Text/Diana Tsai
Home ownership has always been one of the biggest levers of wealth accumulation. For low-income families, this key component of the American Dream is becoming increasingly difficult to achieve as home prices become more expensive. That's what Divvy is trying to solve.
Divvy is the first real estate platform to help families save on a down payment while owning a dream home, and this rent-to-buy model is catalyzing a key transformation of the $36.2 trillion housing market.
Divvy's current main clients are healthcare workers (nurses, x-ray technicians) who can't afford to buy a home because of severe student debt, teachers and educators who can't save for down payments because of their salaries, and 1,099 contractors from the growing gig economy, which Big Mortgage believes doesn't match the job market of the 1990s.
In this interview, the company's co-founder and CEO Adena Hefets shares the idea of building the site
The touching story of a kind unicorn. She recalls how Silicon Valley rejected Divvy in the first place: "Why are you giving loans to the poor?" She shares her own experiences growing up in low-income families, how she created her own American Dream, and why she made it possible for others like her to make it possible for others like her to achieve the American Dream. Let's take a closer look.
Diana Tsai: Let's start with why this is personal to you. Why is it so important to you to get a financial mandate by owning a home?
Adena Hefets: A lot of the reason I'm so passionate about creating homeownership is because it's something highly relevant. Our clients can live in assets, they can't live in the S&P 500. Having a house is the number one factor that makes a person go from low-income to middle-income.
It was also very personal to me. I grew up in a low-income family. When my mother was pregnant with me, my parents decided to buy a broken apartment on Long Island. But they don't get a mortgage. They were lucky because the owners offered them seller financing. My dad was a construction worker and he was always repairing the house, and the house was always being built. I remember my mom would spend $150 to buy things for our four kids, and then she would cry in the car because she was spending so much money.
I think a lot of people in Silicon Valley don't understand that. They don't understand that pain point, what it's like to be truly poor. So they don't build houses for consumers who really have these problems.
Tsai: It's the unicorn part — built for consumers who have real problems. I grew up in a similar experience to you, and I remember seeing my friends buying things at the original price in college. I've never bought anything on the shelf in my life. I can still tell you the price of everything in the grocery store. I really, really understand you. So, out of the thousands of renters/aspiring homeowners you currently serve, can you tell us what demographics and backgrounds they come from?
Hefets: Our biggest customers are medical workers, nurses, X-ray technicians. For these people, student loans are the main reason they can't get a mortgage. The second largest group is educators, teachers, and it's usually a down payment issue. The last group was 1,099 workers. From Instacart Uber delivery drivers to truck drivers, it's actually hard to get a mortgage because of the inconsistency in the source of income.
Tsai: It's amazing that you can serve these unserved people. You really meet a need. Have you ever thought That Divvy would turn into a unicorn?
Hefets: When we first founded Divvy, we didn't think about it. I just think there is such a problem. I think I can help come up with a solution. Then you keep setting goals: If we only serve 100 families, then there will be 1,000 families. So, I didn't expect our size to be this big, but I wanted it to get bigger, and I wanted us to serve thousands of families.
Tsai: I'm starting to notice that unicorns tend to take longer to adapt to the market. This is a huge system-level problem that is trying to be solved. Is this a little more complicated than, how do I call a taxi? It's just more complicated. So, I'm curious about the market adaptability of the product. I'm also curious about the criteria you're basing your decision on: "That's the company I want to build." ”
Hefets: Okay, on the second question, initially my co-founder, he wanted to do a vacation rental company, partially vacation homes. He and I parted ways. It was our first month together, and I just told him, "I'm not going to spend my time figuring out how to provide vacation homes for the rich." ”
So I terminated. I ended up creating Divvy what it looks like today. Of course, looking back now, it was the right decision. But at the time, I had no reason to think that one of them would be more successful than the other. My reasoning was simple: for the next 10 years, I could get up every day and work on one idea and another, and I just felt like I wasn't going to affect the world.
Then there's the fit of the product with the market. It's very tough. I think when you're building a business that fundamentally changes the world, they tend to be a little more complex, that is, the assets of the business are heavier and the investment is greater. For example, if you're solving some major healthcare problem, the investment you have to make in trial and delivery times will be even greater. It takes a lot of money, and you have to raise a lot of money. This is true even for electric cars like Tesla. I mean, they had to raise a lot of money. So there are a lot of people who don't realize this, just like it takes a lot of investment to become the most influential business.
So what makes us nervous about Divvy is that we have to buy a house with cash first, upfront. We're thinking, how can we have enough money to do this? So we have to show immediately that there is some traction in order to be able to raise money. I remember when I first thought of Divvy, on a spreadsheet, I locked myself in the apartment for a week. I know how to do it. So we ran an ad on Craigslist asking if anyone would like to buy a house with us? We had Tracy Peterson, who was our first client, who responded to us and we built the company around her idea. I would tell her, "Well, that's how this model works. You have to pay 10% first and then increase to this level. "I don't have that much money." I said, "Well, Teresa, how much money do you have?" She said: "1% of the value of the house. I said, "Okay.... We will start from there and continue to build. "So a lot of the company is built around the customer's ideas. Tracy Peterson, Katie Sanchez, Tyler Murray, I can name all the customers.
I think when you're successful, you know your product is fit for the market, which is to say, it wasn't a great experience in the beginning. We don't know what we're doing. However, customers are still with us. They were all excited. Because the impact we made was so great, they had a home. The pain points are very serious and they are willing to go through anything with us. I think that's when you know what you've found.
Tsai: What was the hardest part of the journey?
Hefets: The first year's question was: Does anyone want our products? Then we finished 100 suites. We know that in the first year, people want this. The following year, I knew that scaling up would require a lot of money. At the time, we had a small debt arrangement worth $20 million with Cross River Bank — a good start, but not enough to scale up. So the question is, can we go out and raise money and convince people?
Right now, we have a lot of financing channels. But two years later, the feedback I got was, "Wait, let's lend to the poor?" I'm shocked because they have records, they're acting, who cares how you define people, you're getting rewards from them! Serving consumers who don't meet Silicon Valley standards is a shame.
Tsai: So, given this stigma, how did you end up convincing investors?
Hefets: I changed the story. I didn't mention our customers. I just said, it's a reward. That's what everything looks like, not to mention the customer profile. I remember getting angry. I'm angry because of our customers, they're all good people. They need this. They were amazing! At that moment, I hated Silicon Valley. I was so angry. It's tough. Silicon Valley is less supportive of developing products for people outside of Silicon Valley. VCs would say to me, "I just don't understand. I could easily get a mortgage. I sat there thinking, "Did you really say that?" How did you grow up?"
It's surprising that people don't realize that subprime mortgages make up 50% of the market. In fact, you charge a higher interest rate. If you offer financial products, you'll charge higher interest, and the income you get from subprime mortgages is actually much larger than a premium mortgage. But it has such a negative connotation.
Tsai: I appreciate that you just shared this story. It needs to be told. When did you feel like everything in Divvy was about to collapse or be on the verge of death?
Hefets: When THE NEW CROWN HITS. I thought, "Well, that's it, it's been a good ride. "Ultimately, we found that COVID-19 has actually made our business stronger and more successful. But at the time, Sequoia sent the letter to the effect that, "Hide your money, hide your employees, hide in caves, it's the end of the world." I read it and thought, "Oh my God, this is the end." "I think for our generation who lived through the global financial crisis, we remember when we couldn't find a job and couldn't afford anything. Those are the moments when you are truly shocked.
But I think that's part of the leader: facing difficulties and problems, moving forward, not running away, right? It's like, well, we're going to go all out, we're going to fight harder. In the process of starting a company, many times it is a blow in the heart, and the key is to get back on your feet. You will always face problems. Over time, the pain will gradually lessen.
Tsai: Where did this resilience come from?
Hefets: I think I grew up in an environment of nothing. I've been working since I was 10 years old. I paid for college tuition. After I graduated from Cornell University, I went to investment banking because I wanted to be with the smartest people. I always joke that my intercept is the lowest, but the slope is high. I didn't grow up watching the Financial Times. I don't even know what stocks are. I always felt like my life wasn't ready for my success. But it doesn't matter: I want to be the fastest learner. You keep learning and eventually you will understand.
I don't think it's about worrying about where you started, it's about how quickly you can get to where you want to be. It's also the American Dream: you can start anywhere and make yourself super successful by trying.
Tsai: I like that. As CEO, what are the highest leverage activities you focus on that really turn things around Divvy?
Hefets: Recruitment comes first. The second thing is to set expectations, KPIs, and goals. That's what we need to do. But I think there's another factor. You have to make sure the train runs on time and you have to always reach your goals.
But I think you have to push the boundaries. I think more high-leverage activity will actually come into your team and ask them, "What would the world be like if we could do X?" This is an example. Two months ago, I came to our team and asked them, "What if we could lower the rent by $250?" Just lower the rent and make life easier for our customers?" They'll say, "We have debt deeds, and that's why we can't do that, that's why it doesn't work." I thought, "What are we going to do?" Give me a way to make it work. "The team went back and they spent some time on it and actually figured out how to dynamically price the house, and on average, overall, the rent dropped by $250. Because of this change, we actually produce larger amounts. So we're going to be in a better position. So hire very smart people and then push them to think most critically.
Tsai: I like that. What else have you done to violate Silicon Valley conventions besides your entire company?
Hefets: A lot! Divvy has nearly 50% female employees and nearly 25% of people of color, including our contractors. Our diversity is very different from Silicon Valley, where they have a hard time recruiting women and people of color.
Another example, 4 months after the company was founded, we set up paid maternity leave and paternity leave. Didn't ask much. This is unusual for a company that is in its early stages.
Another example: I'm not going to haggle with you over pay, we have pay ranges. I'm not going to give you a raise just because you're better at negotiating. Instead, I want to know that everyone is in a fixed pay range where we don't overpay. By the way, we pay 75% in cash and equity. I'm just wondering if the salary I give you is fair, you should come to work, don't worry about pay, just focus on doing the best job.
Tsai: The last thing I want to say is that if you have an audience right now, everybody in the room is basically kids like you, kids from low-income families. They're thinking, "Can I build a company like this?" What advice do you have? What would you say to them? For example, what would you say to a room full of kids who are thinking, can I build a good unicorn?
Hefets: My advice is to go to education and go find the most difficult job you can find. I chose banking and private equity because I saw very smart people there and I decided to learn to be that smart. Learn as much as you can from the people around you, like the professors, work for the smartest people, and absorb all of this. Then you will become dangerously smart. Then go and build the company.
I think there are more opportunities now, especially for women and minorities, to raise money. There's a lot of support; it's time to take a risk. You'll be amazed at how many people will help you, support you, and guide you forward.
Diana Tsai is a Forbes contributor and expresses opinions on behalf of individuals only.
Translated by Stephen