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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.

Pig Farmers, Prostitutes and Leverage

Summary: 

You need to think differently about money to better appreciate the unconventional approaches taken on this website.

It is a slow day in the small town of Encino and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit. A tourist drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms to pick one for the night.

  • As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.
  • The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.
  • The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.
  • The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.
  • The hooker rushes to the motel and pays off her room bill with the motel owner.

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything. At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything. Yet the whole town is now out of debt and now looks to the future with a lot more optimism. – Anonymous (1st quarter 2009). The earliest credibly-dated citation in English from Google search is found here.


Convention:

The Earth is flat and stationary

Galileo:

The Earth is round and spinning

Convention:

When I drop a ball it falls straight to the ground and the Earth doesn’t spin out from underneath the ball as it falls.

Galileo:

Momentum

Convention:

Momentum’s a concept. I prefer common sense. I drop a ball and it falls straight to the ground. A simpler explanation is the earth is flat and stationary.

Galileo:

I speed along in a carriage, I drop a ball and it falls straight to the ground. I don’t see the carriage move out from underneath the ball as it falls. The Earth is a giant carriage.
Postscript (May 4, 2011): Surprisingly, the ball should fall ever so slightly in the direction of the spin, or in the opposite direction from common sense. The earth's spinning ever so subtly drags gravity along with it so the ball will fall in a forward arc following the distorted gravitational field caused by this 'frame-dragging' (here).

Galileo had to go against convention, to step outside the current observational data set, to come up with his theory of orbiting and spinning planets. We do the same with money. Galileo had momentum. We have velocity of money. There is no trick or sleight-of-hand in the Encino narrative above. It’s a real phenomena made stark about the role of money.

To come up with new money to finance unpredictable R&D+ we need to put aside flat earth conceptions about money. Velocity of money is just one of many financial phenomena we employ in our search to fund unpredictable R&D.1 The boundaries in our search for new money are set by the need for investment funding that spans long unpredictable R&D timeframes, and the need to increase the frequency, if not the predictability, of success in investments.

We discussed in the Island Nation of R&D Inc. that the only government statistic that needs to be checked is whether or not investments are increasing in productivity over time. As long as productivity increased, so did the money supply, as printed by our central bank. Everyone receives enough funding to prosecute their research and the money is not debauched. Having the populace engaged in productive pursuits, as measured in progress toward blockbuster+ products, justified running the printing presses at the central bank.

But people like to keep tally. So we invent a tallying device. A scrip, a promissory note stands in place of the national currency. This device keeps track of your ownership in your work. The more scrip (pieces of paper), the more ownership you have. It feels good for retirement.

i–shares

Our ‘new money’ is called i–shares. This scrip issued by the funding agent+ is based on the full faith and credit of the funding agent. Owners of Intellectual Property+ trade an intangible asset (a patent) for another intangible asset (i–shares). The patent only has contingent value until well-prosecuted by its owners to produce a commercial product. i–shares only have contingent value (as measured in worldly currencies) until redeemed by the funding agent. Successful completion of a commercial product makes tangible the contingencies in both the patent and the i–shares. We take promissory notes and turn them into cash (government-issued scrip), on both sides of the equation.

These i-shares are not monolithic. They are bundles of rights. We unbundle these rights and assign them to those who most value them. Owners of intellectual property want voting rights to control decisions about their property. Investors want profit-sharing rights (non-voting shares). If before we had 100 shares, we now have 200: 100 voting and 100 profit-sharing. There are more ‘rights’ bundled within today’s publicly traded shares that we eventually will exploit in our redefinition of money (e.g., priority rights to compensation in the event of firm liquidation, dividend vs. non-dividend, convertibles, rights to interest payments). We’re not limited to today’s categories of rights, and even the concept of a voting right can be made more flexible (vote for what). Our new money is starting to take shape.

Voting rights means the power to dilute, which is why shares carrying these rights are most valued by owners of intellectual property and funding agents. With voting shares I can easily issue new profit-earning shares for my own benefit, diluting profits claimed by current shareholders. This of course is not a sustainable financing option, since investors vote with their feet. Investors in non-voting shares typically do not see their historical rate of return taken away with a stock dilution, but they do see greatly reduced dividends in the event of a windfall. Dilution happens when times are good. Voting shares claim windfalls+ as reward for making them happen and they do this by diluting the claims of profit-earning shares.

Rights-limited shares are not curiosities. They’re integral to how we secure predictable funding for unpredictable R&D. Owners of intellectual property are committed for the duration. They can’t walk away with interim windfalls. They are wholly dependent upon, and confident of, the funding agent, for operating funds needed to prosecute their business. This pays their bills and their salaries, potentially for decades. Laying claim on profits from research during membership+ is less important financially. Retaining voting rights for the eventual exit means everything.

We sell mostly profit-earning shares to outside investors during an IPO+ and reserve mostly ownership shares (voting rights) internally. Voting shares are used to build the elements of the roller-coaster ride (here).2 Owners of intellectual property receive ownership shares, knowing that upon exit from the franchise these are quite readily converted into profit-earning shares.

After an IPO, franchisee+ i–shares lay claim to publicly traded shares. The funding agent issues i–shares to the franchisee with (eventual) public ownership rights attached to the i–shares. These guarantee public ownership rights to i-share holders upon redemption. Franchisees hold, as always, i–shares, and continue to sense they are giving away ownership as they sell i–shares.

Derivative Investment Vehicles+

As their name implies derivative investment vehicles derive their value from underlying assets+, but lay no claim to those assets in the event of a liquidation. Examples include unsecured loans, warrants, indices and options.3 Derivative investment vehicles are typically time-bound, in contrast to the perpetual fund+. There are unlimited variations on how we slice and dice the underlying assets upon which the valuation of these derivative investment vehicles is calculated.

We fill gaps with derivative investment vehicles. The perpetual fund is designed to provide funding for all franchisees up to their first windfall, after which the windfalls are used for further funding. Schedules (and the amount of funding from the windfall) are unpredictable. Derivative investment vehicles lay claim to the same assets as the perpetual fund, and ‘siphon off’ percentages of windfalls as reward for covering this unpredictability. Use of these vehicles is a key financial skill for the funding agent, one that protects continuous funding during any eventuality.

Derivative investment vehicles in a sense double dip into the same pool as our perpetual fund for their financial returns. Owners of intellectual property expect steady funding and a share of the windfalls. Investors expect steady share prices and a share of the windfalls. Since we use derivative investment vehicles to ensure steady funding and steady share prices, then these two parties will come to understand that the use of windfall distributions to reward investors in derivative investment vehicles is part of the deal. The funding agent insists on flexibility in the distribution of windfalls, to be able to reward all who make continuous funding possible.

Closing

We expect the same level of dedication to ‘doing whatever it takes’ from our funding agent as we do from researchers in our investments. The funding agent should be a bit of an iconoclast. They need to be constantly coming up with new ways to shore up the financial robustness that ensures predictable funding. This comes from thinking anew about the role of money, and from bending the rules as far as they’ll bend, without breaking them (here). We expect the same commitment from the funding agent to tacking and turning, trial and error+, and the same preference for following untrodden (financial) paths that we seek from researchers in our investments.


Editor's Picks for April, 2011

  • 1. Unlike existing junk bonds, which were the debris of fallen companies, [Michael] Milken custom designed his issues to be unrated bonds. He realized they were "subversive" since they undercut the established rating system [Standard & Poors, Moody’s], but, as an outsider, this did not disturb him. He had always been, as he described himself, "something of an iconoclast." He, moreover, saw that if he could open up the huge capital market to growth corporations, they would beat a path to his door. – The Secret World of Mike Milken
  • 2. Non-voting shares typically sell for less (here), but can be bundled with further non-voting rights to make them quite attractive to outside investors.
  • 3. It’s worth noting derivative investment vehicles (e.g., unsecured loans) are not inherently risky. As a trivial example, if an investor uses a fraction of his or her portfolio to margin stock index futures and puts the rest in a money market fund, he or she might have the same volatility and expected return as an investor in an unlevered equity index fund, and a much more limited downside. It’s how you use funds from these vehicles that determines their riskiness.
Further Reading
Reba Tull
Offline
Joined: 03/30/2011
The math doesn't work

If I'm only going to get 1/10 the money from my IPO+ (as seen with Junior Common Stock in the 2nd footnote reference) that I could receive by following a traditional venture capital model, then the numbers don't work out. You'll have to be 10 times more productive in your investments. We're not going to give away my company on the cheap just so you can set up your roller coaster elements and play your ownership games.