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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).

Citizens

Summary: 

We treat investors as citizens in our community. They are educated, participative and committed. Committed investors stick around, supporting our goal of providing long-term predictable funding for unpredictable R&D+.

Citizens and Unpredictable R&D+

We don’t just want any investors. We want our investors. We invest heavily so investors will stick around. We employ a perpetual fund+ to provide predictable funding for unpredictable R&D and we seek corresponding perpetual investors for that fund.

We seek citizens within whom we can build love of institution. These are investors who understand that taking care of the community leads to better results from all investments. Our investments are unpredictable enough. We don’t need more unpredictability coming from the investors. We need steadiness of funding, reasonably priced, and acceptance of the nature of unpredictable R&D. We get all this from citizen – investors.1

We eschew anonymous or absentee investors. They’re too fickle. They don’t take the time to understand what we do and jump to facile conclusions or off a cliff with the rest of the lemmings. We would have to keep too many of them on the rolls to ensure sufficient funds during slumps, dramatically increasing our cost of capital.

We minimize involvement of institutional or wholesale investors. They are too prone to meddling and deadline bias+. Unpredictable R&D can take a decade or more and institutional investors would not have the patience. They feel compelled to conjure visions of even greater wealth latent within the intellectual capital+ of their investments; they peddle 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.2 Investor terrorism+ is prohibited.  Our ways will be foreign to these investors and they will mostly avoid our funding agency.

We seek instead to own the relationship with our retail investors. There are no intermediary brokers or capital venture partners. The funding agency (as a separate legal entity) owns the relationship. Investor capture and retention are expensive, but are quite profitable for today’s investment banking intermediaries. We recapture these profits for the funding agency and use them to educate and build a community of investors that look and act more like citizens. These are citizen – investors.

Investor Education and Participation

We shape investor perceptions into our rather complex funding proposition. Investors see steadily improving share prices in the perpetual fund over several years and these come to be expected. This can lull them into a false sense of security or satisfaction. Underneath the tension’s building. We can only stretch our credit lines so thin to fulfill the market-making activities we use to buoy share prices. Anonymous investors get a whiff of this and quickly look for the exit door.

Our citizen – investors have already factored these tensions into their investment decisions. It’s not pretty, but they understand and trust our safeguards due to both their education and their participation in fund activities. Citizen – investors have direct access to the levers of control for their investments (e.g., support of success assurance+ structures). Our investors are quite involved, in contrast to the helpless position in which anonymous or absentee investors often find themselves.

Our citizen – investors can be educated. You can’t educate anonymous or institutional investors. Our citizen – investors understand our business is messy. How much should we pay down past debts, build up tomorrow’s rainy-day fund, etc.? There will be lots of exceptions to the rules. Sometimes you just have to deal with the loan sharks. We pay agency management+ to make these calls. We educate investors so they can better assess management’s competency in making these calls.

Our citizen – investors are enticed to participate hands-on in funding agency activities. Our funding model attracts and retains ‘thousands of hundred-thousandaires’. We can’t coordinate an effort like this from command central. We leverage the power and geographic dispersion of our citizen – investors.

Example of participation:

Many of you know me. I’m your neighbor. I went to West Haven. I’m not an employee of the agency. I’m just an investor, much like I hope many of you will be shortly. I don’t believe you’ll be hearing from any employees of the agency. All speakers tonight are simply investors. Mary? Yes. Mary’s an employee, but she’s here just to make sure we don’t run out of coffee and donuts (just kiddin’ Mary’s a Vice President in the Agency).

I only get paid a token amount to give this talk. I do this more because I believe in it. I do not get anything if you decide to join or not. No commissions. But you will be doing yourself a favor by really giving some thought to what it is we’re here tonight to discuss.

You are also connected to each other. A friend of a friend. This is typical of the agency. We build family and we do this mainly through referrals. Mayor Nutter’s here tonight. Your Honor. {applause} A democrat. Not sure about those admission standards (just kiddin’ I voted for you your Honor. )

I’m not here to discuss the finances of this investment. Others will attend to those details. I’m here to talk about why you should consider joining beside the money.

Part of reason we’re here in this location tonight is that one of the agency investments is right here in our community. FreezeIt.

Excuse me, I need to look at my notes on this one. Some of this is over my head.

FreezeIt has a pyroelectric material (whew) which when you run electricity through it, it gets colder. It works today at temperatures around 32 degrees Fahrenheit so it has applications in freezers and the like. It has no moving parts. You and I can think of a thousand ways to use this: ice skating rinks, refrigerators, beer coolers, car seats, even baseboards for cooling a home.

Still it has some challenges. Stress testing shows the material may start cracking after 10 years of constant use. That’s still not good enough. My old-fashion freezer at home is over 15 years old. They need to get material costs down. They also would like to engineer more flexibility into the material. And they are looking to tailor this to provide customized temperature ranges. Several markets are already quite attractive, but they continue to need agency funding to continue their research.

This is an amazing technology and the researchers at FreezeIt lead the world in both its basic research and its commercial application. But this is just one of 15 similar investments currently funded by the agency. When you invest here you get to see where your money goes, intimately. As an investor you can walk over to FreezeIt at any time. They’re quite welcoming to investors (but remember, they are working so don’t overstay your welcome). And this spirit of welcome is common across all the investments.

There’s an article on FreezeIt in the Scandal Sheet+ I placed on the table in the back of the room. This Scandal Sheet is written by folks like you and me, not filtered through a corporate communications department. I urge you to pick one up. It’s not all roses. You get to see all the warts and bruises. But you also see we have many ways of fixin’ what goes wrong. We have family members who are quite nosy. They’re like that annoying aunt who always knows what’s best for you. Maybe you’re one of ‘em? But we treasure these quirky relatives because occasionally they catch peccadilloes important for us all.

You are invited to join us today, but the invite here is not a guarantee of membership+. The agency has very high admission standards, but I’ll share a secret with you, it’s not about the money. They’re looking to see if you can believe in the mission, which is to create great products that make for great manufacturing jobs. We all invest here for the money, to be sure, but they’re looking for more. They look for investors who may be able to stick it out for a decade or more. It often takes companies like FreezeIt that long to get their products going.

I’ve done quite well so far with the agency. Here’s my financial history on the screen behind me. I’ll be glad to go over it in detail with you after the talks. Every investor has one of these histories. I believe each speaker tonight will be showing their own. But I’m here to tell you I have gained much more than financial profit. I get to see my savings being put to good use. I get to actually touch products created using my money. But more than that we are family and everyone takes the work we do quite seriously. We fight, we shout, we challenge, we celebrate, at times we seem dysfunctional, we get angry, we cry, we get impatient, we jump for joy. In the end we all know we try to do our best, even if at times we get quite annoying.

They’ll tell you they’re not just looking for your money, and once you do get to know them you’ll see it really is true. Membership is tough. You’ll be subjected to strict educational requirements, you won’t get superior financial rewards without volunteering your labor (another secret, we run jury trials to make major decisions for our investments, and jury members, folks like you, get paid for their time and expenses – the last one we did was in Aruba). We practice one person, one vote+, no proxies. But you are expected to vote and to be informed on the issues. Each vote has a mandatory essay question about the issue (interesting huh?). Don’t worry you can speak your answer into a microphone.

There is so much to learn, but the learning itself is rewarding. From membership in our community I guarantee you’ll find yourself wanting to be a better citizen in your larger communities. This is a very attractive family and you’ll start to ask why your other families can’t be just as attractive.

Thank you for your time. And next I think we have Marsha who’s here to tell us about her recent visit to FreezeIt? Yes.

Note: the illustrative science platform for the above scenario was loosely based on 'Water Freezes Differently ...'

Investor participation allows investors to (modestly) increase their financial returns, partially paid from tax benefits donated by host government taxpayers.

Participation is by far the best way to build love of institution, which is our ultimate goal for citizen – investors. People put skin in the game and the game gets under their skin. So we seek (and fund) many citizen – investor participation activities: investor recruitment / retention / education, jury duty, agency or investee+ surveys, participation in open house activities / investor conferences, editing and writing articles for the Scandal Sheet, participation in issue literacy testing, website contributions, participation in committees and interest groups, and much more. This is free labor, thanks to our taxpaying benefactors, and we aim to get double duty out of each dollar spent: the labor and the love of institution.

Balance of Power

We acknowledge the difficulty of gaining and maintaining the attention of investors who otherwise work full-time jobs to pay their bills. Agency management and investees will always have the upper hand, since their day job is directly or indirectly tied to the funding agency. To maintain a balance we provide citizen – investors with additional protections:

  • We provide an Investor Bill of Rights & Obligations
  • We pay special homage to the dissenter
  • Everyone submits to the arbitration of an independent judiciary, which itself is tasked with safeguarding the best interests of all investors, present and future.

Investors have the power of the vote (one person, one vote, no proxies). They have the power to collectively decide on all matters affecting the purse-strings of the funding agency.

Table 1. Investor Bill of Rights & Obligations. Similar to the R&D Bill of Rights & Obligations, we lay down principles that guide judicial decision making for investors. These are amendments to our minimalist First Principles.
Investor Bill of Rights and Obligations
Rights Obligations
  • One-person, One-vote, No proxies
  • Rights of redress
  • Control of the purse
  • Election of all Agency officials and approval of external oversight agencies
  • Education in funding agency ways
  • Participation in funding agency duties (e.g., Jury Duty)

The secret to winning over the citizenry is investor retention+. If we can’t keep them they’ll end up with all the undesirable traits seen in anonymous / institutional investors. Fortunately we have many more retention options at our disposal (Figure 1). We educate citizens on the benefits of staying and participating, and then we enjoy greater benefits by having long-term citizen – investors. It’s a virtuous circle.

Figure 1. Build Investor Retention

Ways in which we can further build customer retention

Figure 1. Avenues to Build Investor Retention. We have many more avenues open to us for investor retention when we own the relationship with the individual investor. In this capacity we bring forth all the customer relationship management activities of the brokerage house, plus any membership retention activities found in any exclusive club. For example, we build investor retention by insisting on a monthly recurring action on the part of the investor, to gain a slot on their otherwise busy schedule (e.g., habituation). We seek an optimal (i.e., cost effective) mix of these activities – balancing the costs of investor retention against reductions in the cost of capital.

 

Advantages of Using Citizen – Investors vs. Anonymous / Institutional Investors (A Recap)

Below recaps many of the advantages for having citizen – investors over anonymous and/or institutional investors:

Advantages from Citizen - Investors
(Click each item to expand and view its description)
Expand all | Collapse all

Citizen – investors are our best choice for building love of institution, which is the ideal state of an investment relationship. It’s tough love to be sure, but it’s a love that is enduring and can withstand many insults.

Conclusion

There’s an enormous pile of cash spun off from successful investments. Reinvestment of these windfalls+ is the lifeblood of the funding agency. It’s used for market-making in the perpetual fund, to pay down past debts, to build tomorrow’s stabilization fund, for success assurance, and for investor retention / education activities. What’s not used in these (and other) activities is rewarded to investors as moderate windfalls, and to investees and agency management according to pre-arranged reward schedules. It’s up to investors to ensure i) they get their fair share and ii) retained cash is not wasted. Reinvestment is integral to our being able to provide predictable funding for unpredictable R&D, and our ultimate defense for productive use of these funds rests with investors.

Our success depends on informed investors. Investors must develop a deep understanding of the challenges and promise of getting funding allocations right. This takes time, and citizen – investors are more likely to take the time to learn. We develop a deep sense of this being their community and they respond in turn by acquiring the education needed to make this even more their fund. Investors are the ultimate owners of the funding agency. We constantly seek new ways for them to better appreciate and to exercise this ownership.


Home Page September 2011

  • 1. The economy comes first. No amount of hand waving can make up for poor economic performance in any community. From a selfish standpoint we seek citizen – investors for three reasons 1) lower cost of capital, 2) reduced volatility in funding availability and 3) increased long-term safety for the funding agency+. All three of these eventually pay back benefits to investors. For example, a lower cost of capital allows us to fund more unpredictable R&D investments, each of which has the potential to generate enormous amounts of cash paid back as increased dividends to investors.
  • 2. For the owner of intellectual property it’s like being forced to sell your house every four to five years. Even though nothing changes in the house from one day to the next, and you plan on continuing to live in it, the market changes, and so your take from the sale fluctuates. You thought you had $100,000 in equity, but after the sale there’s only $10,000. Purchasers would be unfamiliar with the history of the house and would have to study and inspect it anew each five years – they would have no continuity of understanding. Instead we keep appraisals of intellectual capital in-house, done year after year by the same individuals using the same criteria. Valuations remain fairly consistent as compared from one year to the next. Purchasers must pay the price we set independent of ‘outside’ appraisals and independent of ‘outside’ market conditions.
Further Reading
Reba Tull
Offline
Joined: 03/30/2011
You can't depend on educated investors

 ...today's investment system (NYSE, NASDAQ) is imperfect, but it is the best we can do with a mass of illiterate investors. That's precisely why a vigorous market for intermediaries has emerged (e.g., mutual funds, investment houses, brokers). We depend on the intermediaries to do the best they can with the imperfect information they receive about the investment targets (e.g., the firms behind the stocks and bonds). It's the same with voters and their government.

[We suffer from] a confusion of ideas about what people need to know. ...We cannot get out of the dilemma by:

(1) making a great effort to educate everyone to the point where they know enough to make these [business] decisions, nor
(2) by restricting participation to the people who do know about all these [business] matters.

No one [person] knows enough ... to run the [business]. People are able to survive ... by learning to distinguish between what they must know and what they do not need to know. ... This is a problem of leadership, organization, alternatives and systems of responsibility and confidence. E. E. Schattschneider (1960). The Semisovereign People

 

Reba Tull
Offline
Joined: 03/30/2011
You'll end up with wackos

You’ll end up with a bunch of climate change wackos and social do-gooders.

You’ll find the cost-effectiveness of retaining 1 millionaire far exceeds anything you can achieve retaining a thousand thousandaires.

...as a man's income increases, so the sacrifice of risk-taking becomes less as his capital becomes greater ... The sacrifice of a laboring man in saving a hundred dollars from his year's income is apt to be very great. There is therefore, need of a large reward to make him willing to undergo the sacrifice Allan H. Willett (1902). The Economic Theory Of Risk And Insurance