Entrepreneurs

This Good Unicorn Was Rejected By Silicon Valley For Helping “Poor People.” Now It’s Worth $2B.

Homeownership has long been one of the biggest levers for wealth-building. For lower-income families, this critical component of the American Dream has become more and more unattainable with the increasing unaffordability of homes. This is the problem Divvy is solving.  

Divvy is the first real estate platform that helps families save for a down payment while living in their dream home, a rent-to-buy model that is catalyzing critical transformation in a $36.2 trillion sized housing market

Divvy’s current primary customers are healthcare workers (nurses, x-ray technicians) who can’t afford a home because of crippling student debt, teachers and educators who haven’t been able to save for a down payment given their salaries, and 1099 contractors from the rising gig economy whose income streams are deemed by Big Mortgage as inconsistent with the job market of the 1990s.

In this interview, Adena Hefets, cofounder & CEO, shares heart-wrenching stories on what it took to build this Good Unicorn. She reflects on how Silicon Valley turned Divvy down in the early days saying, “Why are you trying to give loans to poor people?” She shares what it was like to grow up low-income herself, what it took for her to create her own American Dream and why it’s so personal to her to make this possible for others like herself. Let’s dive into the deep end.

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Diana Tsai: Let’s start with why this is personal for you. Why does financial empowerment through home ownership matter to you so much?

Adena Hefets: A lot of the reason why I’m so passionate about creating access to homeownership is because it’s something that’s highly relatable. Our customers can live inside of the asset, they can’t live inside the S&P 500. Home-ownership is the number one thing that will take someone from being low-income to middle-income.

This is also deeply personal for me. I grew up in a low-income family. When my mom got pregnant with me, my parents decided to get this little crappy apartment on Long Island. But they couldn’t get a mortgage. They got lucky in that the owner offered them seller financing. My dad was a construction worker, he would fix up the home all the time, it was constantly being built. I remember, my mom would spend $150 in groceries for the four of us kids, and she’d start crying in the car because she spent so much money. 

 I think so many people in Silicon Valley don’t understand that. They don’t understand that pain point, what it feels like to be truly poor. And so they don’t build for consumers who actually have these real problems.

 Tsai: That’s the Good Unicorn part – building for consumers that have real problems. And I really get you on growing up with very little – I grew up in a similar situation, I remember going to college and seeing friends buy things at full retail price. I had never not bought anything off a sales rack in my life. I can still tell you the price of every single thing in the grocery store. I really, really get you. So out of the thousands of renters/ aspiring homeowners you currently serve, can you give an idea of what sort of demographics, backgrounds they’re coming from?

 Hefets: The largest segment of our customers are actually healthcare workers, think nurses, x-ray techs. For those folks, student debt is the main reason why they can’t get a mortgage. The second largest segment are educators, teachers, usually it’s a down-payment savings issue. And then the last group are 1099 workers. Anyone from an Instacart Uber delivery driver, to a truck driver, because it’s actually quite hard to get a mortgage with the inconsistency in income streams exactly. 

 Tsai: It’s amazing that you serve such an under-served group. You’re really fulfilling a need. Did you ever think that Divvy would become a Unicorn?

 Hefets: When we first founded Divvy, no. I just thought, there’s this problem. And I think I can help think of a solution. And then you kept setting goalposts: if we just get to serving 100 families, then it’s 1000 families. So no, I didn’t think we’d be this big, but I hope it will become much bigger, I hope we get to serve tens of thousands, hundreds of thousands of families. 

Tsai: Something I’ve started noticing about Good Unicorns is that they tend to take longer to get to product-market fit. There’s this mega-systemic level problem that’s trying to be solved. And it’s a little more complicated than, how do I hail a taxi? It’s just more complicated. So, I’m curious about product market fit. I’m also curious by what criteria you decided: “This is the company I want to build.”

 Hefets: Yeah, so to the second question first, originally my cofounder, he wanted to do a vacation rental company, fractional vacation homes. And I split off from him. It was our first month and I just told him, “I’m not spending my time figuring out how to give rich people some vacation homes.” 

 And so I broke off. I ended up creating what Divvy became today. Of course now looking back that was the right decision. But at the time, I had no reason why I would think one would be more successful than the other. My reasoning was simply: I can actually get up every day for the next 10 years and work on one idea, and the other one, I just feel like I’m not going to be impacting the world. 

 And then in terms of product-market fit. It’s tough. I think that when you’re building a business where you’re fundamentally changing the world, they tend to be a little bit more hairy, meaning the businesses are more asset heavy and take bigger investments. For example, if you’re solving some major healthcare issue, the investment that you have to make in experimentation and lead times are just bigger. It costs a lot of money, you have to raise a tremendous amount of capital. Even if you look at something like Tesla, which is like electric vehicles. I mean, they’ve had to raise a tremendous amount of money. And so there’s a lot of folks who don’t realize that, like the businesses that are going to be the most impactful take a tremendous amount of investment. 

 So what made us nervous about Divvy is that we actually had to buy the homes in cash, upfront. We’re thinking, how are we going to have the capital to do this? So right away we had to show that there was some traction in order to be able to raise capital. I remember when I first came up with Divvy, on a spreadsheet, I locked myself in my apartment for a week. And I figured out how it could work. So we put up a Craigslist ad, where we asked, does anybody want to buy a house with us? We had Tracy Peterson who was our first customer, she responded and we built it around her. I’d tell her, “Okay, here’s how the model is going to work. You’re going to put down, 10%, and then build up to this.” And she’s like, “Well, I don’t have that much money.” And I was like, “Okay, Teresa, how much money do you have?” And she’s like, “1% of the home value.” And I was like, “Okay….we’ll start there and keep building.” So a lot of it was built around the customers. Tracy Peterson, Katie Sanchez, Tyler Murray, I can name all the customers. 

 I think you know you have product-market fit when you’re successful, despite yourself. Meaning, it wasn’t a great experience early on. We didn’t know what we’re doing. And yet customers still stuck with us. And they were so excited. Because the impact we’re creating is so massive, they got a home. The pain point was so acute that they were willing to go through anything with us. I think that’s when you know that you’re onto something.

 Tsai: What has been the hardest part of the journey?

 Hefets: The first year was: does anybody want our product at all? And then we closed 100 homes. So we knew in year one, people want this. And the second year was knowing that scaling would require massive amounts of capital. At the time, we had a small debt facility worth $20M with Cross River Bank – it was a good start, but not enough capital to scale. So the question was, can we go out and raise capital, and convince people? 

 Now, we have lots of access to capital. But two years in, people were like, literally, the feedback I got was: “Wait, we’re giving loans to poor people?” And I was shocked,  because they have a track record, they’re performing, who cares what you define people by, you’re making a return off them! There was a whole stigma to get around in serving consumers who didn’t match Silicon Valley standards.

 Tsai: So how did you eventually convince investors given that stigma?

 Hefets: I changed the story. I didn’t mention our customers. I just said, here’s the returns. Here’s how everything looks, let’s not even mention the customer profile. I remember being so angry. Just so angry, because our customers, they’re such good people. And they need this. And they’re awesome! And at that moment, I hated Silicon Valley. I was just so angry. It was tough. Silicon Valley was not very supportive of building products that supported people outside of Silicon Valley. VCs would say to me, “I just don’t understand. It was so easy for me to get a mortgage.” And I’m sitting across thinking, “Did you just actually say that? How did you grow up?”

 What’s amazing is people don’t realize subprime is 50% of the market. And in fact, you charge higher interest rates. So if you’re offering financial products, and you’re charging higher interest, the amount of revenue you can make off subprime is actually quite a bit bigger than prime. But it has such a negative connotation with it. 

 Tsai: I’m so grateful you just shared that story. It needs to be told. When was a time where you felt like it was all coming apart or a near-death situation for Divvy?

 Hefets: When COVID hit. I was like, “Alright, well, that’s the end, this has been a nice road.” Eventually we found out COVID actually made our business stronger and more successful. But at the time, Sequoia put out this letter that basically said, “Hide your money, hide your employees, go under a cave, it’s the end of the world.” I read that and I was like, “Oh my god, this is it. This is how it all ends.” And I think for our generation, having lived through the global financial crisis, we remember what it was like when you couldn’t get a job, you couldn’t afford anything. Those are the moments where you’re really in shock. 

 But I think that’s part of being a leader: running towards hard times and problems and not running away, right? It’s like, okay, we’re going to dig our feet in, and we’re going to fight even harder. So much of founding a company is taking punches to the gut, and it’s about getting back up. You’re going to keep taking them. And they just become less painful over time. 

 Tsai: Where did you get this resilience from?

 Hefets: Growing up with very little, I think. I’ve had jobs since I was 10 years old. I paid for college. I graduated from Cornell and I went into investment banking because I wanted to surround myself with the smartest people. I always joke, I have the lowest intercept of anyone, but a really high slope. I didn’t grow up reading the Financial Times. I didn’t even know what a stock was. I felt constantly my life hadn’t prepared me for success. But that didn’t matter: I was going to be the quickest learner possible. And you keep learning, and eventually you catch on. 

 I think it’s so much as not worrying about where you start off, it’s about focusing on how quickly you can get to where you want to get to. And it’s also the American dream: you can start from anywhere, and make yourself super successful with hard work and effort.

 Tsai: I love that. As CEO, what are the highest leverage activities that you focus your energy on to really move the dial for Divvy?

 Hefets: Hiring is number one. The second thing is setting expectations, KPIs, goals. And here’s what we need to do. But I think that there’s another component. You have to make sure the trains run on time, you have to be hitting your numbers consistently. 

 But then I think you have to push the boundaries. I think that the more high leverage activities are actually going to your team and saying, “What would the world look like if we could do X?” Here’s an example. I went to our team two months ago and asked, “What would it look like if we could just drop rent prices by $250? Just make it easier for our customers by charging less rent?” And they’re like, “Well, we have debt covenants, this is why we can’t do it and here are the reasons why it won’t work.” And I’m like, “How, how could we potentially do this? Give me a way where it would still work.” And the team went back and they spent some time on it and actually figured out how to dynamically price homes in such a way that on average, overall, rent comes down by $250. And we’re actually going to generate more volume because of this change. So we’re going to be in a better position overall. So hire really smart people and then push them to do the most critical thinking possible.

 Tsai: I love that. Besides the entire premise of your whole company, what else have you done in contradiction of Silicon Valley conventions?

 Hefets: Lots! Divvy’s almost 50% women employees, almost 25% people of color including our contractors. Our level of diversity is so different from Silicon Valley, where they struggle to hire women and people of color. 

 Another example, 4 months into founding the company, we set up paid maternity and paternity leave. No questions asked. That was unusual for an early stage company.

 Another one: I don’t negotiate comp. We have comp bands. I’m not paying you more because you’re a better negotiator. Instead, I want to know everyone is in a set comp band and we’re not overpaying. And by the way, we pay in the 75th percentile for cash and equity. I just want to know I’m paying you fairly, you should come in and never have to worry about comp and just focus on doing the best possible job. 

 Tsai: So one last thing on my mind is if you had an audience right now, and everyone in the room was just basically kids like you, low income kids. And they’re thinking, “Could I build a company like this?” What would be your advice? What would you say to them? Like, what would you say to this roomful of kids who are thinking, could I build a good unicorn?

Hefets: My advice would be to go get an education, and then go find the hardest job you can. I chose banking and private equity because I just saw really smart people there, and just decided I was going to learn to be that smart. Learn as much as you can from the people around you, professors, work for the smartest people, absorb all of that. And then you get to a point where you become somewhat dangerously smart yourself. And then go build the company. 

 I think there’s actually more opportunity today, especially for women and minorities, to go out and raise funding. There’s so much support; now’s the time to take a risk. You’ll be surprised how many folks out there will help support and guide you along the way.

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