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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).

Cautions

Summary: 

Here are a few common cautions. Things known to go wrong from time to time. Don’t overly fixate on them; rather keep them in mind as you review the design for the funding agency+.

We’re not building widgets here. Bribery, cajolery and punishment do little to spark the creative spirit (except perhaps in unintended ways). You get the best out of creative people by having them reach into themselves and pull out their own best. This applies as well to how we fund our work. How do we place that investment dollar so as to best elicit creative solutions from investors and researchers? Unfortunately creative people sometimes get a little too creative.

Below we discuss what can go wrong, based on a review of past wrongs in firms with missions similar to ours. We list specific dangers and describe precautions we have taken to protect against them. These are a sampling but are among the most important for our understanding.

Systemic Failures

Systemic failures can bankrupt an entire enterprise. Each investment within the funding agency+ may be doing fine, but management over-extends credit lines and places the entire enterprise at risk. Or, agency management+ picks a fight with the U.S. Department of Justice, and loses. Systemic risks are often precipitated in financial, contractual or regulatory failings. They are often due to agency management: from what they have done or what they have failed to do. They are often found as perfect storms. Systemic failures occupy a very special niche in the history of corporate failures. They are often spectacular and their memories are enduring.

We protect against systemic risks as best we can. Precipitating events are minimized by following the teachings of expect the unexpected+. Occasionally a persistent individual (i.e., a dissenter+) can keep pulling on a thread until the garment starts to unravel. We engage third parties and interest groups, providing them with incentives to be on the alert for the next storm. But in the end our best protection against these types of risk is a tall firewall+ between separately managed perpetual funds. Systemic risks, perfect storms, are perfectly unpredictable.

 

 

Mortgaging the Future+

Mortgaging the future refers to decisions taken (or not taken) that make wealth creation more difficult in the future. Examples include decisions to shortchange programs in community-building or investor retention+. Included are actions that limit or shut off access to future credit lines. The best protection for the future comes from a robust, vibrant, ever-growing community. We must protect against over-extending finances, operations or reputation.

The mandate for an accelerating blockbuster growth rate+ is perhaps our best protection against mortgaging the future. It forces officials in the funding agency to grow the investment base, and therefore to increase funding from investors. Over the long term, investing into future capacity in the agency is the only way this can succeed. Fall short in capacity and you fall short in either investees or investors, and you fall short on the measured growth rate.

The judiciary protects against short term thinking. There will always be a temptation to shortchange today’s programs with the intention of back-filling them tomorrow. This temptation must pass muster with the judiciary. They will view with suspicion each attempt to sell short the future. It’s in their mandate.

Hostage Taking

The funding agency cannot be held hostage+ by investors, investees or agency managers. We are never forced into substandard choices. We are never forced to stay with substandard choices. We always maintain a waiting list of highly-attractive candidates for investors, investees, third party partners and agency managers.1 Everyone is expendable and we must, at times, make very painful choices to drive home this understanding.2

The agency’s Rolodex is the only Rolodex. Investors, investees and agency managers come and go but the Rolodex stays. The success of middlemen, agency management, is often found in their ability to leverage contacts within the Rolodex. We know who knows the right people, and they willingly share those names with us. We seek, maintain and expand a vast network of promising researchers, investors and agency managers. The Rolodex is a fund asset never to be expropriated by any one or few players.

Agency managers are a precious commodity and require special attention. How do you replace a Steven Jobs at Apple Computer? How can Apple Computer’s owners not help but feel hostage to the demands of Sr. Jobs? Our challenge is to take good leaders and make them great. We do this repeatedly. But how can we do this within a single funding agency? The answer, most likely, is to build several funds.

Complacency

We can’t become complacent. We do our best and hopefully this turns out to be wildly successful. But that doesn’t mean 1) we will continue to be successful and 2) we couldn’t have been more successful. ‘What have you done for me lately’ is embroidered on our agency flag. We avoid complacency by the following actions:

  • We build multiple funds with multiple management teams in friendly competition. This allows us to stress test the next generation of leaders.
  • We mandate an accelerating blockbuster growth rate. You can’t rest on your laurels when there is a constant need for new investors and investees.
  • We promote special interest groups. These groups invigorate their members and make them more active in agency affairs, pushing management to higher levels of investor responsiveness.

Sometimes the spark in an individual dims or takes an extended leave. Having a robust management team is helpful, with individual members waxing and waning in enthusiasm over time, but always with a few highly engaged leaders. The most important action for avoiding complacency over the long term is a deliberate grooming of the next set of leaders and enthusiasts – passing the baton from one generation to the next.

Conclusion

Rule number one is protecting the economy. Let the economy tank and no amount of hand waving will protect you from the wrath of the citizens. We’re still learning how to fund unpredictable R&D+. There will be tough times. Investors have a right to expect competency even in times of economic distress. Having our stock price drop less than the general market is no great consolation. Don’t spend too much time worrying about the above cautions to the neglect of doing the hard work needed to make the funding agency financially successful.

An informed citizenry is the best protection we have against all dangers. We invest heavily into their education. An important part of this education is helping them understand the many dangers facing the funding agency. Investors are asked to reflect on how they would design a funding agency to protect against these dangers. Management does this for a living and will most often provide the best insights. But familiarity can lead to blind spots. Our citizenry, educated, participative and empowered, can provide verification for management’s thinking and actions.


Home Page September 2011

  • 1. With investees we maintain flexibility of choice across investment categories+.
  • 2. One major strategy consulting firm needed to sever a quarter of its partners (and a fifth of its revenues) in order to make this simple rule stick.
Further Reading
Reba Tull
Offline
Joined: 03/30/2011
Thinking Mafia

The list is too short. You mention having an informed citizenry is the best protection, but I would prefer to see more detailed recommendations on how we send managers responsible for failures to jail. Jail is the only 2 x 4, applied squarely between the eyes, that will get the attention of these mules. The Mafia never has these failings. Hum.