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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.

From Unpredictable R&D to Predictable Investor Returns

Summary: 

How we take unpredictable R&D+ and package its windfalls+ to provide predictable returns to investors

Problem Statement

Franchise Capital Management+ provides continuous funding for unpredictable R&D+. Unpredictability is defined as uncertainty in knowing if, when, or where an R&D investment will succeed as a major commercial product. Investors could care less ‘where’ an R&D success happens. They care more ‘when’ it will happen. They care deeply ‘if’ it will happen. This last uncertainty is the kicker. If we don’t know ‘if’ a particular investment will ever succeed, then a host of unfounded fears will spring up as to when or where the investment should occur.

Makes a businessperson a little twitchy. Fanty (Rafael Feldman), dialog from the movie Serenity

In mathematics, the Klein bottle (pronounced /ˈklaɪn/) is a non-orientable surface, informally, a surface (a two-dimensional manifold) in which notions of left and right cannot be consistently defined. Other related non-orientable objects include the Möbius strip. ...more
We need investors to stick with an investment for an indefinite time period, with little indication along the way that progress is being made in any particular commercial direction, and with less indication success will ever happen. Sign me up – not! This is an inherently untenable predicament, and clearly illustrates the challenge of securing predictable funding for unpredictable R&D.

The way we’ve chosen to get out of this predicament is to make investments more certain, even if they remain unpredictable in timing and direction. We reduce the last uncertainty: the ‘if’. It’s still uncertain when or where success will happen, but we can be more certain it will. How this feat is achieved is summarized in the Introduction, and discussed in detail here.

If we’re more certain investments can eventually succeed then we can play numbers games. One investment can still fail. Many investments, still with unpredictable timing, give us an increased frequency of success. Increased frequency also reduces a host of other investor fears that otherwise spring up as to when or where success will happen. We still don’t know when, but we are much more assured success will happen, and this leaves open a path to make the finances work.

This is not Shots On Goal+. You cannot reduce unpredictability simply through numbers. Having 5, 10, 15 or 100 investments means nothing toward the overall success rate. Each investment is independently unpredictable and all 100 can readily fail. You need deliberate measures at the level of each investment in order to reduce its rate of failure (‘the if’). The more investments you have, the more your ability to implement measures gets diluted, the higher the failure rate. The difference between our approach and ‘shots on goal’ is found in franchise operations+ (...more). We spend significant amounts of money to make each investment as successful as it can be.1

Perhaps counter-intuitively, if you attempt to reduce the uncertainty of timing (artificial deadlines) or the uncertainty in direction (artificial commercial direction), you increase the rate of failure (‘the if’) for this type of investment. We put in place economic incentives for researchers to succeed sooner rather than later. But we do not impose penalties (beyond the loss of incentives) for researchers who succeed later. This is the best we’ve been able to accomplish (so far) in World Class R&D.

Our ‘final’ problem statement stands as follows: we are more certain we will succeed, but we’re still uncertain as to when or in which commercial direction. Individual investments will still fail, but at a much reduced rate in comparison with alternate approaches. Our successes will be more frequent, but they will still surprise us. Our measure of productivity, an accelerating growth rate in the number of blockbusters, remains true, but not on an annual basis (here).2


Financial Implications

We have a more certain stream of blockbuster successes waiting for us on an uncertain time horizon, and we need to leverage this as the means to fund current operations. Investors don’t like returns that are unpredictable in timing, and would charge an exorbitant premium for investments with our ‘naked’ profile (if they would invest at all). Instead we ‘bring forward’ future blockbuster successes and dress them up as a more predictable and favorable investment profile.

We have many investors and many investments spanning many years. We could use funds from later investors to pay returns to earlier investors, a very Ponzi+-flavored scheme.3 Our official approach, though, is to use derivative investment vehicles+ (e.g., index funds, options, unsecured loans). Investors in these vehicles know they have no claim on the underlying assets+, and are in essence ‘placing bets’ on the success of the underlying assets. Investors in derivative funds only ‘win’ should the underlying unpredictable R&D investments succeed. Together with husbanding of earlier windfalls+, derivative investment vehicles give us the funds we need to reward investors outside the unpredictable schedule of windfalls (here).

We use derivative investment vehicles to bring forward funds from future windfalls and make them available for today’s uses.4 For example, we may take out an unsecured loan for the entire Franchise Capital Management firm+, a separate legal entity, and use the proceeds from this loan to bolster today's returns for investors into the perpetual fund+. Investors receive returns on their investments today. They don’t wait for windfalls. They become less twitchy.

As we become more sophisticated at managing lines of credit and other derivative investment vehicles used to bring forward future windfalls, we could be more generous in the amount we pay out as current returns to investors. Instead we opt to pay steady, slightly-above-market returns during the interim, while we wait for the next windfall to happen. Once the windfall happens we pay a moderate kicker to all investors – a one-time jump in share price. We do this as integral to the branding of Franchise Capital Management. We’re the investment firm that protects your capital, pays you above market rates, and a kicker.5

Our branding is designed to attract investors who will stay the course. We need continuous funding for unpredictable R&D and the best way to achieve this is to retain investors. We tailor the returns we pay on investments to reinforce this behavior. Our belief (one still needing market validation) is an unpredictable kicker can be a very powerful incentive for increasing retention rates (see here).

Conclusion

Bringing forward future windfalls to fund current operations is only sustainable if we can successfully increase the success rate of our investments. We invest a significant portion of our windfalls to make this happen, through franchise operations. Increased success rate means investors (and managing partners within the funding agency) can become less twitchy about not knowing when or in which commercial direction the next success will come. This reduces their temptation to request or impose arbitrary deadlines or commercial directions, which can harm the success rate for this type of investments. It’s a virtuous cycle.

We can only increase success rates by having in place a funding approach aligned with measures to increase productivity. For example, unpredictable R&D requires broad leeway for creativity, and nothing crushes creativity faster than metrics. R&D is a metrics-free zone and the financial approach is built with this restriction in mind. No requests for forecasts are allowed to be made of franchisees for our financial models. There is much more (see here). Bringing forward future windfalls to fund current operations is one piece of a larger puzzle.


Home Page April 2011

  • 1. More accurately we spend significant amounts of money to develop an overarching infrastructure within which each investment can be as successful as it can be.
  • 2. That is to say, our investment base is growing, so the frequency of success must increase on top of the growth rate. Our blockbusters come sporadically, and so we many see zero blockbusters in year five, and fifteen in year six, followed by ten in year seven, etc. When you step back and look over decades, you clearly see (interocular+) an accelerating growth rate in the number of blockbusters, as driven by increased frequency of blockbuster successes on top of the growth rate in investments.
  • 3. Indeed a hint of Ponzi-flavor can still be detected in the rather complex money flows we describe in the full description of Franchise Capital Management.
  • 4. Once any franchisee+ succeeds, we also husband a portion of the windfall to fund current and future uses.
  • 5. Note our branding to investors is silent on our extraction of a tax on the windfall to fund franchise operations. This would just raise unnecessary questions in the minds of the investors. It remains, however, to address this tax question with the owners of intellectual property+ (the investments). See here.
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