Making money fighting the regulatory blob
Updated: Oct 15
Edit: Microsoft completed their acquisition of Activision Blizzard today [yay! 10/13/23]. Deals like this are critical for demonstrating to founders there are other financial exit options outside of an IPO.
Innovative Companies are Creating Alpha tackling regulatory overreach and archaic government processes.
At the All-In summit in LA 2023 Bill Gurley spoke about regulatory overreach strangling innovation in the US. This was a wildly popular presentation and worth a watch - more here.
Since then, I've been particularly aware of companies who are circumventing or breaking through the most restrictive industries to create outsized returns.
In an era where regulatory frameworks often stand as both protectors of market order and barriers to innovation, some trailblazing companies are carving a path through these regulatory mazes to not only advance strategic interests in key areas like space travel and defense but also create significant financial value, or "alpha." Three stories I particularly love are SpaceX, Anduril, and Pentwater Capital Management.
Here’s a glimpse into their journeys of navigating regulatory frameworks, driving innovation, and generating remarkable revenues.
SpaceX: Reimagining space travel...and procurement
SpaceX is a pioneering aerospace manufacturer and space transportation company founded by Elon Musk in 2002.
With the ambitious goal of reducing space transportation costs to enable the colonization of Mars, SpaceX has revolutionized the aerospace industry. It's known for its Falcon and Starship rockets, Dragon spacecraft, and the development of reusable rocket technology which significantly lowers the cost of access to space.
The above shows the position the US would
SpaceX's shift away from the traditional "cost-plus" procurement model to a more cost-effective and innovative approach has reshaped the economics of space exploration. Here's a deeper understanding of how SpaceX managed to offer significantly cheaper bids to NASA:
Fixed-Price Contracts: Unlike the "cost-plus" model, where contractors are reimbursed for their expenses plus an additional amount for profit, SpaceX operates on fixed-price contracts. In this model, a set price is agreed upon for the delivery of a project or service, incentivizing SpaceX to control costs to maintain profitability.
In-House Manufacturing: A significant portion of SpaceX's ability to reduce costs is attributed to its in-house manufacturing approach. By producing about 85% of all launch hardware in-house, SpaceX significantly cuts down on expenses related to outsourcing and supplier markups.
Reusable Rocket Technology: One of SpaceX's groundbreaking innovations is the development of reusable rocket technology. By designing rockets that can be recovered and relaunched, SpaceX drastically reduces the cost per launch, a saving that is then passed on to its clients including NASA.
Anduril: Building for the Mission
Anduril Industries, founded in 2017 by a group of talented founder including Palmer Luckey, represents the fusion of cutting-edge technology with defense solutions. Palmer Luckey, who is also the co-founder of Oculus VR, launched Anduril with a vision to address contemporary defense needs through advanced technology. The company operates at the forefront of innovation, creating hardware and software products driving the industry forward. By leveraging artificial intelligence, machine learning, and computer vision, Anduril aims to redefine defense procurement processes and deliver enhanced surveillance, security awareness, and multi-domain operational capabilities to military agencies and allied nations.
"Building for the Mission" is a distinctive approach adopted by Anduril Industries, which contrasts with the traditional defense procurement processes.
Here's a deeper dive into what this approach entails:
Anticipatory Product Development: Unlike conventional methods where products are developed based on exhaustive specifications provided by government contracts, "building for the mission" embodies a proactive stance. Anduril, by leveraging this approach, anticipates the needs of the government and military agencies and develops solutions even before a formal request or contract is made.
Alignment with Strategic Objectives: This methodology ensures that the technology developed is in direct alignment with the strategic objectives and operational needs of the military. It's about understanding the broader mission goals and creating solutions that will significantly contribute to the success of these missions.
Rapid Innovation and Deployment: By focusing on the mission, Anduril can innovate and deploy solutions rapidly. This is crucial in the defense sector where timely response and adaptation to emerging threats are paramount.
Pentwater Capital: Betting against the Regulatory Blob
Lina Khan, Chair of the Federal Trade Commission since June 2021, has adopted a vigorous stance towards tech regulation, often targeting big tech companies with antitrust lawsuits and attempts to block mergers. This strategy has largely been unsuccessful, to the extent that Pentwater Capital Management has been able to generate significant revenues betting against her.
Pentwater Capital Management, with close to $5 billion in assets under management, is led by Matt Halbower. Known for strategic investments, the fund made significant gains by capitalizing on the FTC's attempted block of the Amgen-Horizon deal, showcasing a knack for exploiting regulatory missteps.
Betting against regulatory overreach: Pentwater Capital showcased strategic foresight by betting against Lina Khan's aggressive regulatory approach. For instance, despite the FTC's intervention in the Amgen-Horizon deal, Pentwater built a substantial stake in Horizon, exhibiting confidence against regulatory blocks. Their calculated move paid off when the FTC's bid to block the deal failed, leading to an estimated gain of around $100 million on its Horizon trade.
Creating alpha from predictable behavior: Pentwater's strategic market positioning was also evident in how they predicted the FTC moves before they announced them. For instance, when the FTC moved to block Microsoft's acquisition of Activision, Pentwater bought short options contracts on Horizon's stock to hedge against potential negative outcomes. When the FTC lawsuit caused Horizon's shares to plunge nearly 20%, Pentwater's position was even more profitable.
A winning strategy: Navigating the regulatory landscape has positioned Pentwater to grow its assets significantly, with a portfolio value of around $14.45 billion as of mid-2023.
These stories of SpaceX, Anduril, and Pentwater Capital underscore how innovative strategies, coupled with a keen understanding of the regulatory environment, can not only generate substantial financial value but also propel key strategic interests forward - the regulatory blob only seeks to expand and it is great to see entrepreneurs pushing back against it!