Qualia CEO Nate Baker

Auren Hoffman (00:00.789) Hello fellow data nerds, my guest today is Nate Baker. Nate is the co-founder and CEO of Qualia, the leading real estate closing platform. They've got millions of real estate transactions every year. He's also the co-founder of Fractal, which is a business incubator. It's launched about 150 vertical SaaS companies. Nate, welcome to World of DaaS.

Nate Baker (00:20.078) Thank you for having me, Warren. Very excited to be here.

Auren Hoffman (00:22.549) I'm super excited. We're friends, just full disclosure for the audience. I'm an investor in Qualia, a very happy investor in Qualia. Now, how would you rate the state of digital transformation in real estate? Are we like in inning two of inning nine or where are we at right now?

Nate Baker (00:42.574) So I think real estate's always been cast as the laggard in moving to some modern software. I do think it's the other way around. I've recently been working on a history of title insurance software, which is our niche. And I've been interviewing a lot of the founders of our competitors who started usually like 20 to 50 years ago. And the thing that I've learned is that a lot of them were actually pioneers in bringing

Auren Hoffman (00:53.267) Okay.

Nate Baker (01:12.234) the internet or, you know, early computers into this industry. And it's because real estate, particularly the part of it we focus on is back office stuff is so data intensive and so like workflow document accounting intensive that it actually fits well with what computers can do. You know, if you look at fidelity title, which is the, you know, the massive player in our space, they got where they did in large part through being the first

vendor in the space to actually have a consolidated back office software system, which is pretty cool.

Auren Hoffman (01:48.389) And so you think like real estate is because when I compare it to other industries, at least in my limited real estate, I wouldn't say it's like at the very bottom, but it's it's definitely not anywhere near in the top 50 percent, at least in my my my my limited experience.

Nate Baker (02:08.078) think if you think about Zillow, were pretty early to having a really good consumer mobile experience, really good home discovery. So I'd push back. think real estate actually was pretty quick to modernize and gets a bad rap.

Auren Hoffman (02:10.419) Yeah, that's true.

Auren Hoffman (02:16.404) Yep.

Okay, alright, I just fair.

Auren Hoffman (02:23.923) Yeah. OK. All right. That's fair. What areas do you think real estate are still underserved by software or by technology?

Nate Baker (02:34.552) So I think the fundamental problem with the real estate transaction, which is what we focus on, is that you actually have dozens of people involved in any given transaction that are all local and are all selected by different people on each transaction. And so what you end up having is a deal team of a dozen people that have not worked together before. And as a result, you have kind of a mess and no single player can decide.

here are the vendors we're going to use. And as a result, we can move quickly through it. so, yeah, yeah. So it's a massive coordination problem. And if you think about it, it's kind of a three-legged stool between the real estate agent, the title agent, which is our customer, and the lender loan officer. Real estate agents are just bad software customers because they are very churning. They're like consumers. Lenders are so hard to sell to big legacy organizations.

Auren Hoffman (03:09.129) So it's like, it's like a coordination problem, essentially.

Nate Baker (03:34.028) And so you actually have to get all three of them on the same page to modernize. So I think it's everything that's...

Auren Hoffman (03:41.269) It's almost the lowest. It's like the lowest common denominator, right? It's like whoever is the least good. one, if one person requires a fax, they all are doing faxes or something.

Nate Baker (03:49.358) Totally. And then they all have to deal with accounting. They all have to deal with appraiser. And so it just adds all this stacking complexity. And so our philosophy had been, okay, build for the title company, which I think is the most underappreciated part of the transaction and build a common coordination platform from them that they can give to the whole ecosystem. So that's where we've been building.

Auren Hoffman (04:14.741) I know you focus on residential, in the commercial, it better? Where does the kind of commercial sit?

Nate Baker (04:24.522) So we do commercials where we've done a lot of buildings you would know have transacted on the platform. But in commercial, it's sort of like, you if you're selling SafeGraph, you know, you're going to have the attorneys working on it. You're going to be reading all the docs. And if there's a software system behind it kind of helping, it's just less important because it's not about automation and efficiency. It's about you.

Auren Hoffman (04:26.28) Yeah.

Auren Hoffman (04:29.937) Okay, great.

Auren Hoffman (04:42.793) Yeah.

Nate Baker (04:53.58) getting the transaction details right. And so that's more akin to commercial real estate and why it's always been, would say software provides much lower value as a percentage of the deal.

Auren Hoffman (05:04.853) just because the dollar is so much bigger.

Nate Baker (05:07.086) Yeah, and it's less, it's more bespoke every single time.

Auren Hoffman (05:09.257) Yeah, yeah. Now, this NAR ruling that came out a few months ago, walk us, well, A, for people not familiar, it'd be great for you to walk us through the ruling and then also like, does it mean for the residential real estate market?

Nate Baker (05:24.2) there was basically an antitrust case that said NAR and a bunch of real estate brokerages had been conspiring to inflate buyer commissions. And basically what has happened over time is that the seller, when you list the home, you will market a particular buyer commission and that gets locked in way earlier in the transaction. And so it's hard to, for the buyer, then negotiate that.

Auren Hoffman (05:49.429) So like I list my home and I say, okay, I'm going to give 5 % to brokers, 2.5 % to mine and 2.5 % to the buyer agent.

Nate Baker (06:01.624) Totally. And what's difficult about this is if you market, we're going to pay 0 % to the buyer as an agent. The buyer's agent is less likely to bring people to see the home and, know, for obvious reasons. so that was a real problem. And, you know, actually they succeeded through this antitrust case and changing the rule. And there were a bunch of big fines paid by NAR and a bunch of the big brokerages. We were actually working on a story about this for like, start marketing.

Auren Hoffman (06:11.549) Of yeah, yep.

Nate Baker (06:31.438) a blog post recently and we pulled the data to look at for commission payments, day by day, across the entire country. How does it change? And I think it was July 1st or August 1st where the ruling went into effect and everyone was expecting some change. And if you look at the data, it's a perfectly straight line, no change, which is surprising everyone.

Auren Hoffman (06:56.863) So July 1st through what you and I are talking in mid November, no change at all during that time. But I wouldn't have expected it to change right away because I would have expected it to take some time before, before I like gotten people's mind and psyche and stuff.

Nate Baker (07:04.067) Yes.

Nate Baker (07:12.854) In the industry, this has been something people have been preparing for for a long time. They've been talking about it constantly. It's like a lot of people are saying, we're going to change it. do business right now. So would have expected the reason we're doing the analysis is that there would have been some change or some kind of group at the edge that was moving things around. That's not how it's, it's working at all. and it's super interesting. So

Auren Hoffman (07:28.607) Yeah.

Nate Baker (07:38.24) You could potentially see some new business models from new entrants or Zillow changing things up or these big aggregators changing things up.

Auren Hoffman (07:43.645) Right, I classically, like, Redfin was, was, they would just rebate the thing to you, right?

Nate Baker (07:49.686) Yeah, exactly. And so I think you will see attempts at it over time, but that just brings us back to where we were is the last 15 years in real estate has been a constant story of someone coming in and saying, we're going to do this completely differently. have a completely different commission structure, a different model, and then hitting their head against the wall for five years and then doing it basically how it's been done. And I think that

Auren Hoffman (08:14.949) What is the most common, what are the most common rates that people pay their brokers in real estate today in residence real estate? Two and a half on each side. So total of five. Okay, got it. And maybe at a larger, you you can negotiate that down or something like that or.

Nate Baker (08:23.374) 2.5%.

Yeah. Yeah.

Nate Baker (08:36.142) I mean, it's sort of like, I'm sure you've talked to investment bankers and you know, it's like the more important transaction you're doing, you don't really get to negotiate the fee down very much. You know, they're like, well, you should pay us more because of how important this is.

Auren Hoffman (08:45.237) Yeah, yeah, that's a good point. Yeah. Yeah, yeah. OK. Interesting. Now, there there have been a lot of like evolution in business models in real estate. We've got Zillow, we've got Compass, we've mentioned Redfin. Like, where are all these companies headed?

Nate Baker (09:08.078) It's interesting. It changed a lot over the past few years. If you think about Zillow in particular, they went through this story from being just a, know, basically marketing, you know, marketplace for consumers and real estate agents trying to help drive consumers to real estate agent partners and help consumers find a home to, okay, we're going to do eye buying. We're going to actually buy your house. We're going to do the whole thing soup to nuts all in one.

Auren Hoffman (09:36.189) That was a brief experiment in a way, right?

Nate Baker (09:39.466) It was a brief experiment, but it was an extremely expensive and large scale experiment, which, you know, the founder rejoined the company. said, this is the future of what we're doing and we're a hundred percent focused on this. And they did to their credit do that. But it's, they're now building what they're trying to, what they're calling the super app, trying to make it so you can buy your home and have all in one, not have a bunch of different point solutions. And they're really trying to vertically integrate much more.

Auren Hoffman (09:43.411) Yep. Yep.

Nate Baker (10:08.306) And this has been the story with most of the big brokerages or lot of them own title companies that are customers of ours. And what they're trying to do is vertically integrate this consumer experience. Because iBuy was right in the sense that it is a better transaction experience for the seller. You are kind of not having to deal with all this nonsense. Yeah. And so it is like a very, they learned a lot about

Auren Hoffman (10:30.377) Yeah, so quickly. Yeah.

Nate Baker (10:36.182) the type of consumer experience you want to provide. And so that is the thing that everyone's doing right now is saying, okay, how do we bring title and closing into this? How do we bring mortgage lending into this? So that you can take your compass agent or your compass consumer through this whole channel where they just have a nice white glove experience and they don't have to be flipped over the fence to a random partner. And so that's where the future of these businesses are. And if you pay attention to their

their earnings calls and stuff like that. A lot of what they do is talk about attach rate of these new products that they're introducing because it's an important driver of their economics as well as the future where they think the transaction experience will go.

Auren Hoffman (11:20.874) As a consumer, I see, I've always thought Zillow as a buyer, not as a seller. Is that wrong?

Nate Baker (11:31.374) think they're trying to do both to some degree. Like you're trying to say, how much is my home worth? If you think about the Zestimate, one of the most successful marketing campaigns ever, a lot of that was targeted at sellers, homeowners.

Auren Hoffman (11:40.948) Yeah.

Auren Hoffman (11:47.155) Yeah, or at least current owners just trying to understand the value of your home or something like that. Yeah. Or at least what my neighbors, what's my neighbor's house worth or something?

Nate Baker (11:51.414) Yeah, what's my house worth? And you know, with that.

Exactly. also, know, buyers and sellers are the same people. Usually when you move, you move from one house to another. And so, you know, it's a bit of a mix between the two.

Auren Hoffman (12:01.106) Yeah, it's a point.

Auren Hoffman (12:07.987) Well, I would have thought iBuy today would have been a bigger piece of the market than it is. And it does seem like a way better experience for the seller and potentially better for the buyer because they could like make the needed repairs quickly. They could do a few other things to so it could be a little bit more move in ready.

and potentially get fees lower. Maybe they don't need agents on either side of the transaction or something like that to get the fees lower. Why has it not grown or, or maybe you're going to say again, you're wrong or it is growing super fast.

Nate Baker (12:46.154) It's not, not. think everyone at the time when Opendoor was really getting this going and Zillow was going, this is an existential threat.

Auren Hoffman (12:51.251) Yeah.

I know the people at Opendoor like they're super smart and they built a good business to their credit like they've built a good business for but it has it's still only a very tiny percentage of the market.

Nate Baker (12:58.31) yeah.

Nate Baker (13:02.976) Yeah, I think they would be the first to say it hasn't gotten to the scale everyone thought it could. I think the fundamental issue is that the house, your homes ended up being a more complex asset to value than they expected. And they expected it to be quite complicated, but there's really a tremendous amount of personal preference that goes into which home you're going to buy.

Auren Hoffman (13:31.252) Yep.

Nate Baker (13:32.402) And I think that combined with rates going up and the cost of carrying these houses for as long as they have to to make the transaction happen just fundamentally caused issues with the whole concept.

Auren Hoffman (13:47.539) Yeah, in a zero interest rate environment, it's much easier to make it work because then you don't have to because you have real costs if you have to carry it for and then, of course, the higher the rates also probably the longer the transactions take in general because people have to go get mortgages, etc. So you've got this like double compounding thing that happens there.

Nate Baker (13:52.312) Totally.

Nate Baker (14:06.828) Yeah, but again, I think they were on to something with this vertical integration, making the transaction much smoother. And it's just, everyone is now trying to say, how do we do that? And how do we, but without the tremendous fixed costs.

Auren Hoffman (14:26.805) And Redfin's been around for a while. It still seems like they're also this like little nichey product. Like it's, it was such a cool idea. mean, I don't even remember when it, when it launched, but was a long time ago. the first person who told me about it was actually Travis Kalanick, who told me about Redfin like 20 years ago. And he was, and he was like buying a house in, you know, in, in, in San Francisco and he used Redfin. I never heard about it just so he can get like the 2 % back audit.

But it still seems like a very niche-y type of thing.

Nate Baker (15:01.006) Yeah, I think, and this goes back to the point on real estate agent commission structures. just, it's been so resistant to change over the years and every single new model that comes in is, really not, not succeeded to that larger degree. Like that business is big, it's a big public company, but it's not done what they wanted, which is fundamentally changed the real estate commission structure. I think a lot of what that goes back to is that people typically find their real estate agent.

Auren Hoffman (15:18.899) Yeah.

Nate Baker (15:30.286) through a referral, like an introduction from a family member, a friend. They're not typically finding it through all these marketing channels. And so that just makes it sticky versus how the business has always worked.

Auren Hoffman (15:44.553) Yep. Okay. That make sense. there, or will like, would like influx of new buyers, like first time buyers or some other type of like, it like, if there was some sort of change in the market, would that help make kind of changes in some of these structures?

Nate Baker (16:06.264) think to a degree people are demanding a better experience, but it hasn't been as dramatic as you would expect. You would think that a...

tech-sophisticated, tech-oriented buyer would be more more demanding of, hey, I want to sign my paperwork online, which our software and others can do. I don't want to go see the title company. I just want to be done. I don't want to go talk to a real estate agent. It's just not how it's worked in practice. And I think a lot of it is that it's an emotional process. The new CEO of Zillow wrote a fantastic letter when he just accepted the job.

Auren Hoffman (16:26.623) Yeah.

Nate Baker (16:46.838) And a stat included was 50 % of home buyers cry during the process of buying a house. Which is like, I don't know what sort of NPS that is, but that's like really, that's really not ideal. And, but I.

Auren Hoffman (16:55.466) Hahaha

They cry because it's it's bad or they cry because they're so happy they found something or okay guys. my gosh.

Nate Baker (17:05.302) No, because it's bad, because the process is miserable, it's stressful, and some of that is just fundamentally unavoidable in that you're moving your life.

Auren Hoffman (17:16.605) Yeah, because they lose a bid, they bid something and they lost the bid and they thought it was going to be their forever home or something or.

Nate Baker (17:23.094) Yeah, or something ends up being way more expensive than they thought. The foundations has a problem, whatever it is. There's like big things that happen. And I think a certain part of the real estate agent's job is just emotional support around moving you through the transaction. And I don't think this, no matter how automated you get it, there's still like a, you know, that emotional component of it.

Auren Hoffman (17:26.129) Yeah. yeah, yeah, yeah, that was happened. Yeah.

Auren Hoffman (17:36.916) Yeah.

Auren Hoffman (17:48.341) Yeah. And also, I mean, if you're buying a home with your spouse, like it's not just like you're, you're, it's not just one person. You got to like, there's two people and they might not know, always know what they're optimizing for. So it's not like you can like put it in an algorithm per se. It's like, want to, I'm weighing the schools X, but I'm weighing the, you know, the walkability Y or something. The, the, the agent has to kind of like suss it out through some conversations over time or by showing you something. And you might not know. mean, most people.

but they're buying a home, first time buyers, like they don't really know what they want.

Nate Baker (18:21.154) Right. And pulling it back to your earlier question about like, are opportunities in the industry? It's much harder to build stuff for real estate agents because to your commercial real estate point, software is just less of an important consideration for them. It's about finding customers and then it's about handholding them through this process. But they, they're less kind of concerned about automation. So that's where the title company has this perfect sweet spot of huge amount of

workflow complexity documents that are just being dumped with tons and tons of regulatory stuff that they have to deal with accounting and all that. So it's kind of the perfect sweet spot for building software.

Auren Hoffman (19:06.535) And what about like companies like Compass? How have you seen them like evolve over time?

Nate Baker (19:14.988) They really got a lot of their growth going through acquisition, like acquiring real estate agents, paying big commissions, building a book of business, building a big brand. And now I think they're much more focused on, you know, like the rest of the tech ecosystem, profitability, driving great margins. And to do that, it's about this vertical integration experience. So their customer in a lot of ways is a real estate agent. And then they're trying to say, what is the suite of products I need to give to this real estate agent?

Auren Hoffman (19:20.052) Yep.

Nate Baker (19:43.106) to make them want to come here and work with me. I mean, think that's very different versus a Redfin where the customer is more the end consumer and they're trying to optimize that price point as much as possible.

Auren Hoffman (19:57.493) about like the MLS is these multiple listing services systems like they are they've got to interact with the listing agents they've got to interact with one another some of them are very large some are very very very tiny like how do see that evolving

Nate Baker (20:15.394) think that what's effectively happened is you get a layer on top of them, which is the companies we've been talking about, but they're quite entrenched. even with the regulatory...

Auren Hoffman (20:23.423) Yeah.

Auren Hoffman (20:28.511) Some of them get acquired by the other ones too, right? So they, even though they're nonprofits, they kind of like sell themselves or merge into bit like Southern California is like one big MLS.

Nate Baker (20:31.65) Yeah.

Nate Baker (20:38.242) Yeah, and it's unique to the US market, how this works. But I think at this point, it's such a large industry, it's so entrenched, it's very unlikely that you have just this dramatic flip overnight in terms of a different market structure. And I think the people who could actually flip it, the Zillows of the world, they like how it operates today. And they've figured out how to work side by side with it in a way which helps their business.

Auren Hoffman (21:07.497) Where do you see like, mean, no, no good interview would be complete without talking about AI. Where do you see like AI playing in this like real estate infrastructure layer over the next few years? Is it just being able to like process the documents faster and those types of things or?

Nate Baker (21:20.994) Go.

Nate Baker (21:25.868) If you think about the cost to do a transaction or originate a mortgage, it's just gone up explosively over the past, like four or five X over the past 15, 20 years.

Auren Hoffman (21:35.977) I didn't know that. was it just because you just need more documents or you have to pay the people more? Why is the cost?

Nate Baker (21:41.294) The cost doubled coming out of Dodd-Frank. So there's a lot more oversight on the banks, lot more, you know, financial crisis caused a lot of regulators look very deeply at real estate fairly enough.

Auren Hoffman (21:44.019) Yeah, yeah, yep, yep.

Auren Hoffman (21:51.253) Yep.

Nate Baker (21:57.814) That work is, I think, very automatable. A lot of the document generation and it's interesting if you think about the role of vertical software in particular, a lot of it is to manage the state of a transaction or some sort of process and also to encode the logic of an industry. So with our business, we have to deal with every single county in the country, every single state.

We maintain all these documents and all these different really custom workflow rules, you know, across the whole country, which is annoying. But once you've done that, you have the kind of structure of the industry and coded in some significant way. If you have, and then we also have tools for interacting with vendors and partners for the title company. So I think those are really the, the component parts you need to achieve automation. And so.

I really think the missing part so far has been how do you communicate in an automated way where you're taking information and then putting it in an unstructured form to have some sort of email call or some sort of message through an app and then do the inverse of that where you're pulling in county tax documents or you're pulling in different

Auren Hoffman (23:01.471) Yep.

Nate Baker (23:21.736) emails from the seller and pulling that into a structured way.

Auren Hoffman (23:24.949) Yeah. And also like, I, there's a lot of like PDFs that people have that you have to kind of parse through too, right?

Nate Baker (23:31.288) Totally. And it just used to be the case. This is like a very risk intensive industry. It's an insurance. It's people's life savings moving between different transactions. It's really important to get the details right. And historically the accuracy just was not good enough to automate a lot of this or at least be kind of the assistant type offering. And now it just is good enough where you can have these tools in the loop.

that where you have more of the human as the reviewer and you're just pushing work to them, pushing review process to them. And so the work is shifting dramatically. And it's coming back to the first point I made is title and the real estate transaction are actually early adopters because the problem set we're dealing with is so squarely in the wheelhouse of what computers are good at. And I think that this is continuing now. So I'd say in five years, the

the work looks fundamentally different for all the back office, mortgage, title insurance in particular. And hopefully that flows into material change in pricing. But at the very least, it's going to flow through into a big change in the expense line.

Auren Hoffman (24:47.847) In mortgage, will be like, I guess there's two benefits to the consumer. One is that the mortgage will be cheaper. Either you get a better rate or you'll just have less fees involved. And then the second is presumably you'll get an answer much faster. Right now, it just takes a really long time for most people to get an answer.

Nate Baker (25:09.166) Totally. Yeah. And so I think, I think that fundamentally changes as the cost of production, like marginal cost falls tremendously. And you know, it's, it's true in basically every type of workflow document, accounting, intensive industry. think that the, vertical software platforms are actually, if they can build fast enough and actually deliver, have a good headstart on being the delivery mechanism for all these incredible tools.

that everyone has invented over the last few years. And when you're thinking about a B2B use case, which is our use case, the price point of the LLMs and all this stuff that we would want to buy from OpenAI or whoever is effectively, it looks free versus these consumer applications. Because we're not talking about making a million calls a minute or whatever. And so you can actually just default it on

Auren Hoffman (25:57.619) Yep. Yep.

Auren Hoffman (26:01.993) Yeah, yep.

Nate Baker (26:06.766) put it as widely adopted as possible in your software. And so I think that's where a lot of these tools are going to be very successful delivery mechanisms.

Auren Hoffman (26:17.033) Now you guys have built like one of more successful vertical SaaS companies, definitely in real estate, like, but you stayed like super vertical. Like what is, what are some of the, I know that was like part of your intention on day one. What are some of like the advantages of being so vertical?

Nate Baker (26:37.706) It's obvious who your customer is. You know, I think that's, that's like a underappreciated fact, but I imagine like building a data business. It's hard to know who is my, I know that this customer is a customer, but I don't know who the next 500 are. And, you know, sometimes you have to go find the use cases and all that.

Auren Hoffman (26:40.042) Yeah.

Auren Hoffman (26:54.335) Correct. Yep.

Yeah, like building, if you're building like a CRM for dentists or something like. Yeah. And then the question is, do I go like make a CRM for mechanics because they already have a CRM or do I go like deeper with the dentists? And you've kind of chosen almost to go deeper with the dentists in a way, right?

Nate Baker (27:01.654) Yeah, you know dentists are your customer.

Nate Baker (27:15.982) Totally. And I would say this is actually a bit of a change versus a few years ago where I used to believe that you start with the title company and you really build more of a network effect around the title company and you sell more to the lender and the real estate agent. But what I've realized is that you can actually just continue going way deeper into your existing customer base and build more and more and more more stuff. And it's so much more efficient.

Auren Hoffman (27:40.68) Yeah.

Nate Baker (27:44.834) You don't screw it up because you know the customer really well. You know what they need and it is improves your net retention across your whole suite of products. And so it's, it's a, it's the way to do it. And just another point on that, when we started the sum of all of our competitors revenue altogether, probably on the order of $60 million. And it's, that's quite small. If you think about

Auren Hoffman (27:47.198) Yeah. Yep.

Auren Hoffman (28:10.643) Yeah, yeah, so you it's hard to know you're Tam.

Nate Baker (28:14.254) super hard to know your TAM and we're obviously much bigger than that now and we've been able to grow the size of the pie substantially. And our competitors have, they're doing better than when we entered the market, which is interesting to me as well. And it just turns out that vertical SaaS is a good business and you're actually able to layer a lot more value over time. Independent of the, yeah, just the

the new entrant or what have you. yeah, vertical sass is a good business. I think it's harder to tell the story of tomorrow you're going to be a hundred billion dollar business. But we've always optimized for how do you reliably build a good business and not take any crazy risk and just keep plodding along.

Auren Hoffman (28:53.141) Yeah.

Auren Hoffman (29:06.773) You're also going after market, these like title companies that are, they're very sticky. They're often, you know, fairly regulated in their markets. Many of them been around for a very long time. They don't change that often. So it's very different than like going after like real estate agents, which are like changing all the time and, know, very, very different type of market there.

Nate Baker (29:30.126) Yeah, yeah, they're much more just local institution that works with all the real estate agents in that area. There are 15 to 20,000 title agents in the country. So it's not like it's you know, super concentrated market either. At least at the agent level, you have a ton of different people doing this business. But yeah, you do often see real estate agents, builders and lenders starting new title companies. So I would say there's maybe.

Auren Hoffman (29:58.322) Okay, so it does happen.

Nate Baker (30:00.654) Yeah, I'd say maybe in aggregate, there's like a 5%, maybe 3 % going out of business rate across the entire industry. So you do see some turnover where the kind of total size is roughly constant.

Auren Hoffman (30:09.491) Yep.

Auren Hoffman (30:14.261) Okay, but that's still like three to 5 % a year is like, you know, a restaurant would be something like probably 12 to 15 % a year or even even higher. Yeah. So I mean, you're, you're, you're, dealing with a fairly sticky, especially when you talk about these are mostly small businesses for small businesses is a very, very, very sticky.

Nate Baker (30:23.564) Yeah, at least.

Nate Baker (30:34.634) And they also, don't, unlike a restaurant, there's not as much in terms of hard costs. So you can scale up and down a bit better. you know, like a good, an interesting stat is today there's less than 4 million home purchases happening a year in 2020 or in 2021. There were almost 7 million home purchases in that year and a similar.

Auren Hoffman (30:39.241) Yeah.

Auren Hoffman (30:56.629) Whoa, whoa, there was there was so there's almost almost 100 % more or 70 % more purchases in Toy Toy World there is today. Is that just is that is that you're feeling I didn't realize it was that dramatic? Is it because of the rates or what's the?

Nate Baker (31:01.366) Yeah. And on top of that, there were a similar.

Nate Baker (31:11.33) Yeah, it's rates and there are similar number of refis too, even a little bit more. And so if you look today, you're kind of talking about 5 million between purchase and yes, the small number of refis that are happening today and 15 million units three, four years ago. And so, yeah, I mean, that's one of the craziest things. A lot of people don't appreciate how dramatic the swing has been over the last

Auren Hoffman (31:24.595) Yeah.

Auren Hoffman (31:29.609) Wow, it's crazy.

Nate Baker (31:40.622) three, four years in all these transactional real estate businesses, lot, they just got crushed because volume went down by two thirds. And so it's been hard for a lot of them to kind of keep moving and growing through that.

Auren Hoffman (31:56.415) where we're still all eating burritos at a similar rate than we were before or something. Right. That doesn't change. Okay. That's interesting too. I I didn't appreciate that. That you're also, you've got a side hustle of creating an incubator. I'm super fascinated with incubators before you started and helped start fractal. Like art, were you, did you go into the history of other incubators? Did you start to look at like, okay, here's the ones that have been successful. Here's ones that haven't been successful.

Nate Baker (32:00.747) Exactly.

Nate Baker (32:26.882) think across the board incubators are not that successful. And I think the reason for it is they have very wide focus and not like a very specific mandate. And the businesses they're starting are not highly similar to one another. And so what Fractal did was basically say, we're going to build Qualia, a company like Qualia, but in every single one of these

Auren Hoffman (32:39.368) Yeah.

Nate Baker (32:54.91) niche markets that look somewhat similar. Think like rehab clinic software, scrap yard software, this type of stuff where there's money flowing around, boring back office workflow. At least that's how people think about it in tech. And, but in reality, there's like a very complicated industry that has a ton of value in it that you can actually go build better tools for people. And then taking the same philosophy of

building a platform, not a feature, building network effects, building tools to help people going into market where there's a lot of principle agent problems in the distribution channel, where you have just complex needs, local regulations, state regulation that you help people deal with. And oftentimes you start in these niches, you build something and then it's like, there's an opportunity to layer.

Auren Hoffman (33:27.39) Yup.

Nate Baker (33:51.586) that next incremental product offering. And I think we've, as an industry, been learning that vertical size, we can just keep doing this and doing this. And so yeah, it's been an interesting build.

Auren Hoffman (34:03.925) You know, two incubators that have been successful that kind of come to mind that are like that. Not exactly in that niche, you know, flagship pioneering. Right. They started Moderna. you know, they, they've very much been very, very, very focused in that kind of biotech world. And they've got, you know, some of that's very expensive, senior like labs and other types of things there. And they've been able to stamp out like some super successful companies.

Nate Baker (34:12.547) Yeah.

Auren Hoffman (34:31.119) because they've been like very very very narrow in their in their focus.

Nate Baker (34:35.278) Totally. I used to work at 8BC as well, which has a very successful, similar type of program. yeah, it is interesting. There's always this tension between, you build a bunch more businesses in a particular niche or are you five businesses a year that are Moderna? And if you can do that, that's a great outcome. Well, our view is that Vertical SaaS today looks a lot more like a construction project in terms of risk profile.

Auren Hoffman (34:37.983) Yeah.

Auren Hoffman (34:53.919) Yeah.

Nate Baker (35:05.422) than it did 20 years ago where it looked like a fundamental technology question. And so people know what you need to do. You need to build this workflow platform. You need to build layers on top, embed FinTech stuff, consumer portal, client portal, marketplace. We have all that stuff and that's just the playbook now. And so we felt like, you can kind of reproduce that in other areas.

Auren Hoffman (35:10.377) Yep.

Auren Hoffman (35:31.093) Do remember this incubator light bank, which was around like 20 years ago in Chicago? they, they, what they, what they figured out is they just got, they got really good at selling to small and medium sized businesses. And so they just figured out, here's how you create a sales team to sell to these folks. And then like, let's start random businesses. Like they started like an office supply business, right? That sold to them.

Nate Baker (35:36.855) Yeah

Auren Hoffman (35:56.693) And they had multiple companies that went public. And then eventually one of the companies they started was Groupon, which was basically just selling to local restaurants and stuff. But part of the problem, think, and for whatever reason, it didn't happen with flagship pioneering, but part of the problem with them is that, Groupon just became so successful that I think it just kind of ended up eating the incubator and the CEO of the incubator ended up becoming the CEO of Groupon.

Nate Baker (36:07.33) Yeah.

Nate Baker (36:21.026) Right. Yeah. So I think that that is a, that's definitely a challenge. In our case, it's a lot of different businesses, a lot of vertical SaaS companies, they all have dedicated CEOs, CTOs, outside capital investors. So it's a little bit less that centrally managed sort of style. So that's it. Yeah. Bit easier to scale just in terms of count of companies.

Auren Hoffman (36:46.249) Now you're almost like kind of the classic, we always talk about these like dual threat CEOs. got to see you're running company full time. And but on the side, you're also kind of a creator, investor, etc. How does one help you do the other?

Nate Baker (37:03.82) I think Qualia basically is the quintessential vertical SaaS company that, you know, like I love the TideMark materials. I don't know if you read that David Yuan's vertical SaaS knowledge project is incredible. Yeah, we're basically trying to do all the stuff they talk about, know, integrate through the value chain, consumer marketplace, consumer based products, vendor marketplace, financing, embedded fintech offerings.

Auren Hoffman (37:09.023) Yeah.

Auren Hoffman (37:18.131) Yeah, yeah, he's a super sharp guy.

Nate Baker (37:33.806) I think figuring out how to build that layer cake is the essential question of building a successful vertical SaaS company and having the discipline to stay super focused on the thing at hand rather than chasing other end markets, which I have done previously many times and it generally doesn't work. and just stay super focused on that customer. yeah. And I think, I think it also, one of my, there's a, there's a,

Auren Hoffman (37:51.54) Yeah.

Nate Baker (38:03.63) kind of a conventional piece of wisdom that people give, which is, you know, I think, I think it's from zero to one, where they say you should go after markets that are, that don't have competition. You should go find this like super niche thing. I disagree with that pretty strongly. I think that you actually, you should in particularly in vertical SaaS, try to go after markets where there are strong incumbents, because otherwise there's not

They haven't established the need for software. And if there's no software in a B2B setting, it's probably the case that people don't value it and that they don't need it. And so I think that that's another thing that we've learned through this process is you have to go after markets when there's existing needs.

Auren Hoffman (38:36.895) Yep.

Auren Hoffman (38:55.773) Interesting. Now I understand how like you being the CEO of a vertical SaaS company will make you a better investor and creator of other vertical SaaS businesses. How's the opposite work? Like if how, how is being creator and investor and other SaaS businesses help you become the CEO, better CEO of your company, which is kind of like your main job.

Nate Baker (39:17.186) Yeah, yeah. So I think, so if you look over last 12 months in our business, we've, we've grown the sort of FinTech, you know, banking partnership, sort of part of our business tremendously to be, you know, really.

Auren Hoffman (39:27.027) Yeah.

Auren Hoffman (39:30.495) which is classic in any type of vertical software. So, yeah, vertical business, yep.

Nate Baker (39:33.462) Yeah. And I was really under appreciating how material that could be, previously. And I think spending a lot of time with the early stage founders who are thinking about where, where they're going to make the, where they're going to build the ACVs. it made me realize I need to take a much deeper look at this. and yeah, that's, that's been.

Auren Hoffman (39:58.324) Yep.

Nate Baker (40:01.822) It's been a big deal for our company and I don't think it would have happened otherwise.

Auren Hoffman (40:06.069) Okay, interesting. A couple of personal questions for you. What is a conspiracy theory that you believe?

Nate Baker (40:14.93) I think that, so I don't know how conspiracy theory this is, but I actually think that homeowners and policy, like local policy makers are intentionally keeping home prices high. I think that it's. Yeah, I think it really is. There's, I read a stat a couple of days ago. I wrote it down here. So.

Auren Hoffman (40:32.595) And this is like the NIMBY stuff and other types of things.

Nate Baker (40:42.734) To get to pre-pandemic levels of affordability, and this is from Fannie Mae, so 2016 to 2019 housing affordability, we need one of the following three things to happen or some combination. Incomes would need to go up by 60%. Home prices would have to fall by 38%. Or mortgage rates would have to fall 4.5 points to 2.35 % from 6.78 % on the average 30 year today.

Auren Hoffman (40:57.641) Holy back growth.

Auren Hoffman (41:02.443) my gosh.

Auren Hoffman (41:12.787) Wow, okay.

Nate Baker (41:14.69) So it's just housing affordability.

Auren Hoffman (41:16.703) Seems like the last one is the easiest one. Yeah.

Nate Baker (41:20.974) Yeah, but like, I don't feel like the mortgage rates are about to go to 2.3%. They've actually been going up for the last month. So I think people are really mad about housing affordability and very justifiably so. It's gotten so much worse. And I think there's obvious policy stuff we could be doing, but people don't want to do it.

Auren Hoffman (41:26.099) Yeah. Yep. Yep.

Auren Hoffman (41:33.799) Yeah.

Auren Hoffman (41:43.657) Why have the why don't the rents always follow the the the buying patterns? It seems like sometimes they're very decoupled. Like what you can rent a house for versus what you could buy a house for, which you rent a bar for versus buy apartment for.

Nate Baker (42:00.598) I mean, I think they generally do follow at some level. I think in Austin, where I'm at today, as an example, there's a tremendous amount of multifamily coming online. So that probably plays into that equation where you can't buy some of these multifamily apartment building units, but there's a ton of units. But I think in general, they do follow at some level.

Auren Hoffman (42:09.353) Yeah.

Auren Hoffman (42:18.068) Yep.

Auren Hoffman (42:23.125) Okay, in the kind of conspiracy, in some ways, it's in everyone's best interest to just kind of keep the price high. Or maybe not everybody, but it's a lot of people's best interest to keep the price high. What I don't understand is in many cities, the renters significantly outnumber the owners. And so I don't understand why an owner wants to keep the price high, but even the owner, they might not, because a lot of owners want to upgrade.

So they want to go from a two bedroom to a three bedroom kind of place or something like that. So even they don't always have like the incentive to keep it. They want to keep their own price high, but they want to keep the other prices more reasonable. So you really only want to keep the price high up. Like if you found your last home, you're never moving again, right? Then you're just going to keep it till you die or something.

Nate Baker (43:12.024) But I in practice, it's not really how it's played out. think people are usually voting to not put a giant tower up next to their house or to build like a denser housing.

Auren Hoffman (43:20.743) Yeah, well, of course. Yeah.

Because that would affect their particular home, but not affect all the homes in the area. so then they were like, my home will go down by 20%, but all the other homes will still be expensive. So therefore I have worse purchasing power vis-a-vis other things.

Nate Baker (43:38.574) Totally. Yeah. So I think that you're seeing it play out. One other really interesting market stat from the last few years is that the number of homes purchased that were annually that were built by home builders went from 10 to mid thirties percent of all home sales over the last three, four years. And the reason for that is, you know, the people don't want to give away their 30 year fixed that they locked in a two and a half percent.

Auren Hoffman (43:57.629) wow.

Auren Hoffman (44:05.128) Yep.

Nate Baker (44:08.43) sort of you're fixed at. And so there's been a pretty significant change in the composition of home sales as well. And, know, if we're easier to continue building, that might help out.

Auren Hoffman (44:21.053) Okay, interesting. This is super cool. All right, last question. We ask all of our guests, what conventional wisdom or advice do you think is generally bad advice?

Nate Baker (44:30.818) I mean, I would just go back to what I said, which is that I think it's bad advice to build software with no competition. think that, yeah, competition is what you want. You just want to be better than the competition. And I think in practice, basically every company is only good at like one thing, maybe two things. And they're just terrible at almost everything else. I remember right when we started Qualia,

Auren Hoffman (44:42.079) Got you. Competition is your friend in a way.

Auren Hoffman (44:57.29) Yep.

Nate Baker (45:00.526) A massive company, billions of revenue announced they were doing a project that we thought was competitive with us. And we were like, this is an existential problem. And it just, you know, it it just wasn't. And, know, I think it was good that you have, you need to have an end market where people are clearly voting with their dollars that they have a problem. And if you don't go, if particularly in B2B setting, build against, you know, to

Auren Hoffman (45:11.111) You

Nate Baker (45:29.634) beat existing bad companies, then there's just no chance of actually getting distribution.

Auren Hoffman (45:36.413) Yep. Yeah. Interesting. this is great. Thank you, Nate Baker for joining us at World of Dazs. I follow you on LinkedIn. I also follow you in person as well. And I definitely encourage our listeners to engage with you and follow you. This has been a ton of fun.

Nate Baker (45:51.438) Thanks for having me, Auren. lot of fun.