Standards of living are about to skyrocket due to the implementation of advanced robotics and AI. They will grow 12 to 15 fold over the next thirty years, so that median household income, in constant dollars, will be around 500K and about 25% of households will have annual incomes in excess of one million dollars. The age of profound affluence will also spread to the developing regions of the world. Consequently, with rather stagnant population growth, Gross World Product (GWP) will increase 35 to 40 times. This massive increase in consumption will create, at a minimum, $4,000 trillion of additional market value in investments. Somebody is going to own all that debt and equity that does not exist today. So, not only will incomes explode, wealth will, as well.
One of the basic rules of the stock market is that the sooner you get in on a deal, the more you are likely to make. Consequently, Venture Capitalists typically expect a 60% return on investment, but those who enter at the IPO level, the first point at which most people can enter, capital appreciation has probably cooled off to under 25% per year. By the time the company hits your 401(k), a 10% growth is counted as a win. Interestingly, the system is rigged to keep all but the wealthiest from the early rounds of funding. In other words, in order to get rich, first you must be rich.
In the U.S., as in most countries, there are a series of securities laws designed to keep the unsophisticated investor from getting fleeced. However, the definition of a sophisticated investor, what in the law is generally designated as an accredited investor, except in a few limited cases, has nothing to do with intelligence or knowledge. You are an accredited investor, and thus by SEC law exempt for these protections, solely based upon your net worth or income. If you have a net worth over $1,000,000 or have had income in excess of $200K for the past two years and can reasonably be expected to continue to earn at that level, you are, no matter how unsophisticated in reality, an accredited investor. Rule 506 requires other measures of sophistication, however, they are in addition to, not instead of, the definition of an accredited investor. Consequently, if you are accredited, you can be approached with impunity, albeit privately, by Investment Bankers and principals of the business. Otherwise, except in very limited cases, you cannot.
The smaller, non-accredited investor, is also constrained by two other critical factors. First, the sooner you get in, the greater the risk. Consequently, more diversification will be essential. This increases the size of your required risk portfolio as a multiple of your average investment. Second, generally the sooner you get in, the more the minimum investment required will be by the issuer. In other words, you can invest $1,000 in an IPO, but in a PPO you may be required to invest $10,000 or more. Since the issuer is limited in the number of non-accredited investors it may involve and they can't make public offerings or solicitations, that is only natural. However, in combination, and in light of the securities laws, all but the wealthy and professional Venture Capitalists are excluded from the high return opportunities. For their own protection, of course.
The preceding is a significant element in the explanation for the current concentration of wealth. The middle and lower classes are allowed to fritter away their money on lotteries and casinos where the games are rigged against them, but they are excluded from investing in business start-ups, where the odds are their favor, for their own protection. These protections were put in place with the best of intentions to assure that the excesses of the 1920's could never recur. However, this is a classic case of throwing the baby out with the bathwater.
The state of affairs presents significant problems for the start-up entrepreneur, as well. Venture Capitalists and Angels finance very few start-ups. When they do, they almost invariably demand a very large percentage of the enterprise as well as significant control. They can do so because the supply of high risk capital is artificially constrained by the restrictions discussed above. In addition to taking a large chunk of the company, they also generally invest in start-ups only if they have a strong management teams with a proven history of success. This means that the more interested they are in you, the less likely you will need them. So, for the start-up entrepreneur interested in involving Angels and Venture Capitalists, the odds are poor and the terms are usually onerous. Wise entrepreneurs steer away from them until they are in a much better bargaining position.
Because of this, the start-up round of funding is often referred to as the 'Family and Friends Round.' Of course, one of the problems with this is that an entrepreneur with a great idea, huge energy, not much practical experience, but willing to learn, may not have friends and family with sufficient income and wealth to prudently meet the needs of the start-up. Clearly, there are long term risks, many non-financial, in enticing family and friends to take imprudent risks on your behalf.
Friends and family can invest in an entrepreneur's start-up because of exemptions that were provided in Rules 504 & 505 of Regulation D. When a private placement is made, shares may be issued to up to 35 non-accredited investors. In Rule 504 placements, disclosure requirements, such as audited financial statements are not required. However, the key word here is 'private.' The issuer is not allowed to make public offerings. In other words, they cannot advertise for investors and they may not advertise a meeting for the purposes of finding investors. Consequently, entrepreneurs and small investors, even if they would like to transact an investment, can't find each other.
The Income Explosion will result in an explosion of multi-millionaires and billionaires. Not in inflated dollars, but in today's dollars. However, as we see, unless you are already rich or are well connected to affluent people or visionary entrepreneurs who will capitalize upon the Transformation, the way things stand right now, you, almost surely, aren't going to be one of them. That, however, is based upon how things are right now. Things can be changed. If you reflect for a moment, you will undoubtedly see how.
Basically, you need to develop a larger, more entrepreneurial, affluent and risk tolerant set of 'friends.' You must create a private environment where the offering of start up and early round securities will be unambiguously 'private.' That is one of the primary benefits of Polymathica Institute Membership. You will gain access to a very private Internet locus of extraordinary individuals and opportunities. As we discuss on our Welcome page, there are many other benefits, but this one is quite tangible and very significant, because of its potential scope.
The Polymathic Institute, among other things, is a collaboration between polymathic intellectuals, visionary entrepreneurs and risk tolerant investors. Each role will play an essential part in the strategy to capitalize upon the emerging global, Information Age civilization and to participate in those trillions of dollars of economic growth. You may find that you will be able to fill more than one role. However, except for a few amazing individuals, people need to collaborate with people who complement their strengths and overcome their weakness. Each of these three roles have characteristic strengths and weaknesses. However, combined, they have none.
Polymathic Intellectuals:
Great ideas disproportionately come to people of intelligence, erudition, curiosity and imagination. For a handful, an excess of these traits can lead to a lifelong battle with focus. Before they can do much of anything with one brilliant idea, another one grabs their attention and diffuses their energy. The successful entrepreneur is a person with enormous drive and one great idea. More ideas constitute a distraction. At present, there are no job descriptions or career opportunities for the person who is an idea generator but not an idea implementer. Clearly, in order to be productive, they need to form a series of collaborations with implementers or what we generally refer to as entrepreneurs.
Visionary Entrepreneurs:
Entrepreneur is a term that encompasses a broad range of activities. A dog groomer who notes that there aren't any dog grooming businesses in a particular area and starts one there is an entrepreneur. The person who anticipates the next great Internet phenomenon and builds a site with 10 million unique visitors per month is also an entrepreneur. However, except for drive and the desire to succeed, they have very little else in common. One is duplicating a well known business model. They will require little in the way of outside funding, sophisticated marketing or organizational development. The other will need all of these plus the trait of vision. Consequently, we discriminate between the entrepreneur and the visionary entrepreneur. The latter can benefit greatly from an environment rich in polymathic intellectuals that in aggregate create an explosion of ideas from which to choose. They will benefit from a deep understanding of the Transformation and ready access to a large community of risk tolerant investors.
Risk Tolerant Investors:
A collaboration between a polymathic intellectual and a visionary entrepreneur will result in a wonderful business plan and little else. Capital must still be applied to the idea. As we see, relying upon family and friends for start-up capital, while common, is less than ideal. Searching for Venture Capitalists and Angels has a low success rate and dilutes ownership significantly from the beginning. What is needed is a community of seed money investors that are tolerant of the inherently large risks that such investments entail and with sufficient intelligence and vision to comprehend and appreciate the opportunities of the Transformation.
We have now provided the basic framework necessary to understand how The Polymathic Institute will function as a collaboration of polymathic intellectuals, visionary entrepreneurs and risk tolerant investors. As we describe it, it is important to understand that the Institute is not programmatic. We are discussing a conceptual interaction, fully aware that variations on the theme will be common. For example, some visionary entrepreneurs may come to the Institute with their idea and not require a collaboration with a polymathic intellectual. They may only need to build and utilize a private network facilitative of building a management team and acquiring funding.
At the outset, a polymathic intellectual will publish an idea. Since the purpose of the Institute is more than simply a venue for entrepreneurial collaboration, it may or may not be formulated as a business idea. However, visionary entrepreneurs will see the potential. Either the intellectual will solicit entrepreneurial involvement or the entrepreneur will contact the intellectual to offer a collaboration. They may build a management team from other members or acquire additional expertise in a consultative basis. Either way, a convincing business plan and, perhaps, some initial proof of concept activities must be undertaken. At some point, they will be ready for their start-up funding activities.
Here each project will vary to some degree based upon its nature, potential and constraints. Most will likely begin with a Rule 504 offering because of the very lax requirements this exemption has. The offering may be just large enough to finance the requirements for a Rule 505 offering or it may be a true first round. The two principals, the polymathic intellectual and the visionary entrepreneur, plus any participants identified as initial officers and principals will contribute some funds. The remainder will be solicited from other Institute Members. It should be mentioned that the polymathic intellectual will probably take a smaller share than the entrepreneur. A passive role may give the intellectual a 10% share, while a more active role may be as much as 30% or 40%.
A Rule 505 private offering generally requires between $20K and 50K to finance the process of meeting the legal, accounting and registration requirements of the offering. This means that they could go out as low as $20,000/35 = $600. This allows smaller risk tolerant investors to become involved at the very outset. Commonly, however, they will recognize that in order to fully subscribe a Rule 505 on favorable terms, they may need to undertake some actual business development and have some sales to show to the larger, accredited investors. Also, to get there, it is common for one or more participant to need some salary.
This, however, does not really present much of an obstacle. A Rule 504 offering with an average investment of $3,000 can still raise $105,000 from 35 non-accredited investors. Of course, it would be incorrect to assume that no Members are accredited. Some may be and will increase the number of investors that can be accepted. While Rule 504 does not have any investor sophistication requirements, Rule 505 does and if a 505 offering is made within 12 months, the Rule 504 offering will likely be integrated and included in the Rule 505 offering. Consequently, the limitation of 35 non-accredited investors should be observed.
The next step is most likely to move on to a Rule 505 offering that can raise up to $5,000,000. The offering can be made privately through the officers of the company and registered securities agents. Except in high demand offerings, agents will sell on a 'best efforts' basis and will take a commission, typically 10%. Again, unless there is extraordinary sizzle, Rule 505 offerings to accredited investors will require a strong management team with solid resumes and an existing income stream.
The determination of how much equity should be given to investors is a complicated matter. However, essentially, enough equity must be given that it is reasonable that the investors desired risk adjusted rate of return can be met. For example, if the amount to be raised is $5,000,000 and a strong case can be made that the market capitalization of the company, if successful, with no additional equity funds could be $100,000,000 within 5 years and the required risk adjusted rate of return is 60% per year, the equation can be worked backward to determine the current value of the company and what percentage would be worth $5,000,000 today. In this example, the current value of the business is $9,536,743 and the offering should be made for 52.4% of the company. These calculations often become contentious between entrepreneurs who tend to value their idea highly and those who must market the security who naturally wish to make it an 'easy sale.'
The Polymathic Institute is an organization with many functions and benefits. Certainly the recreation of the Republic of Letters and The Great Discussion, as exemplified by our Polymathic Roundtable, is one. The development of a certification for Polymaths is another. The exploration and discussion of the Transformation, through The Future 101 is yet another. However, they are all intended to function synergistically with its resulting practical expression in the Enterprise Lounge and the collaboration we explore here.
The Polymathic Institute is an idea created by polymathic intellectuals. It will not achieve its goals without the involvement of visionary entrepreneurs and risk tolerant investors. As we see, the path to commercialization, for the entrepreneur, is greatly simplified by the existence of a vibrant Polymathic Institute. Those who would like to take risks and build significant wealth from the Transformation, can gain access to many opportunities without being an accredited investor and, often, with relatively small investments. We critically need the involvement of visionary entrepreneurs, especially those who are interested in building the Polymathic Institute, itself. Without the Institute, none of the rest happens.
Please sign up for our mailing list if you are interested in pursuing Membership or Fellowship in the Polymathic Institute. As you make the decision, consider that this is more a decision based upon your own self-confidence and what you think you can accomplish with access to the environment we describe, than it is in a belief in anyone else. Our goal is to attract 25,000 Members and Fellows with the expected distribution of primary functions, polymathic intellectuals - 1,000, visionary entrepreneurs - 4,000, risk tolerant investors - 20,000. We anticipate that most investment opportunities for start-up financing will require no more than $1,000 to $5,000.
