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Roadmap 04/11 (click here to expand/collapse)

Below is the Roadmap for select April 2011 website articles.    Please note  the website contains many more articles covering these same topics. For example, pre-game is integral to our program for attracting better R&D investment opportunities.

Provide Predictable Funding for Unpredictable R&D+
(Introduction to Franchise Capital Mgmt.)

Make funding more predictable (From Unpredictable R&D to Predictable Investor Returns)

  Attract and Retain Long-Term Investors

– Make a Market (You Have to See It to Believe It)

  Reinvest Interim Windfalls+

Make R&D success more frequent * (Execution is the Key to Success)

  Get Smarter at Tracking R&D Advancements+ and Transitions+ (Exits)
  Attract Better R&D-centric Investments
  Increase R&D Productivity (Execution is the Key to Success)

* Although it's still unpredictable

As funding agent+ we match investors and investments (owners of intellectual property+). Our role as funding agent (as middleman) is to keep investors happy, thereby ensuring steady funding for investments. We do this by packaging unpredictable R&D investments into an offering that is more attractive for investors (the perpetual fund). We do this by direct mediation into our unpredictable R&D investments (via franchise operations+), to ensure above-market productivity. Above-market R&D productivity is the only reliable means to ensure predictable funding.

Introduction to Franchise Capital Management

Summary: 

An overview of Franchise Capital Management+, a new approach to funding R&D

Background

We inaugurated the World Class R&D Institute website with the concept of the Investible Unit. This is a research team with expertise in a particular science or technology, into which we invest significant research dollars, and from which we expect to launch several blockbuster+ products. We discussed over the last year what it would take to make Investible Units+ successful.

This month we discuss what it takes to make successful the 'agent' who funds these Investible Units. The funding agent+ looks across the universe of investments, selects ones seemingly with the greatest potential, arranges for their funding, and nurtures them toward success. There are three parties to this contract, each with separate agendas: the funding agent, the investors, and the research team. This month's website describes the nuanced considerations needed to make this three-way contract a success.

We face quite a challenge. We need to convince owners of intellectual property+ (investments) and owners of capital (investors) that using our funding agent increases the productivity of investments, as measured in their potential to launch blockbuster products, and more so than the use of alternate agents. It's a double whammy. The only way this works is if we change the way we do research. The only way we change research is if we change the way we fund research. It may be an impossible challenge (here).

The investments we target, those with unpredictable R&D+, are funded today through either the corporate model (hundreds of billions of dollars), or the venture capital model (tens of billions of dollars). 'The way we do research' is common across these two models in that researchers tend to cross the line bringing with them their mental constructs. 'The way we fund research' is very different between the two models. Venture capital is interested in quick one-off wins, and corporate, often, is looking for replicable, factory approaches to R&D (here). Both models (as of 2011) are seeing very low productivity in terms of blockbusters launched.

Franchise Capital Management+ (FCM) is a third model (hundreds of billions of dollars). It's not corporate. It's not venture capital. It borrows from corporate the ability to fund long term research (decades), using winnings from past successes. It borrows from venture capital the practice of pooling many investors to fund near term operations across many investments. It borrows from neither one of them the approach toward how research gets done.

Increased Productivity

We measure productivity as per capita blockbusters over a growing investment pool (number of blockbusters / number of investments, illustrated here). If the number of investments (the denominator) doesn't grow we do not have increased productivity.1 During the ramp up of Franchise Capital Management, during the interim, we need an interim measure. We define the interim measure as per capita blockbuster potential over a growing investment pool (potential blockbusters / number of investments). This is a more subjective measure, though it is not completely subjective (see Watchdog+).

Productivity improvements must be interocular+: you don't need a statistician to ferret out the difference. When Franchise Capital Management is up, running and hits stride, the results will be unambiguous. You simply divide number of blockbusters by number of investments. It's during the interim, when we can only measure blockbuster potential, that investors get a little twitchy. Increased (interim) productivity is measured (mainly) in five areas:

  1. We're smarter in selecting investments up-front (pre-game+)
  2. We're smarter at tracking interim blockbuster potential of investments (mid-game+)
  3. We're smarter at selecting which research to commercialize (a huge investment) and at doing commercialization+ (commercialization)
  4. We're smarter in transitioning out of investments that drag down productivity (end-game+)
  5. We're smarter at how each investment prosecutes its research (effectiveness in evidence gathering)

We're smarter in comparison with alternate funding approaches. The first four areas (#1–4) deal mostly with improved decision making. We remove that activity from interested parties and nurture it within a self-contained agency dedicated to continually improving the quality of decision making (watchdog). For example, watchdog is where we would locate and execute a Trial by Jury+ function, charged with making major decisions of importance to franchisees. The last area (#5) refers to how research gets done, which will be radically different from today's approaches.

A recap of some of the recommendations in each of the above five areas can be found here.

Franchise Operations+

The funding approach begets research decisions begets productivity in evidence gathering. Evidence gathering is where the bulk of funding is spent and is therefore the ultimate target for increasing productivity (and why Willy Sutton robbed banks). But one contrary research decision can wipe out years of increased productivity in evidence gathering. One contrary funding decision can occasion the contrary research decision. NPV+ begets deadline bias+ begets CYA+ evidence gathering. The World Class R&D Institute website provides very specific prescriptions for improving the productivity of evidence gathering (as measured in increased blockbuster potential). But these prescriptions are worthless without also implementing World Class R&D recommendations for funding. It's a package deal.

To change the way research gets done requires deliberate mediation on the part of the funding agent.2 This is not passive investing: 20-30% of windfalls+ are reinvested back into franchise operations. We're undoing close to a decade of academic inculcation for many freshly-minted PhD's, and several decades for industry veterans. For example, when we're done junior researchers will no longer come to senior researchers or managers asking what to do next (i.e., mechanistic behaviors+). To pull off this cultural change takes time, money and cojones.

We provide dozens of specific tools on the World Class R&D Institute website for how to be more effective at research (e.g., alternate competing hypotheses+, bodies of evidence+, compulsories+, mini-clini+). The primary tool, though, is found in the leadership of the research unit. We take good leaders and make them great (here). We don't do this by focusing on the individual leader. Instead we focus on the organizational form within which they lead. Great leaders are radically different from today's (mostly managers). Our new leaders master the art of management competencies+.

Investor Bribery

The venture capital industry started as a patriotic movement to help jump start businesses of returning veterans from World War II. Franchise Capital Management is built upon the premise of launching multiple blockbuster commercial products or services which in turn creates many blue collar jobs in a stagnant global economy. We can play this good-for-the-nation's welfare card for a while: it may buy us some time. But sooner or later investors revert to WIIFM+.

The insurance annuity provides a good analogy for how we can retain long term investors. We provide investors with capital protection, steady growth, and the hint of a kicker (an extraordinary dividend). You buy a policy in our insurance plan, we invest your funds, but you don't have to wait for the investment to mature. You see steady growth in the value of your annuity during the interim. When an accident happens (a fortuitous accident), you get a kicker, in the form of a one-time jump in the value of your annuity. But you only get the kicker if you're still holding the policy when the accident (windfall) occurs. Your funds are pooled with many other members, so you will enjoy many moderate fortuitous accidents, along with many other policyholders.

We bribe investors during the interim (and thereafter) with steady share price growth so they stick around for the fortuitous accident to happen. We also bribe them with a distribution of windfalls (as extraordinary dividends) from our investments. We retain investors long term to secure funding needed to get investments to their first windfalls. We then use these windfalls to secure these investors, and to fund investments as they advance past their first windfalls. Funding from investors and windfalls work together to meet funding needs across all investment categories+ (pre-game, mid-game, end-game and commercialization).


Conclusion

When an investment dollar comes in the front door you could take 20-30% of that dollar and use it to fund franchise operations, to increase the productivity of the investments within which the dollar gets placed. Hard to see though how you'll provide investors with capital protection and steady growth following that approach.

The funding approach needed is much more complex (unfortunately), and involves pooling of funds from many investors and placing them across many investments. It involves bringing forward future windfalls through the use of derivative investment vehicles+ (e.g., unsecured loans) in order to fund today's franchise operations.3 With our new funding approach, an investment dollar coming in the front door is 100% applied toward investment operations. We extract a 20-30% 'tax' for franchise operations only after we achieve the windfall: only after everyone sees evidence we have productively employed those tax dollars.

We've done our best to reduce the complexity of the proposed funding approach, but it still presents a real challenge. To appreciate its intent you first need to think differently about the concept of money. The following articles provide thought-provoking anecdotes to help you start on this journey:

As you work your way through these articles you'll begin to understand that money, the paper dollar bill, gets its value from trust: 'In God We Trust'. Various forms of money can be 'invented' (e.g., M1, M2, M3), and as long as they are not overly competitive with government-issued scrip, they will be allowed to co-exist.

We will be issuing a Franchise Capital Management scrip (i-shares+), and its value will be based on trust. We can reliably and through any financial storm take investment dollars and use them to increase the productivity of the investments into which we place those dollars. This scrip is the vehicle by which we can sustainably place 100% of your invested dollar into investments, and yet still fund the 20-30% overhead required to make those investments significantly more productive. (...more)

At the World Class R&D website we typically tag difficult articles with a coffee cup. This is perhaps an entire month's worth of articles deserving that tag. The reward for making it through these article is worth the slough.


Home Page April 2011

  • 1. Productivity is not considered to be growing no matter how many blockbusters get launched from a declining or stagnant pool of investments. This restriction is important to avoid the trap of falsification bias+, where decisions are taken to discard investments with the confidence no further evidence will be forthcoming to prove the decision wrong. This restriction forces a much more considered analysis of when an investment should be transitioned out of the franchise. You can't cut your way to sustainable productivity.
  • 2. Readers of the World Class R&D website will understand the fine line between mediation and meddling, which is not crossed. If a franchisee shows good results from period to period, then the only job of the funding agent is to ensure the franchisee has enough money to continue showing good results.
  • 3. We borrow today with the intention of paying back the loan from future winnings.
Further Reading