2:39

Let 'em Fail!

Summary: 

We don’t need losers for our investment formula to work. With a perpetual fund the only losers are those that exit the fund too soon.

Some investors look at investing as a game where there are winners and losers. They hope to leverage the infrastructure from a prior failed investment, in order to have their current investment succeed on the cheap.
We invest in major research, infrastructure improvements, or any of a thousand other investments. We build a business case for spending the money, push ahead with the project, and it either fails or fails to realize its intended benefits. Investors lose their money, workers go away smarter but unemployed, and the funding agent+ who structured the deal takes home a small profit, and a new qualification on the CV.

The funding agent returns a few years later with a new spin on the previous investment, seeking new investors. New investors and workers are assembled and a new project is started. Success! This time success comes through leveraging the learnings or tangible assets created during the first investment. This time second wave investors benefit by expropriating the building blocks of success created during the first wave. Returns to second wave investors are significantly higher since first wave investors do not get compensated for their building blocks.

First wave investors took much of the risk. Second wave investors take all the rewards. The funding agent wins in both cases.

This will not be the case with a perpetual fund+. If any investment fails all investors can receive lower returns. If an investment succeeds all current investors benefit from the windfall. Doesn’t matter if you're early or late to the fund. If you invested last year you receive the same windfall distribution as if you had invested this year.

We don’t need losers to reward winners. In a perpetual fund first wave investors harvest the returns of zero wave investors, second wave investors the returns of first, ad infinitum. Sometimes it pays to be second; sometimes first. The risk-return for these two waves is the same. Only zero wave investors need special compensation.1

A perpetual fund rewards investor loyalty. Investments within the fund are continually improving in quality and windfalls increasing in frequency. Wave Two investors do enjoy better quality in their investments vis-à-vis Wave One. However, any Wave One investor complaints would sound a bit like the parable of the vineyard:

  • Windfalls are unpredictable,
  • Windfall distributions to investors are moderate,
  • Wave Two will have the same complaints against Wave Three, and
  • Wave One received part of Wave Two’s windfall in the form of interim share price increases pre-paid from future windfalls.

It’s just as likely Wave One total returns will exceed those of Wave Two’s. With a perpetual fund there is no need for special compensation for earlier versus later investors.


Editor's Picks for April, 2011

  • 1. Zero wave investors receive a greater distribution of the first windfalls+ as compensation for their having gone first. These are typically angel or early-venture funds.
Further Reading
Navigation: