We as members of this Funding Agency+, in order to promote new meaningful employment for our host governments through commercial exploitation of cutting-edge research, constitute ourselves as an investment community dedicated to the reliable valuation of this research, making it readily accessible to the thoughtful analysis and placement of funds by investors.

Asset appraisal makes our funding approach work. We appraise intangible assets in a way that makes them accessible to rational analysis by investors.

Our investors can buy and sell these assets at any time via our perpetual fund⁺ (during open seasons). We perform independent, quasi-objective appraisals of the (intangible) assets underlying the perpetual fund, and this serves as the basis for extrapolation of fund share prices. Reliable appraisals permit investors to come and go with confidence. We do not commit investors for the long term.1 We could do this (it’s the venture capital approach) but these investors charge exorbitant premiums for use of their funds and they get impatient (sometimes resorting to investor terrorism⁺). Instead, buyers analyze our perpetual fund share price, see its connection to the underlying (intangible) assets, and see how the appraisal process for the underlying assets⁺ will protect their investments until they are ready to sell.

Premium Pricing

Investors buy and sell based on premium pricing of the underlying assets. These assets can be priced this way because they enjoy the full faith and credit of the funding agency. Often individuals charged with appraising assets opt for safety and low appraised values over asset potential.2 When your house is appraised too low you don’t get a second mortgage and you don’t make home improvements. Our appraisers do not suffer this institutional bias. We appraise an asset based on its full potential as a member of our community.3

Our investors (mostly) don’t care if we appraise assets at a premium price. They only want assurances assets will be similarly appraised at the moment they sell. The use of subjectivity in our valuation mechanism⁺ is not so much an issue. Investors are more interested in consistency. They want appraisal procedures to be objective. Investors want a consistency in procedures stretching from when they buy to when they sell.

We set the perpetual fund share price based on our ability to sustain (premium) pricing over the long term. This is not market-based pricing. Ours is a private fund and we always control one-half the buy-sell transaction. We do this today and we will do this tomorrow.

We have comparables: one intangible asset lined up against the next. We can reliably rank (AAA, AA, A, etc.) all intangible assets in our portfolio by means of side-by-side comparisons. Quality rankings and premium pricing multipliers are held constant from one appraisal to the next (with continuous minor improvements based on experience). The funding agency ensures quality rankings for its investments are increasing steadily. It’s part of our success assurance⁺ program. Consistency of ranking procedures, premium pricing multipliers held constant, and an agency dedicated to improving effectiveness (quality) in all assets; these all combine to support steady (increasing) fund share prices.4

Valuation of a Basket of Assets

Investors buy and sell into a perpetual fund filled with investments at every stage of completion (or inception). We roll up the appraisals from all assets into a single share price. Precision in the appraisal for any single investment becomes less important. Our ability to support the perpetual fund share price, supported by a basket of assets, becomes much more important.5

What is the real value of any single investment? It promises one day to spin off two blockbuster⁺ successes, and then to spin off itself as an independent firm capable of still more blockbuster success. Once past our shake-out period (12-18 months in pre-game+) we claim these investments have a 30-50% chance of succeeding based on the success assurance mechanisms we put in place. We don’t know when, and we don’t know where. No matter, this could be an investment worth many billions of U.S. dollars.

We have a 30-50% expectancy of receiving a few billion U.S. dollars per year within a decade or two, at a cost of perhaps more than U.S. $100 million per year during the wait. Do we value this investment opportunity using NPV⁺, IRR or Monte Carlo modeling? Not likely. The appraised value of any single intangible asset is indeterminate. There are too many variables and unknowns. An appraised value emerges for an intangible asset by virtue of its belonging to a basket of assets. We extrapolate a single share price based on the appraised values for all assets in our perpetual fund. We select a share price to be sustainable and not subject to large fluctuations. We blow this share price down into our calculations of price premiums and asset quality rankings. Finally we reconcile all appraisals top-down and bottom-up. The result is a quasi-objective share price, using all objective evidence available, supplemented by independent, but subjective evaluations of progress within each asset.

Exhibit 1. Perpetual Fund Valuation Mechanism. The perpetual fund share price reflects the value of the underlying ventures / assets, but as a mix of subjective valuations and market valuations. Share price is reconciled top-down and bottom-up. Click the image for more information.

There are no ‘algorithms’ to calculate fund share pricing: it’s a value we extrapolate. We believe this value can be supported over the long term. Share price is ultimately tied to work by the funding agency to increase success in each its investments (e.g., through franchise operations⁺).6 Success is inherently unpredictable but we claim to make this success more frequent. This claim had better hold true or agency managers risk being thrown into jail for running a Ponzi⁺ scheme.7

Investor and Investee Viewpoints

Within our community we gain direct access to the investor, as a member (i.e., not filtered through a broker). Members are educated to more fully understand the asset valuation mechanisms, and also to know where they should be vigilant to ensure the integrity of those mechanisms (e.g., payment of the fraud insurance premiums). We also leverage the testimony of our investors as further evidence for the fidelity of our appraisals.

Owners of investment properties (investees) are not to be overly concerned about appraised values for their intangible assets. Investees contribute intellectual capital⁺ (and time and effort) and in exchange receive operating funds not subject to arbitrary limits. The goal is to outrageously increase the value of the asset, at which time owners and agency managers receive pre-negotiated ownership percentages.8 These percentages are not (overly) affected by asset valuation. Investees should be concerned with asset appraisals only in their capacity as investors.

Closing Commentary

Today’s attempts at valuation of intellectual capital are (and always have been) too narrowly focused. These are based on obsolete accounting conventions, half-baked patches, unrealistic surrogate measures or unabashed acceptance of clichés and cheap heuristics⁺9. We simply ignore them. No existing valuation approaches are fit for our purposes. Instead, we zealously guard our status as an extra-governmental institution which allows us to make and enforce our own ‘rules’ of valuation.

Repeated exposure to our valuation mechanism leads to expectations met, greater trust in our ‘currency’, reduced costs of capital and greater returns for all. Expectations must be transferable across transactions (from one investment to the next) and this only happens within a common administrative and enforcement structure. We inculcate all investors, investees and agency management⁺ into the mechanics of our appraisals. Most importantly we retain educated citizen – investors so lessons learned can take root. Our valuation mechanism ultimately depends on our success at building community; investors acting like citizens.

Investors in the NYSE or NASDAQ ‘societies’ have certain expectations for shares bought and sold – fungibility, liquidity, regulations (legal remedies for forgery, con games, etc.), costs. These we can easily replicate. Much more important is the perception of share value. In the NYSE investors look at financial projections and make (educated) guesses as to the future value of shares. Investors are most commonly not it in for the long term, and the short term P&L weighs most heavily in their calculations and resulting share prices. This is often the cause for wild swings in share prices experienced with publicly-traded securities.

Tangible profits for our investments are unpredictable and far off into the future. Instead we educate investors to look at the steadiness of our asset valuation procedures, and how this leads to steady fund share prices. We increase the effectiveness of our R&D assets, leading to higher asset appraisals, leading to increased share prices for the perpetual fund. Our share prices are not subject to wild swings. We’re not that quick at increasing effectiveness in our investments. And, single investments dropping out (end game⁺) only have a small impact on fund share price. We substitute reliability of share pricing in our perpetual fund for the often arbitrary share price calculations made by investors in the larger public exchanges.10

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Home Page September 2011

• 1. ...although we provide many enticements to retain investors for the long term.
• 2. Whether they are internal or external auditors, government regulators, insurance companies, investment advisers, or rating agencies, these institutions often act on behalf of another set of overseers, and their (reputational) penalties for underestimates are often much less severe than for overestimates.
• 3. Premium pricing allows us to give away less ownership to investors, and keep more for investees. We do this knowing investors, ultimately, are more interested in share price appreciation, and investees in the legal custody of their research babies.
• 4. Compare this to analysts on Wall Street coming up with earnings projections based on phone calls to friends, or venture capitalists parachuting-in (or using their shark tanks) to perform due diligence.
• 5. ...and this in turn depends on many variables, for example, the robustness of credit lines available to the funding agency so they can make-a-market in perpetual fund shares.
• 6. Also, share price is ‘hedged’ in that all investments are engineered to spin off excess cash in the event of success (cash by design unspoken for). This excess cash is set aside to pay moderate windfalls⁺ (dividends) to investors. Investors are conditioned to view windfalls (dividends) as unpredictable in both timing and amount.  If our decreed price for the perpetual fund is sustainable, cash windfalls get distributed intact. If we fall short, we use the cash windfall to sustain our price support.
• 7. Mandating the funding agency aim for an accelerating growth rate of blockbuster success helps. Growth in the investment base provides redemption for a multitude of sins.
• 8. Even these we adjust over time as a means to build investee commitment.
• 9. The cited reference recommends the following cheap heuristic: "the most appropriate approach to determine Fair Value is a methodology that is based on market data, that being the Price of a Recent Investment." Capitalizing the words makes them seem more authoritative.
• 10. Many corporations have been around for decades (or centuries). They all have revenues which makes it easier for investors to stick around. We seek long term investors based on trust in the valuation of the underlying assets of our perpetual fund.

Further Reading

Independent Evaluation Defined

Bringing It All Together - Franchise Capital Management

From Unpredictable R&D to Predictable Investor Returns