Institutional Decadence
Why the Biggest Opportunities Often Hide Inside Broken Industries - Defense (Anduril), Healthcare (Oscar), Real Estate (Opendoor)
Understanding the difference between an industry that is creating value and an industry that has become exceptionally good at extracting value is a valuable nuance.
Over time, many industries drift away from the mission that originally made them successful. They become larger, more complex, more bureaucratic, and more focused on protecting existing profit pools than improving the customer experience. This process is often referred to as institutional decadence.
Institutional decadence occurs when an industry becomes so entrenched that its incentives no longer align with its purpose. The participants are not necessarily bad actors. In fact, many of them are acting rationally within the system that has been built around them. The problem is that the system itself becomes optimized for preservation rather than progress.
The ultimate result is referred to as rent seeking.
Rent seeking occurs when profits are generated not through innovation, efficiency, or creating a superior product, but through controlling access, exploiting complexity, and benefiting from structures that discourage competition. The industry learns that it can make more money maintaining the status quo than challenging it. The defense industry is perhaps one of the clearest examples right in line with healthcare.
For decades, major defense contractors operated in an environment where timelines stretched for years, projects ran over budget, and cost overruns were often absorbed by the customer, aka the taxpayers. Procurement became extraordinarily complex. Programs became larger and larger. Layers of contractors, subcontractors, consultants, and suppliers were added to the process. Success became measured by winning contracts rather than delivering outcomes.
Over time, the industry developed an incentive structure that rewarded size, relationships, and process rather than speed, innovation, and efficiency. Then along came Palmer Luckey.
What makes Anduril so fascinating is that the company was not built around creating a slightly better defense contractor. It was built around the idea that the entire defense procurement ecosystem had become bloated and inefficient.
Luckey looked at an industry where products routinely took years to develop and asked why. He looked at costs that seemed detached from reality and asked why. He looked at a system designed around maximizing contract value and instead focused on maximizing mission effectiveness.
If incumbents are optimizing for preserving an existing economic structure, a new entrant can optimize for delivering a better outcome.
That means building products faster. It means leveraging modern software. It means reducing complexity. It means embracing manufacturing efficiency. It means accepting lower margins than incumbents while still generating attractive returns on capital.
The beauty of the model is that the very decadence of the incumbents becomes the disruptor’s competitive advantage. And, the larger and slower the incumbents become, the more room exists for a focused founder to create a dramatically better product. The more entrenched the bureaucracy becomes, the more valuable speed becomes. The more resources incumbents dedicate toward protecting existing systems, the more vulnerable they become to entirely new approaches.
This is where the lesson becomes interesting for investors because the framework extends beyond defense. I use Anduril as an example because Palmer is one of my favorite founders. I have done quite a bit of research on him and he’s a fascinating person and is truly in the top of the top of founders.
Mark Bertolini also falls into this category with what he’s trying to accomplish with Oscar Health. The spine is similar but the healthcare industry is a bit different than the parallel between defense and real estate.
When I look at Opendoor, I see many of the same underlying dynamics.
Residential real estate is one of the largest industries on earth. In the United States alone, annual transaction volume routinely approaches two trillion dollars. Yet despite the size of the market, the transaction process remains remarkably inefficient.
Selling a home often involves uncertainty, delays, inspections, negotiations, financing contingencies, commissions, title work, scheduling conflicts, attorneys, and a long list of friction points that consumers simply tolerate because there have historically been few alternatives.
Entire ecosystems have been built around these friction points. Just as defense contractors benefited from complexity, many participants within residential real estate benefit from transaction friction. Every additional step creates an opportunity for someone to capture value. Every delay creates another fee. Every layer creates another participant. But, the customer absorbs the burden.
This does not mean the participants are malicious. Most are simply operating within the incentives presented to them. The same way many defense contractors operate within the procurement system they inherited.
But history shows that when enough friction accumulates, eventually someone attempts to remove it. That is what Anduril, Oscar Health, and the focus of this post, Opendoor represents.
The company is not simply buying and selling homes. It is attempting to redesign the transaction itself. The vision has always been larger than iBuying.
The vision is creating a transaction platform that reduces uncertainty, removes friction, increases speed, and ultimately lowers the total cost of moving homes through the system.
If successful, Opendoor does not need to capture the entire economics of residential real estate. It only needs to capture a small percentage of the value currently consumed by friction.
That is where the opportunity becomes enormous. Investors often focus on current market share. I like to focus on incentive structures. Industries rarely disrupt themselves so it’s worth pay attention to when one is up.
The participants benefiting from existing economics are often the least motivated to change them. The biggest opportunities emerge when a founder identifies an industry where customers are under served, complexity has become normalized, and incumbents have become comfortable extracting value from the process itself.
That is the common thread connecting companies like Anduril and Opendoor. Both are attacking industries that became accustomed to operating a certain way because nobody challenged the assumptions underneath them. Both are built on the belief that technology can eliminate friction. Both are attempting to align profitability with efficiency rather than complexity. And both understand that when an industry reaches a sufficient level of institutional decadence, disruption becomes less about competing against individual companies and more about competing against the incentive structure of the entire system.
That is often where the largest outcomes are created.
The reason I continue to spend so much time studying Opendoor is not because I believe the company has already won. It is because I believe the market may be underestimating the magnitude of the problem it is attempting to solve.
When investors look at Opendoor today, they often view it through the narrow lens of home flipping. They see housing inventory, interest rates, contribution margins, inventory turns, and quarterly earnings. Those metrics matter, but they can also distract from the larger question.
The biggest winners of the last several decades were not companies that simply participated in large markets. They were companies that identified friction inside those markets and systematically removed it. The value creation came from simplifying a process that millions of people already needed.
Residential real estate remains one of the largest and least efficient markets in the developed world.
The transaction itself remains remarkably archaic. A seller decides to move and immediately enters a process filled with uncertainty. They prepare the house. They coordinate showings. They leave their home for prospective buyers. They negotiate offers. They worry about financing contingencies. They navigate inspections. They negotiate repairs. They manage moving timelines. They coordinate closing schedules. They hope the buyer’s financing remains intact. They hope nothing unexpected emerges during the process.
The defense industry spent decades believing weapons development had to be slow. The taxi industry believed hailing a cab was the normal experience. Hotels believed travelers would always prefer traditional lodging options. Industries become vulnerable when they mistake historical practices for permanent realities.
The core insight behind Opendoor is that a homeowner may value certainty just as much as price. A traditional transaction may generate a slightly higher sale price in some circumstances. But what is the value of eliminating weeks of uncertainty? What is the value of removing showings? What is the value of controlling your moving timeline? What is the value of certainty when simultaneously buying another home?
Those questions become increasingly important as consumers become accustomed to on demand experiences everywhere else in their lives.
This is where the parallel to Anduril becomes interesting. Palmer Luckey did not build Anduril by asking how to become a slightly better version of existing defense contractors. He started by questioning assumptions the industry had accepted for decades.
Opendoor appears to be attempting something similar. The company is asking whether a residential real estate transaction should require so much friction in the first place. More importantly, every transaction that flows through Opendoor creates data. Data on pricing. Data on consumer behavior. Data on home condition. Data on local market dynamics. Data on transaction timelines. Data on demand patterns. Over time, this creates a feedback loop that traditional participants struggle to replicate.
The market often focuses on whether Opendoor can generate a few hundred basis points of margin on a home sale. I believe the more important question is whether Opendoor can become the operating system through which residential transactions occur. If that happens, the economics become substantially larger than simply buying and selling homes.
The total residential transaction market in the United States measures in the trillions annually. The fees, commissions, financing revenue, title revenue, ancillary services, and transaction friction associated with that volume represent an enormous economic opportunity.
But the opportunity exists because the underlying problem exists. The larger the friction, the larger the opportunity for the company that successfully removes it. Speed and execution matter but not without the opportunity. The opportunity exists so we’ll discuss the CEO and his team who will address the issue head on soon!