How to Set Up OpCo for Acquiring Assets?

The purpose of the OpCo is to acquire and hold real estate, which you can then use as collateral or sell it off for profit. In this episode learn more about how it works and what you need to set one up!

Cuby makes better buildings by developing and operating turnkey, transportable factories that output easily assemblable parts and offer the world's most efficient, precise, repeatable, and sustainable processes for the construction industry. It is building better buildings for the people who live, work, and play in them by reshaping processes for those who deliver them.

Cuby offers solutions to vertically-integrated developers and construction companies. Know more http://cubytechnologies.com

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How to Set Up OpCo for Acquiring Assets?

Do you have a strong opinion on how OpCo should be set up? One common structure is the OpCo is the GP, and the OpCo is the revenue stream. The OpCo is to franchise its brand. Its revenue stream is the GP carry on the PropCo. They will take 20% of all profits, which will flow right down to the OpCo. That is one model.

Do you have a strong opinion on the right way to do it? Should they be completely separated? Should the OpCo not even bother taking a GP carry and grow the underlying real estate they have access to and use it as a customer acquisition channel? Do you think a legitimate opportunity is to invent a new type of real estate and use your OpCo to make GP carry and become the next Blackstone for a certain asset class?

There is no right or wrong, and it depends on the business. It scales its growth. How asset-heavy is it, and what is required? I think it all depends. For our business, candidly, I don't know if ventures are the right dollars. If I had access to $2 billion now because our business is all about launching the super CapEx light mini-factories that are mobile. Asset light and asset-heavy are relative terms.

If everyone else is paying $75 million to $200 million for their factories and our factories cost $7 million, a far margin baked in, I would prefer to have $1 billion, capture the entire market and own all the factories as opposed to being asset-light and franchising them. It’s because we don't have access to those dollars, we have to get creative with how we think and grow.

With that being said, if you are a hotel business, for example. Lighthouse has an incredible business that I was lucky to be a part of at some point. The way they are growing has always been asset-light but at some point, some dollars might go toward key money, which is a standard practice in the hotel world where you are winning your ten-year contract by physically giving upfront dollars to your customer by saying, “Here is our commitment.” Let's say there is a business that is all about aggregating SFR. Am I buying a business? It probably makes a lot more sense to have a separate property or facility than charging OpCo dollars at costs paid for the SFR.

We can maybe use Zillow because that is a timely topic. Zillow is an example here. Could that be an example of a casualty here where the investor base doesn't get it? Are they investing in a consumer-facing platform that makes traditional service revenues by upselling products or are they investing in the business that is buying the underlying real estate? Zillow is a good example of OpCo and PropCo all in one, whether they choose to separate it or not, now they have shut it down. What are your thoughts on that?

It can work. It will work for someone. It is a different skillset the Tech and real estate. You now are part of the real estate world. I'm now coming into your world. That is a bit more techie coming from real estate but those are two such different skillsets in such different businesses. Sometimes, when you mix both, and you are light on one versus the other, that is where you could potentially run into issues. There is a world where the two of them mix. It will work for someone else. There are a lot of Zillows, and some are doing well applying this business model.

It comes down to the founding team and management team’s strengths. Perhaps in the Zillow case, there was too much focus on technology and not enough core real estate fundamentals. Most real estate investors would look at what Zillow is doing and realize, “This is a disaster when it happens.” Indeed it did happen with how much they are overpaying.

Everyone realizes that technology is the future.

If you are sophisticated, you will realize there is an opportunity to do it the right way. There are trends like iBuying or real trends in this PropCo sector where real estate will be transformed with technology. To summarize this whole segment here, it is typically being, “Here is unique real estate. You can invest in it, and you can make traditional returns.” The tenant will be someone. It could be a big retail chain, a big startup, whatever.

The other approach has been, “I'm a startup. I want to transform real estate.” The nation of OpCo and PropCo came out because the startups in technology companies or large companies, even hotels, realized, “We should be online real estate. We think we can deliver much higher margins effectively. We can pay even more rent to the landlords.” Rather than giving it to some random landlord who would like to own and control the underlying real estate.

I know this has been a jog and a heavy segment of the total show so far but that is where PropCo and OpCo goes is an interesting place to see where it is heading. Any concluding topics before we move on? I want to talk about corporate venture capital next but do you have any concluding segments on PropCo and OpCo for our readers?

It is something that we are going to see a lot more of. If anyone wants to start that business where they are betting on a riskier OpCo, that is going to fundamentally yield something higher on the PropCo, with that being the downside risk. I would support that person any day.

One of the final things I want to chat about is we have talked about capital, not understanding real estate PropTech, construction tech even. There are a few specialist firms who get PropTech but traditionally, your generalist VCs don't understand it. We are now starting to see large real estate firms develop their own corporate venture capital arms. Some of our readers come from that world too. What were your thoughts on the emergence of corporate venture capital? Let's also talk about construction tech, not just PropTech.

Generally speaking, corporate ventures are emerging everywhere as everyone realizes that technology is the future. What is the best way to own it? It is to hire yourselves next to someone that is changing the game next to you. You could potentially be a customer and ultimately be a buyer. In terms of construction tech and PropTech, you and I probably know the same people that are at these big billion-dollar real estate companies, funds, and construction companies.

They put someone in charge of the venture capital side that is looking to specifically solve problems that they might be having or trends that they are seeing they want to be a part of. It goes beyond having a fund, and hitting a seven DPI on the venture side is deeper. It is how do we find the right thing that is going to position us for the next several years?

In construction, we are seeing that. In the top ten construction ecosystems, all of those groups have a person that is running the venture side or corporate venture is a bit slower moving. It is less risk-averse because its model is to find something that can be implemented right away. A lot of times, the more interesting solution is going to be earlier stage or may take years to develop. You have this chicken or the egg happening.

My stronger opinion on this topic is that corporate venture capital is needed in construction tech specifically because, in earlier segments, we talked about the problems that construction faces.

It is deployment and having someone that captures a big subset of the market. Deploy it is the best way to build it, incubate, learn from it and test it without having to launch a PropCo and having to be your own GC and developer like a lot of these venture-backed groups are having to do because the back doors, the turners, they are not necessarily users yet.

If you take a look at other sectors, let's talk about the telecommunication space, for example. The telecommunication space is a big rise in corporate venture capital. Every major telco company eventually created a CVC arm. That is not the same dynamics as construction tech because, in the telco space, they were primarily investing in a lot of software innovations, and traditional venture capital also was part of that ecosystem.

Ultimately, the corporate venture capital didn't become an industry maker in the way construction can. In the construction tech space, it feels like it is a land grab now. You might set up a corporate venture capital firm for treasury management, which is a rare case but you might want to actively manage some of your extra cash sitting there.

Now you can get customer contracts with startups and other technology vendors. By having a corporate venture capital firm, you can do that but also can move the industry. It feels like the consolidation is ripe now. There are many GCs. There are many smaller mom-and-pop firms, and the top 200 firms are large, and they are implementing technology. Those are the guys that can move the industry.

To me, I feel like construction tech isn't going to go anywhere until there is more corporate venture capital. I don't see traditional venture capital investors, and the LPs behind those are understanding construction tech in a major way. It is going to come, and big returns are going to come from the CVC arms of these large construction firms. Do you agree with that or disagree?

I have two thoughts there. You are right in saying that these big construction companies are launching venture arms. That is how you create this mass adoption. There is a reason why a lot of them are backing software. It is a lot easier to push through the entire bureaucratic chain as opposed to physically changing the way you construct.

There's this other big push in the construction world. It's all about sustainability now.

What is happening is there are all these different solutions in the physical-built construction world. Imagine the construction companies are a car but everyone is building a different wheel or tire. Someone is square. Someone is a triangle. You can't have all cars driving the same road if everyone has a different wheel. That is what is going on and why there is not this one unified solve-all solution. You will never scale if that is not the case. I think there's going to be one big bet in the industry.

Lennar has been progressive. They picked the two forces that they have been working with, and there is going to be more of that. In terms of a generalist venture and that when it comes to construction, I think the reason why we are seeing many construction firms play with the deep tech venture ecosystem, frontier tech, deep tech, whatever you want to call it, is because it truly is that now. It is this other thing that no one knows how to categorize. There are robots, things that build things, and hardware.

The only area where that falls is perhaps deep tech. The one thing we didn't cover yet is there is this other big push in the construction world. It is all about sustainability now. You are getting this legislature stuff pushing down on you, and construction companies are forced to innovate. That is why you are seeing possibly corporate venture firms emerge. In the last several months, there have been $500 million-plus funds focused on climate tech. Those guys and girls are getting construction tech well because if you look at the most polluting industry in the world, guess which one that is, and no one talks about it because we still need to build buildings.

We split our episodes up. It is not one long. We also split them up. If anyone is reading this, read the earlier blog post. We have released with Aleksandr. It is a goldmine and a big learning opportunity. Alex, thank you so much for coming to the show. Any final concluding remarks and also how can people reach you? We got a large audience. Who are you looking for? If someone read this months down the road, is there someone or some type of company you would like to talk with?

Not to disguise as much as we have done, because all organized seated our company. I met all several years ago, and I have been working with them since 2021. We joined forces as we were diving into this industry, but we seated the company appreciated. It is rare these days. We have spent millions of dollars developing our products which are these mobile factories that are white-labeled turnkey solutions for the biggest incumbents.

Construction companies and vertically integrated developers, at the sign of a contract, we build them a mobile factory that is able to produce a kit of parts for a building, reducing their labor costs by ten times. To answer your question, those are the people we want to partner with and work with. For our last segment, we love smart, deep tech venture groups. We love construction companies that are pushing the envelope, and we want to develop the product.

That is where we are, and that is what you would want to be talking to. If there is anyone in the industry that is passionate about this space and wants to reach out, my email is on my LinkedIn. We can get together and talk about it but I think whoever solves this, whether it is us or not. It is much needed. This is the last frontier in not just tech but the way we push humanity forward.

How can they find you? What should they type? Should they go to Cuby Technology's website?

It is CubyTechnologies.com. We are going through a pretty big rebrand now. It is going to be fun. As we have tried to be quiet over the last couple of years, we are finally ready for the world to learn what we are doing and how we are doing it.

Aleksandr, thank you so much for coming to the show.

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About Zain Jaffer:

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as "Forbes 30 Under 30", "Inc. Magazine's 35 Under 35," and the "SF Business Times Tech & Innovation Award." He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.