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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.

Retail Investors As Predictable Funding

Summary: 

Why retail investors are preferable to institutional investors

”The next item is the minimalist masterpiece, ‘A Fool and His Money’, We’ll start the bidding at $450,000.”

Why Retail?

Some would-be advisor puts a logo on some fancy stationery and sends out 32,000 stock letters to potential investors. The letters tell of his company's elaborate computer model, his financial expertise and inside contacts. In 16,000 letters he predicts the index will rise, in the other 16,000 he predicts a decline. A follow-up letter is sent, but only to the 16,000 people who initially received the correct prediction. To 8,000 of them, a rise is predicted for the next week; to the other 8,000, a decline. This is iterated a few more times, until 500 people have received six straight correct predictions. These 500 people are now reminded of this and told that in order to continue to receive this valuable information they must contribute $500. If they all pay, that's $250,000 for our advisor. excerpted from John Allen Paulos (2001). Innumeracy.

Our objective is to provide predictable funding for unpredictable R&D+. That is to say, we don’t know if or when any of our R&D investments will enjoy a windfall, but we need to provide funding for as long as it takes to find out. To make this happen we bundle many of these investments into a perpetual fund+ supported by many retail investors. We use the perpetual fund to provide retail investors with more predictable returns. They invest into the perpetual fund and receive capital protection and steady share price growth (...more). Retail investors will be seen to be integral to our ability to maintain steady share price growth.

We achieve share price growth for our perpetual fund by making a market in our own shares, similar to the role played by investment bankers in IPOs. However, in our case we do this annually, during each open season+, and we set target share prices reflective of the value of the underlying assets+, independent of current market conditions.1 We price perpetual fund shares based on imputed or intrinsic valuations of the underlying investments, something public markets will not accept. Intermediates (e.g., investment banks) are overly beholden to current distribution and sales networks which in turn are overly beholden to today’s market conditions and valuations.  So we go private. We sell directly to retail investors.

Private could potentially mean institutional investors, much like is seen with today’s venture funds. However, we need flexibility to be able to make a market under any financial conditions. We borrow from future windfalls+, or we husband past windfalls, to build a stabilization fund for market making activities. We may also oversell an open season by as much as 25% (over-allotment) with the intention of holding back extra shares to prop up share prices, or selling them to tamp down price speculation. Institutional investors will not allow us to exploit their tactics. So we go retail.

Table 1. Comparison of Funding Approaches. Corporations and Venture firms depend on trading markets (NASDAQ, NYSE) to accumulate retail investors as buyers for shares held by their institutional and blue chip investors. Retail investors are ‘decoupled’ from the productive use of investment funds, and from any windfalls (beyond token dividends). Franchise Capital Management seeks a new allocation. 
Funding Approach Investors Affinity to Retail Investors Windfall Distribution
Corporation Investment Banking Decoupled Reinvested
Venture Institutional / Blue Chip Investors Decoupled Distributed to Investors
Franchise Capital Management Retail Investors Coupled Largely Reinvested

Public share prices are largely driven by market psychology. So we go private and control ½ the market psychology by selling directly to retail investors. We tamp down on ½ of price-distorting behaviors, eliminating speculators and other short-term players often found in the public markets.

Comparison to the Corporate Model

Why not use the corporate model? Being decoupled from investors means we don’t have to deal with their distasteful investment behaviors+ at all. And, we get free reign on reinvestment of windfalls.2 We get our funding from the investment houses and wash our hands of retail investors with their short-sightedness.

Corporate IPOs are once-in-a-decade events for most corporations. It’s of little concern to an issuing firm if the market tanks a year after they complete their IPO. They already have their money and are decoupled from the share prices set by retail investors betting against each other in public markets. With Franchise Capital Management we come to the marketplace each year seeking funding to carry all investments through to their first windfall.3 We care if the market tanks next year.

Corporate IPOs are priced using current market conditions. Free reign on reinvestment of windfalls comes with a loss of control on share pricing. The investment house has every incentive to undervalue the share price paid to the issuing firm, to ensure its own profitability in market making, and to allow its blue chip buyers to profitably unload their IPO shares to retail investors. We’re a private fund seeking long term investors (e.g., blue collar). Our share pricing must be protected from short term market fluctuations. We can’t build predictable funding on a base of unpredictable annual price fluctuations.

Open seasons are once-a-year events which are highly choreographed to achieve share pricing independent of market conditions. An investment house may spend 2-4 weeks test marketing its IPO with blue chip buyers to calculate the investment house’s share price commitment to the issuing firm. We’ve spent a year building price support with retail investors, based on an intimate understanding of their investment needs. Instead of handing a 10 -15% profit to an investment house in exchange for the promise of below market prices, we use the money for investor management and other incentives to find and retain long-term (coupled) investors. We make a market for our own shares, but at a price reflective of our own internal valuations, and not one of an investment house subject to the fluctuations of the market.

Comparison to the Venture Model

Why not use the venture model? We get our funding from institutional and blue chip investors. The Rolodex is more manageable in size. And one institutional investor can provide as much funding as a thousand retail investors. No muss no fuss. You can tie up the investors for the duration, like venture funds. Keep them around until the windfalls.

Because one institutional investor leaving takes out as much as a thousand retail investors. It’s too easy for investment bankers and professional investors to imitate their peers. This is their living, and if their peers are seen to be getting ahead by making risky investments, then they are obliged to follow. Make the risky investment (with other people’s money+) or you’ll fall behind your peers. The commissions are great and they’re non-refundable when the collapse comes (ten years from now). Institutional investors do not have the psychology we seek for predictable funding. Perpetual fund regulated share pricing is not sexy enough.

Investor Retention+

With wholesale investors we talk to a representative, who cannot tell us what it would take to retain their investment. His or her decisions are largely based on how others view their decisions, and ‘others’ can be fickle. And they suffer the distortion of dealing with other people’s money.

With retail we talk directly to the investor and find out precisely what it takes to retain their money (e.g., size of windfall distributions). At open season we have at our disposal an arsenal of tools to stem investor exits. We can do this because we have detailed information about you, the retail investor, in our databases. (...more)

Retail investors are a lot of work and worry. But they are worth it in that they can be more readily conditioned for retention. They have fewer options for investing their money. They are less likely to be taken in by securitized mortgages, for example. Retail investors can get infected with gold-rush fever, but they more often-than-not prepare separate mental accounts for retirement money and speculative money. They want safety and modest returns for retirement. We want their retirement business for investment stability.

Conclusion

People who try their luck and don't fare well will generally be quiet about their experiences. But there will always be some people who will do well, and they swear to the efficacy of whatever system they've used. Other people will soon follow suit, and a fad will be born and thrive for a while despite its baselessness. Human nature has a strong general tendency to filter out the bad and focus on the good. Casinos encourage this tendency by making sure every quarter won in a slot machine causes lights to blink and makes its own little tinkle in the metal tray. Seeing all the lights and hearing all the tinkles, it's not hard to get the impression everyone's winning. Same for funding agents. Losses or failures are silent.4

For this reason most investors are unaware of the pitiful performance of most (mutual) funds. The investor scam above is executed with more subtlety. I pull together many different groupings of stocks and give them a name. I pay handsome commissions to amiable financial advisers to extol the virtues of these funds (diversification, long term performance vs. market). I discard variants showing poor performance (who’s going to notice?). I loudly trumpet the variants showing above market performance.

We make investors understand that Franchise Capital Management has only one perpetual fund and there are no shell games. The core skill of our financial analysts is to weather long dry spells. They wait, unpredictably, for the next windfall. They stand mostly outside the storms of the public financial markets. They only interact with the outside world during open seasons and windfalls. They can weather several ‘weak’ open seasons without overtaxing their ability to make market for perpetual fund shares. The ‘balance sheet’ is of little importance. Much more important are the lines of credit and other derivative investment vehicles+ they keep at the ready. Continuous funding is not at issue.

Retail investing is our brand. We’re proud to help ‘the little guy’ get a piece of the action normally reserved for blue chip investors (...more). You physically get to see your money at work (on investor days) and you no longer feel a part of a Ponzi+ scheme aka NY Stock Exchange or NASDAQ. There are no financial manipulations between investors and the deployment of their funds into productive economic activities. We provide a ‘direct’ conduit of investment dollars from those seeking capital protections to those seeking predictable operating funds. Investors see immediate payback from the productive work of their funds. Owners of Intellectual property+ see, personally, those who are funding and depend on the success of their work.


Editor's Picks for April, 2011

  • 1. The share price calculation is “Total Investment Capitalization / Total Perpetual Fund Shares”. Investment Capitalization is largely imputed based on research progress, as independently evaluated. Only by increasing progress in individual investments can this ratio increase.
  • 2. …firms without attractive internal investment opportunities … choose to keep the cash windfall inside the firm rather than distribute it to investors in the form of dividends, share repurchases, or debt reduction. - What Firms Do with Windfalls.
  • 3. A rough estimate is $25 million (year=2011) per new investment (franchisee+). For ten new investments we come to the marketplace seeking $250 million. Numbers of new investments grow each year, unpredictably. We come to the market each year because we can’t afford (or forecast) perpetual fund price support for a decade’s worth of new investments.
  • 4. excerpted and reworded from here.
Further Reading
Reba Tull
Offline
Joined: 03/30/2011
You've discounted corporate approaches too quickly

Your argument discounting the corporate approach is unconvincing. According to your own chart, corporate is already most of the way there. Corporations already reinvest windfalls+, and they already can provide predictable funding for unpredictable R&D+ (here). It doesn’t matter if corporations take their money at ‘market rates’ and pay a 15-20% fee to a syndication for that privilege – that’s the way of the world. It looks like all you’ve did is set up a new corporate office and give it a new name: the managing partners of the Franchise Capital Management firm+.

It would be easier to find a forward-thinking corporate executive than to start a new Franchise Capital Management industry.

Reba Tull
Offline
Joined: 03/30/2011
Populist doesn't mean practical

Retail investors put their savings into pension funds and annuities. That’s 80-90% of the retirement money. You won’t change those habits quickly, which means you will have to deal with ‘institutional investors’ with all their limitations as you describe.

Retail investors are lazy, and they get what they deserve. You require too much thought for even a blue chip investor. How do you intend to overcome the innate lack of investment comprehension of the retail investor? Dealing with blue collar workers may have a populist appeal, but in reality they won’t send you their money. To be honest, many probably wouldn’t even know how to send you their money: their employers have it tied up under contract in today’s financial vehicles.