⏳ How financial engineering saves lives


February 10, 2021

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Apple iPhone 12’s mini phone is selling so poorly that some telecom analysts think that Timmy Cook & Co. are gonna pull the plug on the line. In at least one subsection of life, size matters.

The Big Idea
Andrew Lo

How financial engineering can save lives

Andrew Lo is a legend in finance.

Named one of Time’s 100 most influential people in 2012 — with the magazine describing him as a cross between Charles Darwin and Adam Smith — the MIT finance professor has taught a generation of hedge fund quants.

While the term “financial engineering” often gets a bad association, Lo’s work in the field of biotech may lead to groundbreaking cures.

Nearly a decade ago, Lo lost his mother…

… and 5 other people close to him to cancer over a 4-year span, according to a Bloomberg report.

After these tragedies, Lo set out to see how financial engineering could help find cures for rare diseases. In his research, Lo found that many biotech startups can’t get funding because of what’s known as the “valley of death.”

A successful new drug might pay off $2B per year for a decade and only cost $200m to create… however, the chance of success is low (5%); even with that payoff, many investors balk at the risk.

What if you could pool the risk, though?

Lo proposed creating a $30B fund to fund 150 biotech startups ($200m each). The key insight was that each startup had to target a different (and unrelated) disease.

The reason: Lo wanted all of the startup bets to be completely uncorrelated, meaning failure by one would have zero effect or relation with another.

Using this model, his research showed that the odds of finding:

  • One drug = 99%+
  • Five drugs = 87%+

Effectively, this approach de-risked biotech funding for the most conservative (and largest) investors in the world.

Neil Kumar — one of Lo’s students — used the framework

And launched BridgeBio Pharma in 2015. Lo was a small investor while megafunds like PE giant KKR and VC fund Sequoia poured in hundreds of millions.

BridgeBio centralizes research and operations functions but spins out new drugs in separate subsidiaries (it’s called the “Andrew model”). Today, BridgeBio has 20 rare disease projects in the pipeline and 4 are in phase 3 trials, per Bloomberg.

The firm IPO’d in 2019 and is worth ~$9B.

For Lo, it’s positive news but there’s more to be done: “The more financing that comes into the industry,” he says, “the faster is the scientific progress we’re going to make.”

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Snippets
  • Cyberpunk cyberpunked: Game developer CD Projekt announced it was the victim of a ransomware attack in which hackers managed to steal the source code to key games.
  • Shopify’s getting social: For the first time, Shopify is bringing its Shop Pay checkout option — used by 40m+ buyers — out of its own platform and into Facebook and Instagram.
  • DoorDash does the robot: The food delivery service acquired robotics startup Chowbotics to whip up salads, poke bowls, and snacks at universities, hospitals, and grocery stores.
  • EA sticks to mobile with its $2.4B acquisition of mobile gaming behemoth Glu, famously known for its Kim Kardashian Hollywood game.
  • You can’t be the ‘Everything Store’ without a wall-mounted home control product… which is exactly what Amazon is releasing with a new Echo device.
  • Not Succession: James Murdoch (Rupert’s son) is launching a SPAC to acquire Asian media brands.
  • Never enough: Twitter’s users, revenue, and earnings were all up YoY… however, the company warned expenses (e.g., head count) will jump in 2021, cooling the market reaction.
  • Apple Watch yourself: A Mount Sinai study found that health monitoring on the Apple Watch can detect COVID a week before testing.
The Hills Have… Potential?
dam graphic

The world is facing a big dam problem

For 100+ years, hydroelectric dams have generated power on demand. But with energy needs rising, we’re running out of places to put them.

Enter RheEnergise, a London-based startup…

… that’s turning hills into batteries

Their “High Density Hydro” systems are similar to typical hydroelectric plants — using surplus power to pump liquid uphill to a holding area, then releasing it to create power when needed — but offer several key advantages:

  • They’re smaller, cheaper, and quicker to build with just 1/5th the construction time of a typical hydro-plant.
  • They can be built underground, freeing up land for solar farms or wind farms, or environmental restoration projects.
  • Their systems are closed loop, so they don’t even require an existing waterway.

The secret is their proprietary HD R-19 fluid, which is 2.5x as dense as water, allowing them to generate the same power with a much smaller system.

The Earth needs ~100x its current energy storage capacity by 2040

But room for hydroelectric dams is running out.

“Most potential sites have been used up,” RheEnergise claims, “and most people consider pumped hydro a dead end.” But they’ve found ~10k sites in the UK alone for their HD Hydro systems — 80k across Europe, and 160k+ in Africa.

RheEnergise has received ~£550k in grants from the UK government

It has also raised ~£660k in crowdfunding and hopes to be operational by 2023.

Given the environmental drawbacks of large hydropower, that’s the best dam news we’ve heard all week.

The high-density dam (on the right) takes up much less real estate (Source: RheEnergise)

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Dwayne ‘On the Rocks’ Johnson
Guy Fieri

Guy Fieri (welcome back to our email) owns Santo Tequila (Source: Santo via THR)

Celebrities are taking shots at the liquor market

On HBO’s “Silicon Valley,” former billionaire Russ Hanneman built a tequila brand aptly named Tres Comas in an attempt to re-billionize his bank account.

Now, it seems a growing number of celebrities are also trying to add tres comas to their names by shaking up the liquor space.

The proof is in the proof

Hip-hop artists — like Diddy (with Ciroc) and Jay-Z (with Ace of Spades) — have a track record of scoring big in the liquor space.

In recent years, A-list names *taking shots* at the market include:

  • 2017: George Clooney sold tequila startup Casamigos for $700m
  • 2018: MMA Champion Conor McGregor launched a whiskey now valued at $235m
  • 2020: Ryan Reynolds’ Aviation Gin sold for $335m (we wrote more about the hilarious Reynolds here)

With celebrity brands currently making up ~5% of the space, insiders see room for growth.

Who’s the next Clooney (or Diddy)?

One name you might know: Dwayne “[On] The Rock[s]” Johnson. The mega-super-duper-star launched Teremana Tequila last spring and broke records by selling 300k+ cases in 2020.

Others mixing it up:

  • Football player J.J. Watt, cycling legend Lance Armstrong, and Momofuku founder David Chang are all investors in nonalcoholic Athletic Brewing Co. (We wrote about it here.)
  • Guy Fieri and former Van Halen frontman Sammy Hager (!!) own Santo Tequila
  • Actress Kate Hudson launched King St. Vodka in 2019

Oh, by the way, Tres Comas exists IRL. In likely the funniest official press release to date, publicly traded liquor conglomerate Diageo proclaimed it as “the only tequila acceptable for billionaires.”

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The Hustle Says

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Valuation of the day
Reddit Super Bowl Ad

The 5-second Reddit Super Bowl ad that you have to pause to read (Source: Twitter)

Reddit won major praise for its 5-sec Super Bowl ad. The short ad was a headnod to the whole GameStop drama, which was catalyzed by the subreddit r/WallStreetBets and its passionate members.

On the heels of this marketing coup, Reddit announced a $250m funding round that valued the social media startup at $6B (double its most recent valuation round of $3B).

Reddit’s CEO told the Wall Street Journal that it was a “good market” to fundraise in, especially with Reddit posting big ad numbers (up 90% YoY in its last quarter).

Did Reddit just turn a $1m ad spend into a $3B valuation bump? Probably not, but whatever.

The funding documents aren’t public, but here’s our guess at what the “sum-of-parts” valuation for Reddit looks like:

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