17:32

Roadmap 09/11 (click here to expand/collapse)

Below is the Roadmap for select September 2011 website articles. 

Provide Predictable Funding for Unpredictable R&D+

We Make R&D funding more predictable ...

At a lower cost of capital

With reduced volatility (i.e., short term predictability)

Without mortgaging {bracketing} the future (i.e., long term sustainability)

Investors can buy and sell shares at any time (during open season+), reducing premiums they would typically charge if we mandated long term commitments, and reducing a perceived need to 'meddle' into investments, demanding 'window dressings' to increase the sale price for the next investor down the line.    Valuation of Intellectual Capital+

Asset valuations (appraisals) are greatly increased due to membership+ in our community. They command premium pricing due to the financial strength of the community, readily available comparables, and tangible benefits of membership provided by the funding agency.    Community

We can have at our disposal (in the U.S.) additional tax benefits that comes from working with member-contributed equity.    The Cooperative Solution 

Long-term investor-citizens come to rely upon the predictability and sustainability of perpetual fund+ share pricing. This reduces premiums they otherwise would charge due to the unpredictable nature of the underlying assets+ (R&D-based ventures).      Valuation of Intellectual Capital

We have at our disposal a broader variety of cost-effective tools for investor retention+ when we work with our investors vs. anonymous / absentee investors.      Investor Retention

Investor-citizen familiarity with our financial safeguards tamps down on irrational investor fears, reducing the urge to sell off during generalized market downturns. Increased volatility in buying and selling forces us to recruit (and pay for) excess investors just to be sure we have enough funds to cover the sell-offs.        Investor Education

We build love of institution in our investors. Our client base will be thousands of thousandaires and only a few millionaires (when they start). We can't do this without investor referrals, outreach, testimonials and involvement in retention and recruitment programs.        Love of Institution

Investor-citizen participation in governance builds an appreciation of the complexities in our operating model (e.g., asset appraisal, the stabilization fund, derivative investment vehicles+). Citizens learn to acknowledge that knowing and doing are two different skill-sets. An idealized vision of the funding agency leads to unrealistic expectations of the funding agents. Our operating model reflects the uncertainties of investing into unpredictable R&D and we need a latitude for our mistakes from investors.      Investor Participation

Asset appraisal, upon which the perpetual fund share price ultimately resides, is performed in a way that tamps down on period-to-period fluctuations in asset value (across a basket of assets). Interim asset appraisals informs the share pricing used by investors to buy and sell during open seasons.    Valuation of Intellectual Capital

A mandate for an accelerating growth rate forces agency management+ to continually recruit new investors, who can then be recruited as natural proponents for safeguards put in place to ensure the future of the agency. For example, new investors will not want old investors to exit with the cash, gutting the finances behind our community services. We make this a first principle.    First Principles+

Mandatory reinvestment of interim winnings is the principle funding source for all our community services. It's so important we make it a first principle.    First Principles

Minority opinions (dissenters+) provide a wake up call to other investors should the future of the agency be placed in jeopardy by self-interested investors or outsiders.    Dissenting Opinions

A common law+ legal approach makes it difficult for today's investors to enact binding legal precedent that can be burdensome on tomorrow's investors. It's very difficult to know the best way to exploit unpredictable R&D. We don't write down rules, precedents or procedures that either 1) make it too difficult for future generations to experiment or 2) make it too easy for future generations to excuse their lack of creativity.    Common Law

Investor voting constructs+ make it difficult for today's investors to enact bylaws, rules and regulations that are binding and can be burdensome on tomorrow's investors.     Voting Constructs


Benefits of a Community-Based Operating Model for Our Funding Agency

Breathing Life into Intellectual Capital

Unpredictable R&D is a different kind of intellectual capital. Its exploitation requires creativity, experimentation, progress that is halting and tentative, and a willingness to throw away all the rule books. We do not pick a commercial direction and start marching. Ours is a wilderness criss-crossed by many overgrown paths, each with unique challenges, and only a very few taking us where we want to go. Consider it a mystery instead of a puzzle. There are many misdirection cues, incredible complexity of plot, and many, many plausible conclusions. The answer often emerges when we discard that which is right before our eyes: discarding yesterday's misleading evidence.

These challenges (opportunities) get reflected in the demands we place on the funding agency. We must better educate citizens (vis-à-vis anonymous or absentee investors) to appreciate the value of the freedoms we make available to our investees. Investees are freed from many arbitrary constraints. Our task is to make these freedoms seem dear to investors so they aren't tempted to take them away, with meddling or impatience. Responsibility for the defense of these freedoms must become a matter of personal mission for many of our investors.

Above we listed advantages of a community-based approach vis-à-vis a corporate or venture capital approach (our competitors). We take the best and discard the worst from these competing models. We have our investors (venture) but we allow them to exit at any time (corporate). The community-based approach also brings advantages not found elsewhere (e.g., love of institution).

Breathing Life into Intellectual Capital

Summary: 

Intellectual Capital+ is found dead within many a corporate or academic repository. We breathe life into these dead assets and nurture them within our exclusive community.

Background and Understanding

Location-location-location.

You intend to spend $1 million building a house. In our community it can be worth $10 million. In that community it may be worth $1 million. Our community provides the best schools, the best public services, the best neighbors, and a community block committee dedicated to maintaining and raising housing values for all its members. That community has terrible schools, no public services and neighbors with cars jacked up on cinder blocks in the front yard.

Community is a major contributor to asset value. It's a multiplier of asset value. Although with Intellectual Capital+ we have no bricks and mortar and we won’t have our neighbor’s sewage running through our streets, the comparison still fits. Intellectual Capital shares psychological attributes with real estate investments.1 Investors and investees learn to view these assets in terms of their potential as members of a nurturing, vibrant community.

De Soto, in his book The Mystery of Capital (2000), gives results from a global survey of asset values of squatter dwellings in third world slums. These are properties with no official property records and little access to public services. These properties represent dead assets from an economic development standpoint. Owners can’t sell, get credit or even rent these properties – default results in unrecoverable losses or vigilante law, dramatically reducing incentives for economic activity. Squatters want legal recognition – the ability to call this property their own in the eyes of the host government – but numerous regulatory and legal hurdles are often placed in their way, as carefully documented by De Soto and his team.

A squatter's dwelling has little value when neighboring lots are littered with garbage, raw sewage runs through the streets and rains bring a constant threat of landslides or flooding. Who invests in these properties? Those living there see little need to invest in home improvements. These same dwellings in a more orderly community bring a pride of ownership and a sense of shared responsibilities. Residents make small, steady, incremental improvements to their property, and importantly they begin to care about the look and feel of their neighbor’s property.2

De Soto argues tens of trillions of U.S. dollars in latent capital are trapped inside these slum properties due to the inadequate provision of host government services. This is based an estimates from providing even the barest minimum of community services: official property records, addresses for mail delivery and minor changes to civil law that better defend the newly-recognized properties rights of squatters.3 As a result the national economy loses significant economic activity. A 10% jump in spending would release several trillion U.S. dollars in additional revenues, wages and tax incomes for host governments.

Analogously, tens of trillions in U.S. dollars of latent capital are tied up and wasted in Intellectual Capital sitting dead in first world ‘repositories’. Although assets based on Intellectual Capital often have official ‘property records’ they receive little more in the way of public services. The wealth of Intellectual Capital remains mostly locked within the minds of their owners. Owners must feel improvements to their property will redound to their benefit. Improvements won’t be washed away in the next downpour (e.g., corporate restructuring). Unleash the latent capital trapped in these dead assets and significant value emerges for the local economy and for its citizens (i.e., our investors).

The ‘mystery’ for both slum dwellings and Intellectual Capital is that wealth emerges from the minds of those who embrace these underutilized or dead assets as their own. Wealth is created, as if by magic, simply by someone internalizing the value latent within these assets, and finding ways to make this value apparent to others. If you loan me one dollar and I sit on it, then no wealth creation happens. Wealth is created when I spend a dollar in a way that makes my worth now appear to you to be incrementally greater than the dollar. I unleash latent wealth trapped within my person or my belongings: a new suit or a fresh coat of paint. Many new suits and coats of paint make a community more attractive overall to investors and the wealth creation cycle accelerates.

Minding Intellectual Capital

Intellectual Capital epitomizes an asset pregnant with latent wealth. Its very name connotes wealth found within the minds of individuals.4 To unleash this wealth we must first tap into those minds. Intellectual Capital is acknowledged as underpinning every major product launched in the world. We acknowledge its value conceptually. But we most often have no idea how to unleash value in this particular instance of Intellectual Capital.

Wealth creation with Intellectual Capital is also very mind-centric. We invest into Intellectual Capital in a way that unleashes wealth as perceived in the minds of others. This is much more than a coat of paint. I loan you a dollar and you tell me two dollars have been created in your mind. Given the intricacy of the research involved I have no way of knowing for myself. A dollar may seem well-spent to the creators of the Intellectual Capital, but wealth only gets created when others agree.

Investors, even should they be experts in the field of research, can never hope to gain the same level of understanding and appreciation of an asset’s wealth potential as found in the minds of its creators. The value resides mostly in an implicit knowledge+ possessed exclusively by the research team. We can capture this implicit knowledge, make it explicit, but knowing is not doing. Only the team on-the-ground or under-the-hood can effectively exploit Intellectual Capital. Outsiders are always at a disadvantage in this valuation exercise.5

For example, a team discovers B-cells harvested from the blood of individuals inoculated against this year’s strain of flu can be used to develop antibodies (i.e., an antibiotic) for next year’s strain, despite mutational differences between the strains. We invest a dollar and find out the technology only works for blood type O+. Have we increased the wealth latent within this Intellectual Capital? We’ve cut out two thirds of the population from our potential customer base. But we also have moved the Intellectual Capital closer to practical application.

Investors must get inside the minds of creators of Intellectual Capital. The need for this melding of minds persists, potentially for decades, and only concludes when a consumer (an independent mind) reaches into their own wallet to pay for a ‘tangible’ manifestation of the Intellectual Capital. Mind melds are not a feat accomplished by anonymous, absentee or institutional investors. We need citizen – investors.6

 

Wealth in the Minds of Investors

When ‘outside’ investors into Intellectual Capital come to realize the intangible nature of its wealth creation, they become understandably anxious. They feel compelled to conjure visions of greater wealth in minds of investors further down the road; they need to sell this vision to the next round of buyers. We prohibit investors from feigning wealth creation in this way, using window dressing as a surrogate for wealth. Investor terrorism+ is prohibited. You can’t browbeat creativity out of researchers, and we don’t let investors torpedo investments to placate their short term anxieties.

We decree, by fiat, wealth is created based on advancements+ in effectiveness as evaluated only by the funding agency. More than this, we set the amount of wealth created from each advancement. Investors may have it in their minds the value should be higher or lower for any particular asset, but they will learn, over time, to respect the integrity of our valuation formulas in the aggregate. Investors come to acknowledge the reliability of this decree because they will see it works (and it is mandatory).

Investors can buy and sell at any point. Investors have no need to build visions of created wealth in the minds of the next round of investors. They buy and sell at the decreed price. Our decreed price is targeted to be above-market, but not by much. It’s a price deemed to be sustainable and steady for a very long time. The intangible in-the-mind wealth creation in Intellectual Capital is made tangible by our valuation mechanism+. Investors no longer need a mind meld in order to buy and sell.

The decreed price is ‘hedged’ in that all investments are engineered to spin off excess cash in the event of success (cash by design unspoken for). This excess cash is set aside to pay moderate windfalls+ (dividends) to investors. This cash windfall is our cushion, our margin of error. Investors are conditioned to view windfalls (dividends) as unpredictable in both timing and amount. If our decreed price for the perpetual fund+ is sustainable, cash windfalls get distributed intact. If it falls short, we use the cash windfall to back fill our price support.

We use a basket of Intellectual Capital-based assets. Management within an individual investment can be effective and still fail. Sometimes Mother Nature just doesn’t cooperate. Evidence is just as effective if it tells us when not to continue, when to stop. At all times we have an assortment of assets at various stages of completion. Some stop and others go. A basket of assets gives us some level of predictability over these inherently unpredictable R&D assets.7

Wealth destruction in Intellectual Capital is also mind-centric. We employ a variety of means to keep this from happening, but they all rely on investor retention+. We do not mandate a long-term commitment by investors, but we do provide powerful incentives to build investor retention. We expend enormous amounts of effort conditioning investors into the madness of our ways, and we want this investment to reap big dividends by helping tamp down on irrational investment behaviors+.

Wealth in the Minds of Investees

Wealth is also created in the minds of investees. They have a new-found confidence, a lift in their step. They boldly mortgage their assets with the intent of investing the funds so as to make them more valuable. They look around and see other similar investments in the community. We share lessons learned. Investors only pay once for lessons. But we do keep up with the Joneses; maybe even try to beat them.

This month’s edition of the World Class R&D Institute home page is dedicated to the advantages accruing to investors as members of our community, and not as much to the investees. Investees as members of our community are protected by an R&D Bill of Rights & Obligations and receive many member-exclusive benefits. We invest upward to 20% of winnings into success assurance+ for investees. Investees leverage these and other community services to extract the maximum wealth from their Intellectual Capital. Benefits accruing to investees were discussed at length in previous editions of the home page.

Investees must acknowledge in their words and in their actions the mechanics of wealth creation. Hard work and long hours are not enough. We’re looking for effectiveness, creativity, passion, etc. Investees are freed from worries of having the financial rug pulled out from underneath their efforts, but only to the extent they can free themselves from past (mis)conceptions about exploitation of Intellectual Capital.

Ours are Phase 1 industrial+ pursuits. This means the rules have yet to be written. Don’t pull out the manuals from past failed attempts. With financial freedom will come a very great sense of professional discomfort, fumbling and vulnerability. These are inherent in teams searching for new organizational forms and breakthrough products. React defensively or combatively to this new world order and you risk losing your hard won financial freedoms (or at least being replaced).

Love of Institution

It’s not just the money. We seek love of institution. An investor in love protects against drift in the mission (e.g., high quality blue collar jobs and high demand consumer products). We are in constant danger of diverting too much attention to the inevitable day-to-day urgencies and financial disputes. Our mission is noble but the wealth creation will be outrageous, attracting fortune hunters and seekers of glory. We need love of institution to protect against the outside sieges (e.g., trial lawyers) and inside interlopers (e.g., greedy management). And we need love of institution to ensure we will always be tough on ourselves, always challenging ourselves to get better. This is unpredictable R&D which by definition makes our success unpredictable. We admit no complacency+. We are never satisfied.

The wealth of an individual investment derives, by far, from investor perceptions of the financial health of the community within which it resides. Investors purchase shares in a perpetual fund, or in other words, shares in our community. Individual investments benefit from a multiplier effect+ coming from membership+ in the fund. For this reason, investment management within the community will be pushed (by other investees and investors) to maintain very high standards of behavior within the community. Perceptions of the one redound to perceptions of the many.

We zealously guard investor perceptions about individual members in the community for the benefit of all the community. For example, although we impose no arbitrary limit on funds available for investment operations, this imposes an even greater responsibility on the management of those operatins to be mindful of how investors perceive their expenditures of funds. We mete out punishments disproportionate to any crime, a multiplier effect. Perception becomes reality in our community.

As an investor, my wealth comes from the financial health of the community as ultimately derived from the performance of the underlying assets+. Anything I do to improve asset performance, including love of institution (i.e. of the funding agency), redounds to my financial benefit. I invest into homes within a community, but I also recognize the value of investing in the property management firm that ensures the upkeep of all the homes.

Conclusion

Trillions of dollars of Intellectual Capital are headed for the morgue – basic research not destined to become commercial products. Every month the AAAS Science magazine (published weekly) documents several exciting science platforms, the vast majority of which will never see the commercial light. First to open up this capital market opens up trillions of dollars of high-quality employment, profits and tax revenues in host countries. This wealth is mostly inaccessible to today’s funding approaches (e.g., corporation and venture capitalists).8

Reliable property appraisals (premium priced) are integral to the extraction of latent wealth from these assets. With unpredictable R&D we seek creativity in researchers, which cannot be measured objectively. We’re a goal-free, metrics-free society. Investors must gain an appreciation for the fidelity of our quasi-objective appraisals of these R&D investments. Investors are free to come and go. If they do not gain this appreciation they can simply leave. They paid premium pricing when they entered and they receive premium pricing when they leave. Investors who stick around, based on trust in our appraisal mechanisms, receive even greater rewards (e.g., steady share price increases and windfall payouts).

Both investor and investee must reset their core beliefs for value creation based on Intellectual Capital. If you demolish the slums and move the inhabitants into a modern housing complex built on the same location (e.g., a corporation) you remove the eyesore but do little to unleash latent wealth. Wealth must emerge in the minds of the slum owners.9 Authentic unleashing of capital makes landowners less timid about making capital improvements to their property and investors less timid when investing into properties located in a growing and vibrant community.

Today, property rights and the market for unpredictable R&D are poorly formed. We have no accounting rules backed by decades of legal precedent and institutional legacy. We have no ready market should investors be forced to exit precipitously. There is no ‘insurance’ to protect investments from hazards. There are no boards enforcing ethical practices by our real estate agent, or providing independent assessments of the value and structural soundness of our investments. Investments in unpredictable R&D are investments into the U.S. Wild West of the 1800’s and face the same hazards, and promise of outrageous fortune, as seen in that era. Our funding agency is the Marshall Dillon allowing investors and owners of Wild West assets to do business without having to resort to gunfights and vigilante law to make their agreements stick. This is a new frontier. Let’s have fun and make a lot of money while doing so.


Home Page September 2011

  • 1. Unpredictable R&D+, our investment target, is an intellectual capital.
  • 2. A corporate R&D portfolio filled with dead-end projects brings down the value of those few projects with true potential.
  • 3. They need as well a third world counterpart of Suze Orman to help them understand how not to squander this newly-recognized wealth
  • 4. (intellectual = mind, capital = weath)
  • 5. For an illustration of how this plays out during the acquisition of intellectual capital, see here.
  • 6. We accomplish this feat by putting our representative of the funding agent+ full-time on the ground and under the hood. These individuals, looking at the panoply of commercial applications for the intellectual capital, can more fully assess in which direction wealth creation is headed.
  • 7. We also have flexibility over when stopped investments are officially written off, allowing us to line up losses with unpredictable wins.
  • 8. Corporations have little rapport with the majority of their investors. Venture Capitalists allow investors no freedom of early exit. We provide both. Investors stay with us because they want to, and they want to because they really start to understand the intricacies and the promise of our wealth creation mechanisms.
  • 9. You assuage the liberal conscience but freeze the indigents at a higher level of poverty. Researchers in major corporations routinely exhibit this impoverishment of spirit, even though they typically are well paid and work in beautiful facilities.
Further Reading
Reba Tull
Offline
Joined: 03/30/2011
Too much theory, not enough practicality

Seems like a lot of capitalistic theory without much practical application. What’s so great about saying a dollar invested needs to return more than a dollar? Pretty basic math. And premium pricing for building in an exclusive community is an attractive analogy, but it’s not clear how this applies to intangible Intellectual Capital+ assets. Investors can’t look at existing intangible asset and gain an appreciation of how the next intangible asset will fit into the neighborhood. It’s a visually compelling narrative, but I’m not sure what to do with it.