Thursday, March 3, 2011

Open Partnerships - Modest profit alternative to non-profits

An Open Partnership is a special form of communal enterprise where a maximum communal equity value is perpetually enforced.  All other aspects of communal equity accounting apply (buy in price can still be set democratically below the maximum).  This means that unlimited partners can (have the right to) join the commune, buy buying the appropriate fraction of communal equity (nth partner buys in at 1/nth communal equity).  Open partnerships  therefore have a limit on expected and actual profitability because if they are more profitable than normal (natural?), then an infinite number of new partners are motivated to acquire a partnership share.

The appeal of forming open partnerships is to make a purpose driven enterprise, and achieve social responsibility recognition.  A promise is made to society that gifts it an option to buy into the enterprise at a specific price.  The 2 main classes are alternative business models for charities and customer-purposed organizations.  Customer purposed organizations may be thought of as semi-charities even if their beneficiary clients are all humans rather than specific disadvantaged classes of people.  So, charities and customer purposed organizations are in fact a continuum on the same class of applicable Open partnerships.  The other class is legal monopolies such as patents or massively social (government) funded monopolies such as utilities, where the open partnership restriction on the company is an appropriate social compensation for the legal or capital benefits given to it by society.

Economic analysis
Lets say an Open partnership caps its maximal communal value at $1M.  For a normal disinterested investor happy with normal returns, he would be willing to invest in the open partnership if it has a decent expectation of earning 100k/year (10%) in annual profits in perpetuity.  For a customer of the enterprise, he might be motivated to influence the company into targeting 5%-8% return on equity (ROE) rates (50k-80k/year) by improving products or lowering prices, especially if his partnership purchase involves partial reinvestment by existing partners.  A philanthropic/charity minded investor might be motivated to invest at 0%-1% ROE if the company strives for and accomplishes social goals, and especially if full reinvestment by existing partners is involved.  Intentions and motivation are not static over time, and the organizations direction should always be based on its present partner wishes for direction.  The 10% normal ROE rate effectively acts as a cap, attracting all customers and social members with special additional motivation to the partnership if it is exceeded.

The following example illustrates the dynamics of open partnerships.  Consider a communal value open partnership with 10 initial partners, that is both capped at and worth $1M.  Each share is worth $100k.  If profits one year are well beyond a $100k normal ROE (say $1M) then the number of partners could grow from 10 to 1M.  The initial 10 partners would receive $99999 as a result of their dilution (new partners buy from old partners collectively).  Each share would be worth $1 (with 1M partners), and each partner would be entitled to $1 as their share of the year's profits.  From the perspective of the original 10 partners, being too successful results in their dilution from 10% share to 0.0001% share.  Rather than profit maximization, the focus in open partnerships is on profit sustainability.  Sustainability reinvestments in growth and customer acquisition/satisfaction become relevant equal priorities leading to greater socio-economic benefits of jobs and consumer value.

Charities
Cancer and AIDS research are often funded through grants, and often provided through personal charitable donations.  From an investment perspective, funds are channeled more towards opportunities that could yield 100B+ in potential profits through treatments grotesquely propositioned as "pay us everything or die."  Furthermore, those involved in the war on cancer have misaligned incentives in that victory in the war on cancer means the end of the war on cancer, and an end to their usefulness.

Cancer research enterprises structured as an open partnership capped at say 40M-100M equity value provides sufficient incentive to both successfully develop cures, and to price the cure in a socially responsible/benefiting manner.  Those members of society disposed to philanthropy or desperation are willing to pay higher than market value for a partnership share at its early research stage, and financially motivated investors willing to buy in at a higher price once research has demonstrated results.  Partners have the rights to information necessary to decide whether the enterprise deserves their additional capital (in form of loans).  This modest profit model is far more suited to achieving philanthropic goals than is either a charitable or non-profit model.

Another issue with charities, are the substantial legal hurdles (in Canada) that prevent charities from directly helping people beyond education and councilling.  Any value transfer to individuals is forbidden by legislation focused on preventing tax evasion.  For instance, charities (tax deductible) are not allowed to be legal defense funds or affordable housing builders in Canada.  Depending on the scope of the enterprise, an organization wanting to provide affordable housing could setup as an open partnership with capped equity between 10k and $1M.  Some concept of a sliding cap based on housing units provided is conceivable.  Even without a charitable organization status, such an organization can attract investment from social groups that genuinely care about the issue, but also its potential customers.  Instead of a tax deduction partially motivating strictly controlled charitable operations, slight opportunity costs to return on capital would be the charitable sacrifice but applicable to unrestricted benefits for community or humanity.


Patents
Society currently generously incentives innovation by granting innovators a 17 year monopoly (patents) during which they may extract unlimited profits from their innovation.  Society asks for nothing in return.  If society demanded instead that patent monopolies structured themselves as open partnerships there would be a fair bargain between the monopolist and its potential customers.  The customers that benefit most from the patent would have the highest incentives to buy into the partnership.  My rule of thumb, as a general guideline, is that $4M communal equity cap on a patent holding corporation would constitute sufficient incentive to develop any innovation.  A $4M equity value would represent the Net Present Value of future profits at the time it is worth $4M.  A $4M asset + employment in sales/management/engineering applications of the company, with input in hiring assistance on the project, and reimbursement with interest on development expenses are sufficient incentives to develop anything.  Higher maximum equity awards are appropriate when society wants to encourage solutions to specific problems it faces.

A related factor that can block innovation is the innovator's greed in seeking monopolist profits from his invention.  Capped equity makes selling to both customers and investors easier, the same way that selling a ferrari for $30k is easier than selling it for $200k.  The inventor can sell a 50% stake to one customer for up to $2M, or to 75% stake to 3 customers for $1m each.  From the customers' perspective who buy into the patent holding corporation, they first have sufficient control over the corporation to enforce fair prices, but they benefit from any monopolist premium on prices.

Monopolies (Utilities)
On paper, there is decent regulation of monopoly utilities in Ontario.  Electricity is government owned, so profits at least go back to society.  Heating gas monopoly is price regulated based on gas cost.  Communications have more complicated and weak regulation on its monopolist/cartel providers, but theoretically impose a mechanism to complain about their abuse.  Liquor sales are monopolized under the pretext of social responsibility in limiting general alcoholism and underaged drinking.  These regulations are cost/time expensive, corruptable, and unnecessary if the monopolies adopt an open partnership structure.  Open partnerships naturally focus on sustainable operations rather than profit maximization since stakeholders of the monopoly have additional incentive to obtain ownership influence.

So anti-alcohol groups or alcoholics can take ownership of the liquor board.  A democratic process can directly affect liquor sales operations much quicker than slow regulatory government feedback, and without largely irrelevant liquor control policies influencing general leadership or governance decisions.  An other defect of regulation is that laws can become outdated, or a monopoly no longer a monopolist.  For example, land lines are apparently a declining business which has competition from wireless and cable.  It would be normal for a land line open partnership's communal equity to decline below its cap as a result of competition, and the company should enjoy the flexibility of leveraging its land lines for other business opportunities.




Monsanto
Monsanto is recognized as the most evil corporation in the world.  The reason is principally its GMO food operations, which are resistant to its Roundup herbicide, and whose seeds infect neighbouring farmer fields.  It spends more on its legal enforcement of its patents than any other organization in the world including persecuting infected non-customer farmers.  Monsanto uses its government given right to maximize profits and trap its customers and non-customers into dependence on it, holding world food supply hostage in the process.

Presuming that GMO food has no negative health effects, or can be engineered further to even have health benefits, then GMO food has a cure-for-cancer level humanity benefit potential for global economic/population sustainability through higher yields and lower costs.  Disgust with monopolist intellectual property enforcement that seeks to capture 90% of the economic gain from the innovation is understandable.  War against GMO food is economically unfortunate.  GMO innovators could be revered as humanist heroes under a different business model.  An open partnership structure would allow its farmer customers to buy-in influence its pricing and legal policies, and allow farmers and eaters to buy in to influence its R&D efforts towards more globally economic sustainability projects.  Open partnership investment in Monsanto GMO food operations would transform Monsanto investors from evil enablers of oppression to heroic providers of economic food sustainability.

Social Networks, bands, sports teams
The user is the product for social networks.  At least one of the more successful social networks has a sordid history of membership privacy abuse and funding backed by investors with CIA ties.  There is a competitive opportunity for community owned open partnership structures for social networks.  There is an emotional satisfaction in fans supporting a band, and a utilitarian benefit beyond economics in encouraging it to make more music.  Sports teams instill a vanity components in their fans' support, and have vanity celebrity status as the primary motivator in team ownership.  Vanity and other emotional aspects can enhance value/worth of an enterprise far beyond its pure economic value through open partnerships, or at least communal equity structure.  Communal equity ensure's that there are no minority owners (all owners equal).

reddit.com is a social network which does an admirable job of providing democratic, user-focused and user-friendly organization and presentation, despite being owned by a traditional corporate media overlord: Conde Nast.  Conde Nast has owned it for several years now, and presumably purchased it under the same monetization ambitions that, when implemented,  so often destroy internet communities.  Conde Nast appears instead to have been convinced that the better option is the only other business model for internet communities:  to grow them with the ultimate purpose of selling them to someone else with delusions of mass monetization.

Conde Nast can, if it is eager to monetize additionally or sell, instead sell as an open partnership, marketing the offer to its own community.  Reddit.com has an enthusiastic, supportive community with collective support and admiration for its current administrators.  An open partnership evokes community building and social good motivations among its investors in a way that pure economic investment cannot.

The Power of dividends
An Open partnership valued at its maximum communal equity stays at that value by paying all of its profits as dividends.  Dividend payments are widely misunderstood as harming company/investor health.  This is wrong because first, a company healthy enough to pay dividends is attractive to have whatever financing needs it has met by the same investors it paid dividends to.  It is also wrong from an economic sustainability perspective since investors can best decide for themselves what opportunities are in greatest need of investment or they can increase their consumption.  Apple (stated to have $65B in cash equivalents) has precisely the same operational profit outlook if it gave back $64B to investors than it does if it didn't.  Open partnerships naturally enforces the corporate duty to pay back investors.  Escaping that duty through corruptly management-loyal board-of-directors is a direct cause of current economic stagnation.

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