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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).

The Cooperative Solution

Summary: 

Our task is to provide predictable funding for unpredictable R&D+ over the long term. Features of our funding approach (e.g., 'one person, one vote+', investor education) are closest to those found in a cooperative+.

Our island nation comes alive! We breathe life into formerly dead Intellectual Capital+.

Introduction

We step back from this month’s recommendations (September 2011) and a new organizational form emerges, one similar in features to the cooperative+ model. The cooperative model has the following features (among others):

  • One person, one vote+, no proxies
  • Member retention and inter-generational continuity
  • Capital retention and reinvestment by members
  • Member education
  • Member participation in governance

This is an organizational form with over 100 years of business experience, academic study and documentation (a good thing). It has never been used for a business similar in scope and purpose to ours (a bad thing).

The funding agency+ has needs similar to a cooperative, but this does not mean it will become a full-fledged co-op.1 We admire how cooperatives avoid anonymous and absentee investors. We admire their focus on long term retention and education of members. We admire the idea of greater investor awareness and participation in cooperative activities. But our task is not the same as going down to the local farmers’ market. There’s a qualitative difference between our needs and those typically seen in a cooperative.

Tweaks

Ours is a very nontraditional ‘product’ for a cooperative: taking members' money and using it to launch new firms. It’s even a stretch to compare it to an cooperative for investors (i.e., an investment club). As such we have many special tweaks not typically seen in today’s cooperative enterprises (although they are similar to those found in a cooperative bank).

  • We have a judicial arm, called Watchdog+.
  • Not all votes are created equal. Our judicial arm constructs each vote to nudge results toward protecting the long term health of the funding agency. We require high levels of equity participation.
  • We are an exclusive club. We filter new members with investor (and investee+) profiles.
  • Members are free to come and go, buying and selling fund shares based on an imputed value, although we work hard to keep their business.
  • We have a brokerage firm. We treat all members like consumers of brokerage services.
  • We have a savings and loan. We loan money to members so they can buy shares, or to keep them from having to sell shares.
  • We have an insurance firm. We jointly assume risk with external insurance providers to protect the reputation of the funding agency.

In general, though, you can consider all the above tweaks as different departments within our banking co-op, thus saving the comparison with the cooperative movement (and potentially the tax breaks, below). It’s not too far a stretch to compare us with the operations of the mega-cooperative Co-Bank. The similarities are much more striking than the differences.

A close reading of cooperative literature suggests interesting tweaks for the funding agency.

Patronage Refunds+

With an ‘official’ cooperative we can have a new way to build Joe-investor’s participation in the funding agency. We pay for his participation, and call it a patronage refund. Members of a cooperative patronize the cooperative store for their purchases. At the end of the year, the store (hopefully) has a profit, which is distributed back to the owners of the cooperative. In the business world these would be dividends paid back on a per share basis to investors (and taxable as income). In cooperatives they are looked upon as refunds, and are paid back based on the patronage of the member at the store during the year. The more you purchased from the store the greater your refund.

Patronage refunds, whether distributed or retained, reduce the co op’s tax obligation. The U.S. tax code allows the co-op to retain up to 80 percent of this allocation. The retained portion provides a tax-free and interest-free way to capitalize the co-op.2 With a bit of clever accounting, we set it up so investors tap into this tax savings to increase their equity holdings (up to 10%) by participating in agency activities. Patronage refunds potentially turn every investor into a taxpayer-paid contractor to the funding agency.

A Co-op of Co-ops

Another insight worthy of consideration from the cooperative experience is the idea of having a co-op of co-ops. We have an umbrella cooperative providing guidance to many smaller, independent cooperatives. Where leverage and scale are important, we use the umbrella cooperative. Otherwise we leave it up to the smaller independent cooperatives to find their own best ways.

The idea of having a co-op across several smaller funding agencies is quite appealing. Our perpetual fund+ grows probably as large as it needs to be with only 30-35 investments. We bud off new funds once we reach scale. This allows us to grow new management in each of the mini-funds. It also allows us to set up firewalls so any crisis of confidence in a single fund does not spread to others. Similarly-sized mini-funds also provide valuable comparators for measurement of agency management+ performance.

Across the mini-funds we mandate our first principles+. Branding is integral. You see our golden arches and you know what to expect.3 But our principles are a light touch on an otherwise unencumbered mini-fund management. Who can argue against a first principle stating you must be increasingly successful? Or, you must not mortgage the future+?

Each new mini-fund allows its leadership to feel they are starting anew, that new and exciting horizons are waiting to be discovered. New approaches can arise from new thinking, varied host governments, different cultures, different values, or even different definitions of success (e.g., success in terms of altruistic goals).4 A cooperative of co-ops ensures a supply of fresh blood and a sense of newness that keeps our funding agency alive and vibrant for many generations.

Closing

The value of intangible intellectual capital emerges from the minds of our citizens. Investors in our funding agency learn to feel comfortable funding intangible assets. Investees learn to feel comfortable borrowing against or sharing ownership in these assets. This happens much more readily with citizen – investors in a community sharing an understanding of these assets. We know there will always be differences of opinion about asset valuations, but at least we discuss these differences using a shared language.

We create a fiat money+, a substitute for host government money. Investors receive perpetual fund shares, which ‘derive’ their value from the underlying investment assets. Investees receive i-shares+, which are a financial instrument created whole cloth by the funding agency.

Acceptance of these forms of fiat money comes from expectations met, as enforced by the judicial and administrative structures of the funding agency. People are quite particular about who they let print their money. They like to have a sense they can stop runaway printing presses. Communities of citizens are better at building this level of trust in our new monies than would be anonymous, absentee or institutional investors (would you trust GM to print your currency?)

Community, as practiced within the cooperative movement, allows us to reach a common understanding and appreciation for the value of our fiat monies. We see there are many other members within our community sharing our same understanding, increasing our comfort of being able to buy and sell as needed in the future. Asset valuation and wealth creation, creatures of the mind for intangible assets, are sustained across time, even generations. We see new investors entering our community, getting educated, and adopting our beliefs as their own. They are not anonymous investors, they are new citizens. And we as citizens working together maintain both the perception and the reality of wealth creation in our fiat monies, and we do this across generations.

Slowly over time, investors and investees come to implicitly trust our brand. Our cooperative becomes the marketplace for personal funding of unpredictable R&D side-by-side with the role played by NASDAQ / NYSE for anonymous funding of firms in more predictable industries. Investors buy and sell shares in our different mini-funds, each with its own cutesy moniker, much like they would buy and sell shares traded on the larger public exchanges.


Home Page September 2011

  • 1. The cooperative manifesto advocates democracy for the sake of democracy. We do not endorse that principle. We do not reach into the deeper realms of altruism and egalitarianism as espoused by the cooperative movement. Instead we advocate one-person, one-vote, no proxies as a means toward a more secular end: outrageous success enabled by reasonably-priced capital for unpredictable R&D+ pursuits. We practice democracy for the sake of self-interest. Whether or not some host government agency ‘certifies’ our organization as a cooperative is only of concern for the tax benefits, which we do not let overly influence the design of our organizational form.
  • 2. Patronage refunds reduce revenues, reduce gross margins, reduce profits and therefore reduce taxes. Payment for services rendered increase expenses, reduce gross margins, etc. and therefore reduces taxes.
  • 3. It makes sense to leverage a common judicial infrastructure across all funds, with adjudicators being aware of the particular intentions of each fund.
  • 4. For example, more altruistic funds may opt for funding based on donations, government handouts or dipping in the bottomless coffers of major academic institutions.
Further Reading
Reba Tull
Offline
Joined: 03/30/2011
Co-ops are membership organizations, not equity firms

My experience with most cooperatives (e.g., farmers’ markets, credit unions) leads me to believe they can be successful for very rote businesses, but not for one as sophisticated as your funding agency+. It’s hard to see how you will attract top quality leaders when they will then be subject to the whims of a largely uneducated investor population. It’s hard to see how investors will ante up the amounts of capital you require ($100K+) when co-op members tend to view equity placed into cooperatives as a price of admission, rather than as an investment for their retirement.

Since there have been thousands of utopian, cooperative+, and other experimental organizational forms in American economic history, we would expect that many should survive in competition with the traditional firm. They haven't ... there were fundamental transaction cost problems impeding the survival of such non-authoritarian forms of organization. Douglass C. North (1981). Structure and Change in Economic History, W W Norton & Company, New York-London, p. 38.