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Roadmap 09/11 (click here to expand/collapse)

Below is the Roadmap for select September 2011 website articles. 

Provide Predictable Funding for Unpredictable R&D+

We Make R&D funding more predictable ...

At a lower cost of capital

With reduced volatility (i.e., short term predictability)

Without mortgaging {bracketing} the future (i.e., long term sustainability)

Investors can buy and sell shares at any time (during open season+), reducing premiums they would typically charge if we mandated long term commitments, and reducing a perceived need to 'meddle' into investments, demanding 'window dressings' to increase the sale price for the next investor down the line.    Valuation of Intellectual Capital+

Asset valuations (appraisals) are greatly increased due to membership+ in our community. They command premium pricing due to the financial strength of the community, readily available comparables, and tangible benefits of membership provided by the funding agency.    Community

We can have at our disposal (in the U.S.) additional tax benefits that comes from working with member-contributed equity.    The Cooperative Solution 

Long-term investor-citizens come to rely upon the predictability and sustainability of perpetual fund+ share pricing. This reduces premiums they otherwise would charge due to the unpredictable nature of the underlying assets+ (R&D-based ventures).      Valuation of Intellectual Capital

We have at our disposal a broader variety of cost-effective tools for investor retention+ when we work with our investors vs. anonymous / absentee investors.      Investor Retention

Investor-citizen familiarity with our financial safeguards tamps down on irrational investor fears, reducing the urge to sell off during generalized market downturns. Increased volatility in buying and selling forces us to recruit (and pay for) excess investors just to be sure we have enough funds to cover the sell-offs.        Investor Education

We build love of institution in our investors. Our client base will be thousands of thousandaires and only a few millionaires (when they start). We can't do this without investor referrals, outreach, testimonials and involvement in retention and recruitment programs.        Love of Institution

Investor-citizen participation in governance builds an appreciation of the complexities in our operating model (e.g., asset appraisal, the stabilization fund, derivative investment vehicles+). Citizens learn to acknowledge that knowing and doing are two different skill-sets. An idealized vision of the funding agency leads to unrealistic expectations of the funding agents. Our operating model reflects the uncertainties of investing into unpredictable R&D and we need a latitude for our mistakes from investors.      Investor Participation

Asset appraisal, upon which the perpetual fund share price ultimately resides, is performed in a way that tamps down on period-to-period fluctuations in asset value (across a basket of assets). Interim asset appraisals informs the share pricing used by investors to buy and sell during open seasons.    Valuation of Intellectual Capital

A mandate for an accelerating growth rate forces agency management+ to continually recruit new investors, who can then be recruited as natural proponents for safeguards put in place to ensure the future of the agency. For example, new investors will not want old investors to exit with the cash, gutting the finances behind our community services. We make this a first principle.    First Principles+

Mandatory reinvestment of interim winnings is the principle funding source for all our community services. It's so important we make it a first principle.    First Principles

Minority opinions (dissenters+) provide a wake up call to other investors should the future of the agency be placed in jeopardy by self-interested investors or outsiders.    Dissenting Opinions

A common law+ legal approach makes it difficult for today's investors to enact binding legal precedent that can be burdensome on tomorrow's investors. It's very difficult to know the best way to exploit unpredictable R&D. We don't write down rules, precedents or procedures that either 1) make it too difficult for future generations to experiment or 2) make it too easy for future generations to excuse their lack of creativity.    Common Law

Investor voting constructs+ make it difficult for today's investors to enact bylaws, rules and regulations that are binding and can be burdensome on tomorrow's investors.     Voting Constructs


Benefits of a Community-Based Operating Model for Our Funding Agency

Breathing Life into Intellectual Capital

Unpredictable R&D is a different kind of intellectual capital. Its exploitation requires creativity, experimentation, progress that is halting and tentative, and a willingness to throw away all the rule books. We do not pick a commercial direction and start marching. Ours is a wilderness criss-crossed by many overgrown paths, each with unique challenges, and only a very few taking us where we want to go. Consider it a mystery instead of a puzzle. There are many misdirection cues, incredible complexity of plot, and many, many plausible conclusions. The answer often emerges when we discard that which is right before our eyes: discarding yesterday's misleading evidence.

These challenges (opportunities) get reflected in the demands we place on the funding agency. We must better educate citizens (vis-à-vis anonymous or absentee investors) to appreciate the value of the freedoms we make available to our investees. Investees are freed from many arbitrary constraints. Our task is to make these freedoms seem dear to investors so they aren't tempted to take them away, with meddling or impatience. Responsibility for the defense of these freedoms must become a matter of personal mission for many of our investors.

Above we listed advantages of a community-based approach vis-à-vis a corporate or venture capital approach (our competitors). We take the best and discard the worst from these competing models. We have our investors (venture) but we allow them to exit at any time (corporate). The community-based approach also brings advantages not found elsewhere (e.g., love of institution).

Valuation of Intellectual Capital

Summary: 

We allow investors to come and go. They need a share price to buy and sell. Share prices are regularly updated and accessible for rational analysis by investors and investees alike.

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


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
Reba Tull
Offline
Joined: 03/30/2011
Still Looks Ponzi-ish

Despite assurances it’s hard to see how this differs fundamentally from a Ponzi+ scheme. You are going to impute a ‘premium price’ for assets that are by definition unpredictable in their returns. You offer above market share price appreciation at what seems to be no risk. No risk by definition means no returns, which means somebody’s going to get burned eventually – there has never been and will never be a free lunch. Your call for an accelerating growth rate of blockbuster+ success (which you hid in a footnote) sounds like a ‘suck-in technique’ to lure in later investors in order to pay off earlier. You make an unsubstantiated claim for increasing portfolio asset quality as a basis for increasing share price. You know quite well advancements+ in these investments are, by their very nature, unpredictable.

Early investors into this Ponzi scheme will do fine, if they’re smart enough to leave while the share price is still rising. Investors around for the collapse will haul you into court and you can share a cell with Bernie Madoff and the many others before him. The intricacy of a Ponzi scheme, and yours is quite intricate, does not a valid defense make.