Designing a financial instrument for high growth startups

Fundamental technological innovation, such as autonomous vehicles, cleaner batteries, cheaper space travel, etc., require a combination of thorough user understanding, delicate scientific diligence, and financial agility. These ventures aim to build deterministic solutions using deterministic processes.

While the financial securities deployed to sustain these ventures, such as convertible notes, corporation shares, and employee stock options, remain stochastic in the valuation process. These financial securities and mechanisms are adopted because they can be arbitraged by terms of the jurisdiction during a liquidity event. On the other side, the securities are provisioned between the parties, based on subjective consent, that may sustain best effort to reach the liquidity event.

The arbitrage of the jurisdiction is deterministic in attempt to delegate operations or conflict resolution, after the liquidity event. However, those contracts do not ensure the liquidity event itself.

The question then is, can we design financial security that would result deterministically to a liquidity or a non-negative ROI in worst case scenarios?

The solution

In business, companies use consortiums as a construct to invest in research and development of cutting-edge technology in a cost-effective way. Some examples of this are the GSM Association (GSMA), the Internet Engineering Task Force, and the USB Implementers Forum.

Initially externally funded, these organizations become cost-effective and self-sustained once they achieve their intended objectives. Beyond reaching the venture goals, they validate markets for their investors and even enable the governance of marketplaces to an extent.

Investment => Due Diligence => Liquidity

On another note, franchises are low-risk investment opportunities. After meeting initial conditions, franchising can be a deterministic investment mechanism.

Marketability => Investment => Liquidity

Compared to a class venture capital model, using consortiums can reduce costs of validation, and invest later in startups that would adopt the validated technology or validated market study.

Due diligence ?> Investment ?> Marketability ?> Liquidity (classical venture capital approach) Validation through consortium cost sharing||> Grow (a more deterministic approach)

Such an investment approach can enable high-resolution fund, from different types of capital, across different jurisdictions, and dilute the cost of operations.

The liquidity can become deterministic whereby transforming the liquidity challenge as a management challenge to the organization. The same way Generally Acceptable Accounting Principles (GAAP) are used, an alternative accounting mechanism can be developed to ensure the intended liquidity. Such mechanism would define the sought financial mechanism that would ensure a non-negative ROI.

Those mechanisms must exist in organizations who have been exposed to such a risk continuously, defining a common framework that can be adopted to manage such complexity is worth the trying.