Choosing your investors is critical for any business, particularly governments and startup entrepreneurs. Both often choose ineffective investors to fund their ideas and assets. By ineffective, the investors supply money but little else and expect a high return on their investments.
Governments, with their choices of investors, waste billions of dollars, make the community poorer, and are on their way to making the planet unliveable. However, there is a rule of thumb that will make investor choice simpler, less expensive and more reliable and allow investors to contribute to the enterprise's success.
The "secret" is choosing investors from those who benefit the most from the product or service. Do not take money from those only interested in making money rather than the product. Any investment aims to produce products and services that consumers want and the workers like to build. Both groups benefit from the products.
The method allows consumers and workers to invest in the businesses producing the goods and services when they make payments for goods or get paid for their services. The approach results in reliable, fit-for-purpose, and low-cost products.
Consumer investors ensure that the products produced are economically efficient. Worker investors seek ways to produce goods and services for the least material and financial costs.
A NetLogo Simulation
The following illustrates the above with funding a business that provides services for Community Housing Markets. The Housing Markets need IT, accounting, insurance, house maintenance, real estate services and governance systems. The Housing Markets are all similar, and it is expensive for these services to be set up from scratch each time a Housing Market is established. Service providers can provide services to many, providing economies of scale. The lower the cost, the more likely the markets will choose a given supplier.
Bank Loans to individual groups or to a service provider will likely cost 20% interest over a short period. Equity investors will want 20% or more returns in perpetuity. Funding from contractors, employees and customers removes interest and dividends or capital gains costs.
The NetLogo simulation "investment funds for simulation" (described below) compares bank loans, fair bank loans and Community funding. A potential provider of services believes they need a $1,000,000 investment to build a business providing these services. They wish to model charges, the number of customers, and how much to charge to make the business viable.
The simulation compares
- Regular Bank Loans are where the lender keeps all the interest; the interest rate is the small business loan rate of about 20%.
- Fair Bank Loans are where the lender shares the interest with the borrower.
- Community funding is where all investors are treated equally and receive a 40% return annually for five years. The return is 20% from the sale of fixed value $1 shares, and the other 20% are new shares issued by the Company.
1, 2 and 3 are represented on the netlogo screen by a triangle, a square and a pentagon. Each customer is represented by one of the three symbols and appears in each cluster.
The clusters on the screen represent 100 customers. If each customer contributes an equal amount to pay off the borrowed Capital, then red indicates the customer is not yet profitable and yellow shows it is. With Community Funding, every customer adds to the profitability as no interest is extracted from the organisation.
In the following screen, all clients of the Community Funding operations are profitable and have been since the simulation started. Most Fair Bank loans are profitable and about half the regular Bank loans. The same pattern occurs with all simulations.
Removing debt has removed costs from providing a service. It also changes the way businesses treat customers. When money is extracted from the business with debt, the customers who contribute the most to the bottom line are treated differently and get the most attention. When the customers all acquire equity with each sale and customers all get a single vote, then all customers are treated equally.
The simulation is freely available by contacting the author.
Benefits of a Finance Service Provider Obtaining Funds from Consumers
Finance service providers create systems enabling others to finance other activities. Here the service providers provide services to Community Housing Markets. The customers or Housing Markets themselves supply the finance and acquire joint ownership of these markets. The Housing Markets want a given level of functionality for the lowest price. The service provider returns a 40% annuity to the Housing Markets (or investors in Housing markets) for five years. The service providers typically require less than half the external investment needed to construct and deploy the services. Once the capital investment is paid off, prices can continue to drop.
The extra returns come from reducing prices, not by increasing prices. Reducing consumer prices as a return on investment is an effective way to maintain consumer loyalty.
Funding Government Services
When applied to government infrastructure assets like money, roads, railways, and schools, every citizen who uses services is treated equally, and the economic activity supports democracy. Significantly, it reduces the cost of finance because of the massive bias of government spending in favour of the wealthy, distorting and increasing prices of all goods and services.
The government outsources the creation of new money to the Banks. The Banks charge the borrowers interest, which the Banks keep. Most of the interest is profit, and Banks are profitable because they keep charging interest even when the borrower has paid back all the money. They do this because the Banks do not reduce the amount borrowed by any of the interest they charge.
Figure 1 above shows the dramatic difference in the investment cost distortion. The triangles represent funding with bank loans, and the squares represent funding with Fair Bank Loans. In both cases, the amount of interest charged is about the same, but the borrower of a regular bank loan owes nearly $6,112,000, while the borrower of a fair bank loan has $4,200,000 in assets.
The same is true of all government infrastructure. Regular unfair Bank Loans are a massive money transfer from everyday citizens to the wealthy. The simple change requiring Banks to share the interest with consumers will correct most of the financial system issues and strengthen democracies.
However, changing to Community Funding will give the same benefits as Fair Loans and, in the case above, increase the value of the investment by a further $2,000,000 with $1,075,000 less in repayments. If governments do not change, citizens can work together and change by adopting Community Funding.
