Seward, of course, knew nothing about Prudhoe Bay and the other North Slope oil fields. Even if he did, he wouldn’t have put much value on it. The oil industry was in its infancy at the time. Edwin Drake had drilled the world’s first oil well in Titusville Pennsylvania just eight years previously. 

Seward could have sent Drake himself to the North Slope and Drake wouldn’t have had a clue how to develop it. The technology didn’t exist. The market wasn’t developed sufficiently either; no market existed for the vast quantity of oil on the North Slope. Prudhoe Bay was worthless to Seward and the United States at the time of the purchase. It became valuable only as technology and the markets evolved.

What Seward acquired for the country, at least from an economic standpoint, were thousands of business options. By acquiring Alaska, the United States bought the right to develop any of the thousands of natural resource deposits the territory contained but not the commitment to develop any of them.

They were out-of-the-money business options at the time because it didn’t make sense to develop any of them. Some of those options, like Prudhoe Bay, turned valuable as the future unfolded. Most remain out-of-the-money even today because the economic benefit isn’t great enough to justify the cost.

Had Seward acquired obligations instead of rights, the economics of the acquisition would have been completely different and far worse. There is no way Seward or the United States could have predicted the future well enough to figure out which of the thousands of natural resources to commit to develop, even if they knew exactly what Alaska contained.

If Seward had to commit to developing specific deposits, he would have looked at the situation through a 19th-century lens and almost certainly spent money on uneconomic or worthless resources. By obtaining rights and not obligations, the country could sit back and see how the future unfolded and then pick and choose which business options to exercise. No one had to forecast the future.

The advantage of obtaining a right versus an obligation is the former allows its holder to avoid negative outcomes. The holder of a right doesn’t have to predict the future. He can wait and see how the future unfolds and then decide whether to pursue the opportunity. This wait-and-see-then-pick-and-choose feature of a business option is what gives out-of-the-money business options their value.

At KP7, we believe the market systematically undervalues these types of out-of-the-money business options. An equity analyst would have, in all likelihood, placed no value whatsoever on the collection of out-of-the-money business options Seward bought for the United States. That equity analyst would have missed one of the greatest investments of all time. While any single out-of-the-money business option might have essentially zero value, a portfolio of thousands of them can be valuable, depending on the business opportunity underlying the option.

If you take a peek under the hood of the KP7 portfolio, you will find tens of thousands of out-of-the-money business options. We see them as valuable.

Our investment theses on a number of portfolio companies, including Blackberry, Adaptive Biotechnologies, and Altius Minerals, include analyses of the companies’ portfolio of business options. It is not the only element of the investment thesis, but a material element. We like to collect out-of-the-money business options in volume.