I first met Chris about 7 years ago at an alternative economy conference in Inverness. Chris has had a pretty unconventional career path that takes in the UK Department of Trade and Industry; market regulation and development as a Director of the International Petroleum Exchange and then a Dot Com entrepreneur in the world of global markets. This path came to an abrupt end when he blew the whistle on oil market shenanigans and since then he has been researching more enlightened - peer-to-peer - approaches to the flawed system he had left.
Collecting business models
He says he collects business models like some might collect butterflies. But unlike a butterfly collector - these aren’t pinned down in glass cases. He’s breathed life in to a number of them - prototyping enterprises where there were no existing examples. This has led to ventures as diverse as raising the local pub from the ashes, literally (The Star and Garter in Linlithgow) to producing a short film.
His prototyping of corporate forms and instruments adopts a fractal approach - one foot in the existing and one foot in the possible. He has discovered that complementary solutions may be found via an ‘adjacent possible’ through a process of testing agreements and structures. The word ‘agreement’ comes up a lot in Chris’ chat.
I was hearing, that to make it as a prized corporate structure in Chris’ collection, it would need to be simple, flexible, have an element of being scalable without encountering conflicts of interest and be founded on agreements. And perhaps most prized of all - created a structural alignment of all interests.
Practical applications and prototyping
He’s tried a simple structure, an Unincorporated Association, based on a two-page governance document - this was instrumental in regenerating the much-loved local pub.
He appreciates the infinite flexibility of a Company Limited by Guarantee (CLG) for asset holding and use. But perhaps, if I understood correctly, it is a Limited Liability Partnership (LLP) that possesses most of the sought-after characteristics for bringing people together to develop assets to be held in perpetuity and in common within a CLG.
The development structure he calls a ‘Capital Partnership’ produced a short film with a launch party in Soho, London from nothing but a concept, a willingness to work together and free capacity. All those involved were members; actors, directors, agreement writers. They weren’t issued ownership shares of £1.00. They received ‘nths’; that is a percentage of the future revenue of the film produced.
This offer wasn’t so acceptable to suppliers of essential equipment such as cameras and lights. So the LLP needed cash. This is where the funding innovation came in. Two capital partners invested the £30,000 in cash in return for an agreed percentage of the film’s revenue if there was any.
Aligning interests of all stakeholders
Capital partners do not participate in net profits after costs - they simply participate directly - as genuine partners - in any gross revenue. I think the emphasis here is they were participating - and it was in their interest to participate in ensuring the film was a success. All stakeholders interests were in alignment. This contrasts sharply with both bank debt and with typical venture capital which extracts profits - and where more often than not, it can be more in their interest to screw everyone in the pursuit of those profits.
So while the structure supported the film production, unfortunately this film didn’t have a happy ending. The director (the founder and driving force) had a melt down and left for South Africa and the film was never marketed. But nobody got hurt. No employees got stuffed. Everyone went in to it with their eyes open. Film investors know they only make money on one-in-ten films and they had a genuine tax loss to ease the pain. The LLP hadn’t contracted with anyone and didn’t own anything - it was simply a framework or a wrapper that enabled people to come together for the common purpose of creating a potentially productive asset - in this case a film.
What works for a film would also work for developing or acquiring any type of productive asset - land, buildings, wind turbines and of particular relevant intellectual property such as that produced through Open Care. Its a financing structure that enables the creation of new flows of use value - whether that’s care, rent, production, energy, pizza or beer.
Then he pulled from the pocket of his jacket two sticks.
He told me these were tally sticks - an accounting mechanism that pre-dated double entry bookkeeping. All those counter-intuitive credits and debits!
He said it was a way to record a transaction.
Notches are cut in a stick, and a record made in writing to identify the people and what the notches represent. The stick is then cut into two, with one piece longer than the other. A transaction between two parties may be recorded by splitting this ‘tally stick’ into two - with one party retaining the long stick, and the other the short stick.
He told me they were used in two ways. The first was to record a PROOF of payment, also called a memorandum tally. This was like a receipt of past value transfer. The second was more interesting. The second was as a record of a PROMISE and was also called a loan tally which enabled finance to be raised through the exchange of value now against a promise of provision of value later. Naturally this offer of credit required trust that the beneficiary would provide value in the future.
Apparently, these tally sticks were used by kings who always needed money (or money’s worth of goods and services) before taxes or rents were due. The tally sticks enabled a funding mechanism by which rent or tax payers who had spare resources or had created some surplus could pre-pay their taxes - which of course they would only do if they received a discount.
When the agreement to prepay taxes or rents was made the tax/rent payer received a loan tally as a record of the pre-payment . When the time came to pay his taxes or rent he then returned the tally stick promise to Exchequer where it was matched using the notches (and of course the grain of the wood) to the other half of the split tally stick. This cancelled the tax obligation and is the origin of the expression ‘tax return’ for our annual accounting with the tax man!
This return of promises also gave rise to the expression 'rate of return’. This represents the rate over time at which the tokens or sticks could be returned to the promissor who issued them. In simple terms - you take the discount (or profit) and divide by time. There’s no compound interest - there’s simply a swap of money’s worth going on.
Promises and agreements as a funding mechanism
So how is this relevant to today? What’s interesting is that anyone can issue these promises or credit instruments. They become a way of funding an asset or an enterprise. There is no permanent dividend. You could sell 5 years of future production, rent or revenues. Unlike interest on a loan, all/both parties share risk and reward. In a bad year the investor/s gets nothing but in a good year they’ll do well too. What this opens up is a new funding option for anyone without the need for shares. It is simply pre-payment at a discount.
Chris was able to give a couple of good examples of places where this had worked in practice. He told me about a deli in NY State in the U.S. The owner wanted to borrow money for a new pizza oven but conventional forms of capital knocked him back. Then a customer offered to pay in advance for a pizza and this gave him an idea. He issued $10,000 of promises in exchange for $8,000 in cash - pre-payment at a discount - and these $1 Deli promises soon began to circulate as a form of currency which he called DeliDollars.
So it would seem that this suggests that we don’t need money. We need an agreement (there’s that word again) which in this case is some way of keeping score. Beyond that we simply need land or location, intellectual value (know-how, know-who) and design. And a will to work together.
Both Open and Closed
Chris went on to explain the agreements we need are neither open or closed. Or perhaps they are both open and closed. He said - as a model for sustaining operations - open doesn’t work because anyone can take your work and quite simply you’ll starve or at least you’ll struggle to continue your work. Yet, the open source community is a response to ‘closed’ or proprietary models where value is extracted by rent-seekers aiming to screw as much as possible from all other stakeholders. Perhaps the ideal are forms or structures that are neither (or both) - like a club which may be both open and closed as dictated by club rules or agreements. Closed because only members may participate: but open because anyone who agrees to the club rules may join.
Club rules begin with aims and extend to members, standards, dispute resolution and so on. But fundamentally a club is a two-way agreement, being interactive and participative so that interests become aligned.
So I could understand how this all worked when there was pizza involved - just! But I couldn’t understand how this model was applicable to future, indirect benefits or outcomes - such as those that arise from social innovation or in the field of citizen science. In this example, Chris explained that the productive asset - which in the case of citizen science is IP - are held by all the stakeholders collectively with someone (typically a founder whose vision the IP was) designated as custodian of the ethics and aims.
In addition to the custodian, you have people with rights of use, people who invest in future rights of use and a trusted third party (someone who took care of any conflict resolution, and perhaps holds the money). This model can apply to land, energy and even IP like open source insulin. The rights to open source insulin would be held by a custodian in keeping with the values of open source but not necessarily ‘open’ to those who operate on exploitative practices. A platform cooperative agreement could then be set up to act as a framework for the creation and use of productive assets. Think of it like a platform for all the stakeholders.
There was a ton of other interesting stuff he said - like the business model created by James Watt. But my brain is still struggling to process this. So perhaps this is enough to chew on for now.
I’d be interested to hear thoughts from others as to whether this has any interest in relation to the Edge of Funding session. @winnieponcelet @noemi Seems it also may relate to the session proposal on Ethics & Data Protection @markomanka @alberto
Chris is currently a Senior Research Fellow at the Institute for Security and Resilience Studies at University College London where his action-based research focuses on a new and complementary generation of networked markets and instruments. In parallel to this research, his work at the Nordic Enterprise Trust, Scotland sees him developing new partnership-based enterprise models and financing or funding instruments.