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.

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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

Community

Breathing Life into Intellectual Capital