Beyond The Walls: Diamond Age’s Whole-Home Endgame, Part 2
[Editor’s Note: This is Part 2 of a three-part inside story of one of new residential construction’s most promising technology-powered start-ups, which aims to impact the homeownership affordability crisis in the next decade. Diamond Age co-founders Jack Oslan and Russell Varone invited us to visit the three-year-old, mid-stage firm’s Phoenix headquarters as well as its first two real-world project sites with Century Communities’ Century Complete line of homes, about half-way between Phoenix and Tucson, AZ. What sets Diamond Age from 100-plus other innovators in the residential construction sector – all competing in roughly the same pools for tighter early- and mid-stage investment capital, end-user customers, and other vital resources – becomes important to both the firm’s proving-ground stages and, ultimately, to its end-goal of making more affordable homes easier to deliver to a market that so needs them. We’ve borrowed one of co-founder Russell Varone’s oft-used expectations-management rules of innovation development – “crawl, walk, run” – to structure our report. Part 1, “Crawl,” published in TBD on Jan. 19, here. Part 2, “Walk” is our next installment of this special report on the Trailblazers at Diamond Age.]
CONTEXT
If a treasure trove of money, Silicon Valley pedigree, Wall Street Journal coverage, and a purposeful -- everybody-deserves-a-decent-place-to-live -- mission statement all added up as intended, housing’s affordability crisis would look, feel, be different than it is today.
Katerra would be operating as a bold market-mover today, not the industry’s most costly set of lessons on how not to go about trying to alter the arc of ground-up housing supply and attainability.
Among them [and there are far wiser, more thorough insider-views as well]:
• Money alone is no substitute for a trust-based relationships “capital stack,” amounting to an ecosystem of real estate, building, products, trades, and distribution players who invest themselves in your success.
• Linkages between deep, multi-cycle experience in hyper local residential construction and technology, automation, and data solutions appear to be a requirement for success.
• Fast-tracking too many dimensions of an operation with easy-money capital and technologies can produce an equivalent of an atmospheric cyclone bomb.
• Having oneself [corporately] as one’s most important customer, can distort a realistic view of demand and valuation.
For all of the 100-plus years visionaries, industrial designers, retail giants, distributors -- and even some very clever builders and architects – have professed that factories would be the future of housing and homeownership attainable to more people, here we are today. Factories account for low single-digit share of all housing, not the hundreds of thousands of units factories in other countries are producing.
Construction Physics host and curator Brian Potter writes about construction market startups, and has compiled a knowledge base on 300 of them, dating back to the year 2000, with a crescendo of projected capital investment of $9 billion in 2022.
Potter’s analysis published in March 2022, before “easy money” went the way of all flesh. However, three highlights bear note – especially as private equity, venture capital, and lending writ large have all entered a new, much grouchier ballgame.
• Construction start-ups as a percentage of all venture capital funded enterprises, peaked at .87% of the total in the Softbank/Katerra flashpoint, and drifted to just over half a percentage point in the 2020s.
• 40 or more venture capital backed construction start-ups got going in each of the last two to three years
• An overwhelming share of the $3.4 billion VC has invested in the builder/developer bucket of innovator start-ups has gone to the top five players – two of them are no more.
Potter’s conclusion – particularly in a funding and investment market that has taken an icy turn for players that don’t stand in distinction as operationally, strategically, and real-world, nearer-term financially a better, less risky bet.
It’s likely that the nature of the construction industry means these companies may have a harder time scaling than similar companies have elsewhere. Procore is an illustrative example - it’s had many years (18) to gain traction, and has received a huge amount of investment (over $600M, by far the most in the construction management software space.) It’s used this time and funding to become the category leader in its space. It solves a pressing problem via software (avoiding the large marginal costs of hardware), and has an extremely powerful flywheel available to it (the way the product works means that any customer might invite hundreds of other potential customers), as well as an elegant mechanism (an app store) for adding more functionality, decreasing churn, and upselling customers over time. In short, Procore has a huge number of advantages, and in some ways is a ‘best case scenario’ for a construction startup.
“But Procore hasn’t seen the same sort of success that startups in other spaces have - it’s market cap is less than $10B (it’s currently trading below its IPO price), it’s spending more than 70% of its revenue on customer acquisition, and it’s not expected to be profitable in the immediate future. Even companies with every possible advantage have a tough time in the construction industry.”
THE SHOP
For just under a year, most of the magic that’s happening at Diamond Age has been going on in a low-slung, 25-foot high, 1975 commercial class C, industrial facility, about 23,000 square feet on just under 3 acres. Jack Oslan, Diamond Age ceo and co-founder, lovingly refers to the space as “the crappiest building in the best neighborhood.”
The space is frill-free. A squad of pre-owned industrial robots – acquired at a heavy discount – stand ready for deployment as Diamond Age continues its development of what will round out a “full-stack” of tools that match the 26 or so skilled subcontractor trade crews typical of a new home build cycle. The used robots will do the job. So, too will a lean team of industrial, mechanical, electrical, laser, software, communications, process design, and other engineers whose resumes often speak to real-life experience in intense, high-stakes workplaces, (for example, U.S. Navy air craft carriers with nuclear payloads, aeronautics manufacturing plants, and -- just-saying -- Tesla assembly facilities) rather than fancy degrees from the nation’s Silicon Valley tech company feeders.
We’re more about steel-toed boots, Red Bull, beef jerky, and pizza boxes than your typical tech start-up,” Varone says. “We’re not especially looking for people out of Stanford or Berkeley or Ivy League schools. The people that come here and thrive are ones who – young or not – solve hard problems.”
What goes on in the Phoenix facility – split roughly half-and-half between machine-shop level hardware and technological nerve-center software – is, as we speak, deconstructing and re-constituting the basic math and economics of a square foot of built residential living space.
Let’s unpack this.
As we’ve noted, Century Communities has begun promoting its 43 Mountain View Estates, single-family homes – ranging 1,500 to 2,000 square feet – for buyers willing and able to foot a mid-$200s ASP. Diamond Age – for the first time in Century’s time as a homebuilder – is taking on full-stack general contracting duties once each slab is poured. By now, three of the 43 homes – started in early December – are ready for final finishes, within a 60-day build-cycle.
A back-of-an-envelope breakdown for the 43 homes in build-cycle days might look as follows. Typical per unit slab-to-keys cycle times – still elongated somewhat due to the latter ripples of pandemic era supply chain disruptions – are 180 to 210 days. For 43 homes, that totals in a range between 7,740 at the high-end and 6,300 build-cycle days at the lower-end for the 43-home project.
Compare that to a rate of 60 days – and improving – with Diamond Age’s vertically integrated platform, from slab-pour to closing: 2,580 build-cycle days.
Against, the 180-day cycle lower end comparison, Diamond Age – even with just 10 of its eventual full-platform of 26 factory-in-the-field robotics and automation tools deployed – is on pace to net a pick-up of 3,720 build-cycle days for the 43-home project.
Chalk up a 72% improvement in velocity to a platform that’s still in a year its founders regard as mid-stage in the scheme of things.
As we get more housing stock into the market this year, we expect to see a reduction in the square foot price to produce the homes,” says Oslan, who’s been pressing pedal to the metal on a Series B funding raise to put more runway out in front of an operation he envisions will scaffold its future potential with a client-driven success story as a critical driver. “Our business proof comes first with our customer at Century Communities, and reducing their cost to bring entry level homes to market.”
All in, Century’s 43 Century Complete models in Mountain View Estates in Casa Grande, AZ, will both prove-out Diamond Age’s capability at capturing dollars in labor, materials, and first-time quality, and at the same time serve an even more vital role in the evolution of Diamond Age from start-up to sustainable going concern.
The 43-home project – all 73,100 square feet of its built space – will become a people-and-machine learning lab every square foot of completed construction.
The on-site laser scanning, measuring, process analysis, corrections, and adaptations – every inch we do is feeding directly and real-time back to our team in Phoenix, where these learnings are taken and fed back into improvements in speed, accuracy, and addition to the automation set,” says Oslan.
Diamond Age’s business and operational plan calls for it to complete its technology tool suite by the end of 2023, scale to multiple cohorts – or business units – of factory-in-the-field systems in 2024, and “hit the gas pedal in volume and client growth in 2025,” according to Oslan.
THE WALK
Apart from hitting its goal of completing two-to-three homes a month and feeding all of that site-generated data back into its software and hardware engineering teams back in the Phoenix “shop,” the move from “Crawl” to “Walk” – as a construction technology start-up in a now-crowded field of them is this: Its first customer – Century Communities – is so keen on the solution it has invested in the company.
Genji Nakata, Executive vp - National Operations at Century Communities, who spoke to John Burns Real Estate Consulting’s Dean Wehrli, noted both quality superiority – durability, thermal mass and R-Value, noise-suppression – and cost.
The more tools Diamond Age can create, the more automation they can bring into the build process, the simpler it gets, the more predictable it gets, the faster it gets and the less expensive it gets,” says Nakata. “All three [Mountain View Estates] floor plans start in the high 200,000 range. So again, we’re really, really excited to be offering this revolutionary, very special product to our customers for a very affordable price.”
When an end-user customer – one of a potential universe of thousands – becomes an evangelizer, a start-up like Diamond Age might regard itself as standing on its own two feet, and walking.