Knox Financial CEO David Friedman still feels the sharp pangs of seller’s remorse when he thinks about the condo he sold in Boston after he and his then-girlfriend got engaged and decided to get a larger place together. “I thought, this is a bad decision,” he recalls. “This home has been my best investment.”
But at the time he was running a thriving real estate technology startup, Boston Logic, and he had too much going on to even think about turning the property into an income-generating rental. “So I said, screw it,” he says, “and I sold it.”
Sure enough, four years later, the home sold again—this time for $200,000 more than Friedman got for it. “I felt like somebody had stolen $200,000 from me. But in fact, it was myself four years earlier stealing that money from me.”
He complained to his friend and colleague at Boston Logic, Spencer Taylor, who said the same thing had happened to him with a property in Vermont. “We looked at each other and said, hey, if we make this easy, there are a lot of people like us who will hold onto their homes and turn them into income properties.”
So in 2018, two years after Friedman had sold Boston Logic to PE firm Providence Equity, he and Taylor cofounded Knox Financial and have been disrupting the real estate rental market ever since. In the following interview, Friedman shares his strategy for growing Knox nationally, lessons he’s learned from previous startup experiences, and why he chooses not to skimp on talent.
After you sold Boston Logic, you could have taken the money and run. What made you decide to take on another startup? Did you consider a more traditional CEO role?
I spent a lot of time thinking about it, actually, and there were a few options I was considering that I hadn’t explored in the past. I considered doing some investing on my own. I considered buying a bunch of real estate and operating it, or getting a CEO role or some other senior role at a company that was post product market fit because, did I want to start from zero? One of the things I did in early 2018 was, I bought a property in Vermont next door to the one that we already owned and I was remodeling that house, doing some of the work with my dad, and I took an exploratory call with a guy who runs a venture capital fund. At the time, a lot of people were saying to me, ‘Dave, you’re a startup founder—you’re going to found something. This is your natural state.’ I wanted to consider other options. But lo and behold, they were all right. The universe was trying to tell me something.
So how does Knox make money?
It’s pretty simple. We’ve taken all the things that you have to either procure or do yourself to own and operate an investment property and we’ve packaged them together. We changed how one pays for them and therefore how we charge for them. So instead of hiring a realtor who charges you a month’s rent every time you have turnover, a property manager who takes 8% of expected revenue, a lawyer who charges you their hourly rate, and so on, we charge 10% of the rent we actually collect, which undercuts the market by several percent of your annual costs. It also simplifies things for the homeowner and it aligns our interests with them because we only make money when they make money and our clients respond to that in a really big way.
How many clients do you have now and what are your plans for expansion?
We have 50-plus units in the program now. We’re looking at a bunch of markets that are similar to Boston in a number of ways. So likely something on the East Coast, like D.C.
Real estate markets are so different city to city—how do you control for that as you’re scaling up?
You try to minimize the number of things that are going to be different. The first thing we look at is unit economics—so are we going to see a similar cost to acquire a customer, revenue per customer, etc.? Is the population of folks similar? Are appetites for rental units similar and is the population a similar demographic?
The other thing we do when we prioritize markets is we get really into our data model. We look at a lot of data from the St. Louis Fed and a few other sources as well as our own proprietary pricing algorithms for rentals and insurance, and then using all that data, we say, okay, here’s a market where our product is going to appeal more than it will in another. Understanding that data model before you start spending your marketing dollar is super important.
How do you maximize your marketing budget?
We do a bunch of PR, content production, radio advertising. That’s the mass media side. The other side is built on our data model. So we’ve actually taken housing data and our algorithms and a few other data sources to figure out which addresses in the greater Boston area we want to market to. We figure out which homes are going to be a good fit, then we link homes to homeowners using some data tools, and then we can market to them with snail mail and social media. So there’s a lot of data work that drives us to not market to an entire population of a million people, but to a few tens of thousands of people who we think are gonna be the customers who get the most benefit from the platform.
There’s been a lot of talk about another housing bubble. Is Knox offering a kind of hedge to the homeowner?
Yes, definitely, because we offer an alternative to selling. You can hold on to your property and now it’s no longer your primary residence, but a longterm investment both for cashflow and value growth. Every day, we’re getting calls from customers in the Boston area who say things to us like, ‘My home’s been on the market for 90 days or six months or something like that and it’s not moving, but I don’t want to do another price reduction. Your program seems like a really nice alternative. Let’s talk.’ I think in a recession we’re going to get a lot more of those phone calls.
What mistakes have you made in previous startup experiences that you’re hoping not to repeat?
Oh, we don’t have enough time to go through that entire list. But the net is that there are any number of things that Spencer and I know because we have been through the startup experience and we’ve made the mistakes. I often say I don’t want to nail a board to the floor if I’m going to trip over it in a year. So we know what that looks like and what a lot of those boards are that you nail to the floor.
For example, one of the one things a lot of startups run into is they implement a bunch of technology systems that are not integrated. So from a very early stage at Knox, we are implementing technology systems that are connected, which means that our data platforms are dramatically more robust—this is from accounting to CRM to marketing to operations—they’re dramatically more integrated. And we have a much larger amount of data about our customers and potential customers than our previous startups did and more than most companies do at our scale. We have just an incredible amount of detail and that allows us to make much better decisions.
It also allows you to not have to deal with the gargantuan task down the road of upgrading and integrating. You get to a point where you say, okay, this startup accounting system or this startup CRM no longer serves my company and you not only have to take on a much greater monthly cost as a result, but you also have to take on an enormous upfront cost to migrate and then integrate. We said, all right, we’re going to do the integration when there’s no data in the system so there is no migration to be done. And we’re going to spend a little bit of extra money on a monthly basis now to avoid enormous bills down the road with consultants. That’s on the technology side.
On the people side, one of things I learned is that I don’t think it’s smart to try to hire the cheapest employee for every role. There’s a lot of writing that says that when you’re a startup, you should find a way to systematize and hire the most cost effective person to sit in a chair. And what I find with startups is, early on, you actually should be spending a little bit more on hiring people that are over-powered for a lot of roles, because their roles are going to be less defined and you need to allow them to work with less direction and with less structure, and that takes a more senior, more expensive and more capable employee.
If you just look at it on a financial basis, employees have fixed costs. So what I found with advanced employees is if you tried to save, say, 25% on a salary basis, your fixed costs on that employee are generally the same because you’ve got to load up that employee on your P&L with like health care, etc. So the 25% is actually a smaller percentage. If you up the salary by 25%, you’re suddenly in another echelon of employee and they’re 50% more productive. So you’re actually getting a lot more for the dollar and it also frees up your time because you’ve got a resource you can rely on more and you don’t have to double check their work as much. So we’re doing that right the first time here.