast talk to the West Coast, stands. Helping people understand what you need to be sane and explaining to people on the lending side to get them to say yes, is something that you can really do across... The same teams, especially early on, are covering resi and consumer and covering the different asset classes in the same way I did at TPG.

Dod Fraser:

So it's understanding the rubric, and once you have that, you can have those conversations. So I think the thing that I've found interesting on the advisory side is helping, like understanding the assets, like what is the asset risk? Figuring out what that analogy is and then figuring out for that analogy, who are the big lenders? Because the worst thing you can do is go to someone that doesn't understand asset lending. Like they say they do, but if they've never done that similar asset, you'll get into so many little problems that add up to be big problems.

Dod Fraser:

And that can be, they don't understand how to document the deal. So you spend three times the amount of money and three times the amount of time documenting because you go down all these little side threads because they've never done a deal like this before, versus you find someone that understands that analogy and then it's like right in their sweet spot. They've done this 100 times, so the change is actually more just understanding the asset risk, rather than how it gets documented, where you can get stuck.

Dod Fraser:

So going back to the first part of your question, how do I think about advisory? It's where can I be most useful to those companies? And do I understand and can I help them with thinking through, "Okay, this is the asset risk, and here's the types of lenders that would be interested in funding you, given your stage." And it's the same stages today as it was then, which is you can start with small scale facilities, but to get into the bigger scale, there's different people that are good at certain things and you just need to pick where you are in your life cycle for the right lender.

Delian:

And it seems like, correct me if I'm wrong, but the world of capital markets, especially for this asset-based lending, is actually a much more opaque world than the venture capital world. Sometimes when a founder comes and he's like, "Hey, I'm raising for a healthcare tech company." And you tell him, "Well, great. You need to find somebody that understands that 'asset class'. Just go and look at all the healthcare tech companies that have gotten funded over the past five or six years, all of them will be publicly listed on Crunchbase, and that's basically your lead list," versus, if I were to tell somebody, "Hey, you want to raise a $15 million line to buy a lot of CNC and mill machine, it's like, well good luck figuring out who is good at that, because it's a particularly opaque industry."

Delian:

Obviously, there's some of these let's say, debt-based deals that get announced, but it feels like most of the time, that stuff is typically behind the scenes. It's like an accurate portrayal, or how do you even go out and figure out for net new asset classes that maybe you're not familiar with or don't know immediately a lender that's experienced with them, how do you go out and find them?

Dod Fraser:

I think there's two answers, two parts to that answer: early on, you're dealing with these alternative asset managers where actually one of the single most important differentiators, we did this at TPG, we've done at Perry's, our sourcing engine is different. And here's why it's different.

Dod Fraser:

So sourcing is a differentiator, and is proprietary. So they actually are very careful because they don't want that proprietary edge to leak out. So I do think it is a quieter group that is out there trying to source it. Now, there's a lot of them, and some of them are better at certain things and not as good as others, but they're not very public about that.

Dod Fraser:

So I do think there is an intentional amount of minimizing the amount of discussion with each lender, where they're just not that open. And so there is a word of mouth element where I've talked to a lot of them, or they're friends of mine over the years, because I've worked with them, so I think that does help accelerate the ability to find the right person, or who do you start with because that can really, if you find the right person early, you save a lot of time.

Dod Fraser:

Instead of boiling the ocean and going to 50 people, you can be much more targeted in who you look to, and that in the end, shrinks the amount of time and increases the probability of success.

Delian:

And then, outside of capital markets, you mentioned a couple of these major projects you've been involved with, Partnerships being, is the one that I've been most excited by the title, mortgage, et cetera. Can you talk through some of the things that, let's say, came naturally to you as a part of helping spin up some of those initiatives that you could lean on your prior both TPG finance background versus areas that were completely net new and maybe you stumbled on, early on that didn't come as naturally?

Dod Fraser:

I mean I think the strategy side of it, like should we pursue this? Should we not pursue this? I think is something that was a strength of mine and continues to be a strength. So that part has been fun and continues to be fun. The execution side of it, I think, finding the right team, the core team that can focus on it, because in the end, I always was spread too thin. And so what's most important is early on, finding here's the right leader of this team and then helping then unblock them. Finding that person that's better at it than me.

Dod Fraser:

I think that actually is the single most important part to making any of those teams successful is, "Okay, I found that leader. I know they're better than me at this job. I'm going to go find them, I'm going to hire them." And I've done that on all of the teams. And I have made some stumbles over the years, but that to me is probably the single most important differentiator, because it's that focus and attention that you really need and then you want to build the team around that, which is good culture, good cohesion, I'm proud of the number of people that I've stuck with. That I've hired that have stuck with us for a long time or come back. That's really fun for me.

Dod Fraser:

In the end, I think that shows... That's how you make those pieces of the business successful, especially some of, as we were talking about, those examples were set up, siloed intentionally, because we were very focused on getting that core customer experience, as one board member analogized, like a racetrack. You just loop in the racetrack and everything... It's a clean, seamless, customer experience. And then these other things we needed over time, but we needed to get that core customer experience right, and so there was a degree of autonomy, which was a lot of fun for me, but also a need to not have a huge blast radius impact.

Delian:

And maybe, can you talk to me about one of those hiring processes? Maybe explain a little bit about what Opendoor Partnerships is and what was the profile that you're looking for, for somebody to lead that? And then how did that hiring process go? And how did you know that the person that you did end up bringing in would be "better than you", in actually running that portion of the business?

Dod Fraser:

So Partnerships has a huge BD component to going back to actually sourcing as an example. Sourcing deals, being out there, networking, talking to people, some people are just, there's a lot of characteristics for why people are good at that, and there's not one common determinant there, but someone that can develop those relationships and get those people engaged and excited and working with you is how you can and our Partnerships' role, really succeed and thrive.

Dod Fraser:

And then the other piece of it is the execution and following that up with, "I promise this and then delivering." And actually that delivery piece is actually a very different skillset. So that you need both of those for partnerships to be successful. Which is nominally the initial sell, but also the follow-through. So partnering the right people together to make that happen is actually, I think, the key piece on the partnership side that makes a huge difference.

Dod Fraser:

And depending on which Partnerships' team you're talking about, that has been repeated multiple times on different teams within Opendoor around Partnerships, where you get that pairing right and then it can really work well.

Delian:

And Opendoor obviously went public at the end of last year. Can you talk a little bit about how capital markets shift in comparison to being a private company versus now being public? I assume there are some things that are much easier and probably cost of capital cheaper in some ways, but then some things that are also, come with more scrutiny and maybe have more work than as a private company.

Dod Fraser:

It's funny, except for watching the stock price, which I do sometimes, probably too much. I actually think the biggest change is just the equity capital base, at this point, is at a place that allows us to really think very longterm about the business and the plan. And so you're not thinking about, "Okay, my next fundraise is around this time next year. Okay, how do I position the business to really be at the right point at that time?" Versus, "Okay, in five years this is what we want to be." So you can make longer term bets, longer term decisions and think longer term, because of that depth of capital.

Dod Fraser:

Now, that's not actually public versus private decision. It is a little bit in that public companies from a capitalization perspective, they have greater access to capital. But it's more about the capital base allows you to think longer term.

Delian:

Super interesting. And then, maybe as a final question, if there was a fresh college graduate that was listening in that had a bit of an economics background, like yourself and wanted to get into the world of startups and capital markets, into a role that you've had, what would be the ideal path? And let's maybe caveat that this is in the world of 2020, where there are fat startups galore, versus 2003. What do you think is the ideal path of learning about this whole ecosystem? Do you feel like you still need stints on both the East Coast and the West Coast now? Is that a requirement?

Dod Fraser:

So I think it depends on the stage you're trying to join. You can have less experience at later stage, but especially early stage, you do need to have a core skillset there and an understanding of what the other side is going to be looking for. I think there are a couple of core skillsets to be successful at capital markets. One is to just understand the math of it, the technical side. Understanding the trade-offs, which is the same thing as any investment underwriting.

Dod Fraser:

Then there's just the documentation of it, understanding how legal docs work, the basics there. And both those two buckets, it just sort of reps help you. And then the third is, you sort of combine those two and how do you negotiate? And that's something that you just develop over time.

Dod Fraser:

So having some of those hard skills is really important to being effective early on, and so to your question, if it's capital market specific, I do think that those hard skills are really important. And where you get them? There's a lot of different ways you can get them. You can get them from being an investor, you can get them from being a lender, a bank. There's a bunch of paths that these people find us from, but I do think that training to jump in and be one of the early employees is actually quite valuable, because it allows you to, going back to where we started, which is like how do you get East Coast and West Coast to talk? It allows you to see the other side in a way that makes you effective at your job.

Delian:

Well, no. Definitely. Definitely makes sense. Well, Dod, really appreciate you, taking the time to come on the podcast today.

Dod Fraser:

Absolutely. Thanks for having me, appreciate it.