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 BLOG >> January 2016

Constraint Satisfaction: Part 2 [Agriculture
Posted on January 29, 2016 @ 08:08:00 AM by Paul Meagher

In my last blog on constraint satisfaction I illustrated what constraint satisfaction is using a mathematical example, namely, solving a set of linear equations. In this blog I want to talk less formally about constraint satisfaction and other less formal approaches that have been suggested to solve such problems.

Constraints come in many forms, have different priorities, are more or less negotiable. When engineers are designing a building they have general constraints in the form of available funding and a time frame for the project. In addition that may have architectural drawings, building codes, zoning, neighborhood covenants and a host of other constraints that they must adhere to. On top of this they may also be constrained by ecological design principles to produce a building that works with the natural landscape, uses eco-friendly materials, and is energy efficient. From this large set of constraints emerges a design and a plan to erect a structure that meets as many of the constraints as possible.

It is well documented that engineers do not simply accept all the constraints that are handed to them, but often consider what happens if a constraint is relaxed, removed, or reinterpreted. The process of constraint satisfaction is a process of arriving at the set of constraints that appears to be feasible to work within. Solving a constraint satisfaction problem in such circumstances may be more about changing the working constraints than coming up with an elegant solution to existing constraints. The numerical example of constraint satisfaction might leave one with the impression that constraint satisfaction is a simple 2 stage linear process when the reality is that posing and solving constraints is often a back and forth process.

What is oftentimes puzzling to me is the observation that increasing the number of constraints that apply to your work can enhance creativity rather than restrict it. It is as if creativity is channeled more productively when the number of constraints is increased. Freedom from constraints can sometimes be the enemy of creativity. If you are building a house and add the constraint that it has to be eco-friendly or green, then this constraint might encourage more creativity rather than less in the design of that building. It is also documented that innovation in the construction industry goes up significantly when new building code regulations come in.

Creativity is one approach to coming up with a solution given a set of constraints. The problem with relying upon creativity alone is that there is often a vast history of experience in tackling similar problems and it may be foolhardy to believe that you will out think all who have come before. Some areas of design have come up with design patterns that are proposed as solutions when you encounter problems of a certain type. One of the most famous examples comes from the architect Christopher Alexander who proposed 253 design patterns for towns, buildings and construction. If this is the type of problem you are trying to solve than this is a template you might want to use for building it. You can adjust the template to fit the particulars of your situation. Likewise in software development, there are a set of common software design patterns that you can use when confronted with a particular set of problem constraints. If you are unaware of these design patterns, then there is a good chance you will cobble something together that will fail in ways that could have been anticipated by those aware of these design patterns. Finally, there is ongoing work business design patterns that anyone starting up or running a business might consult to come up with strategies and tactics. Business Model Generation (2010) by Alexander Osterwalder & Yves Pigneur would be an example of such work.

Some say the value of design patterns consists mostly in giving a name to problem-solution pairs so that we can be more aware of them, can discuss them more easily, and potentially use them in our designs. The design pattern literature is one that I hope to examine in more detail in the future to get a better sense of how useful it might be. There are many in the fields of architecture, software design, and business strategy who believe design patterns are worth learning and using to solve problems of various sorts. In many cases there is not much new under the sun so if you are going to solve a common problem it makes sense to be aware of common solution tactics for that type of problem.

Permaculture Voices recently profiled an extreme example of a person who was up against the wall financially with his business and pivoted to work within a new set of constraints (and new business model) that allowed his business to thrive from that point onwards. This was actually the example that got me thinking more about how we often fail if we work within the wrong set of constraints and how we can succeed when we adopt a different set of constraints. The constraint of working with very little capital is one that many people fear but when we face it head on and adapt to it, then sometimes we might be more profitable because we are spending less capital on our operation than before and making way for more profit.

For this blog I consulted the book Innovating Minds: Rethinking Creativity to Inspire Change (2015), specifically the section on Made & Found Constraints (p. 139-146) for some useful discussion on the nature and role of constraints. They conclude that section with this comment:

Constraints of all sorts offer both guidance and goads. How we use, choose, or iteratively make and revise constraints profoundly propels the generation and refinement of innovative ideas. ~p. 146

I hope this blog series has helped to highlight the importance and role of constraint satisfaction in design, creativity and innovation.

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Constraint Satisfaction: Part 1 [Creativity
Posted on January 28, 2016 @ 07:18:00 AM by Paul Meagher

In today's blog I want to begin exploring the concept of constraint satisfaction. Why? Because it is critical to understanding, both formally and informally, what creativity and design consist of.

An awareness of what your constraints are is important when it comes to designing anything. Design takes place within a set of constraints and the adequacy of a design is mainly determined by 1) whether you have your constraints right, and if so, 2) how good a fit your solution is to those constraints. Creativity is used to express these constraints and find a solution that is a good fit to these constraints.

A formal example of a constraint satisfaction problem is solving a set of linear equations. You may be familiar with solving linear equation problems from high school math.

Given:

x + y = 6
3x - y = 2

Solve for x and y.

One way to solve for x and y is by graphing each equation and finding out where they intersect. The point of intersection is the solution.

Using graphs is a good way to solve simple linear equation problems. If we add more equations with more terms then we need to use other techniques, such as Gaussian elimination or the Simplex algorithm, to solve this problem. There are powerful software tools, such as the GNU Linear Programming Kit (GLPK), that you can use to solve a variety of constraint satisfaction problems. I recommend you check out The GNU Linear Programming Kit, Part 1: Introduction to linear optimization (Part 2 and Part 3) to see how linear constraints can be formally expresses and optimal solutions found using this software. GLPK is the type of software you might use to create your own version of Uber or Lyft.

The purpose of today's blog was to illustrate that a central idea in design and creativity, constraint satisfaction, can be expressed in mathematical terms in some cases. When we do so it can be quite powerful. There is another approach to solving constraint satisfaction problems that can be found in landscape design, software design, and permaculture design called design patterns. In my next blog I'll explore the use of design patterns as a more informal approach to expressing and solving constraint satisfaction problems.

Note: The graph above is from p. 126 of a 1990 textbook by Robert J. Schalkoff called Artificial Intelligence: An Engineering Approach. Robert devoted a useful chapter to Constraint Satisfaction Problems and the application of the logic programming language Prolog to such problems. It is interesting to note that IBM's Watson, the Artificial Intelligence (AI) that beat all the best Jeopardy! champions, is partially implemented in Prolog. Prolog offers another software toolkit for formally expressing and solving certain types of constraint satisfaction problems.

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What Is An Earnout? [Finance
Posted on January 27, 2016 @ 09:28:00 AM by Paul Meagher

If you are selling your business (or some percentage of it) and you think it is worth $X but your buyer thinks it is worth $X-$diff, then you might still reach an agreement if you agree to the $X-$diff valuation today and the seller agrees to an "earnout" for the remaining $diff if the company performs to a certain standard over an agreed upon time frame. You as the seller get an immediate payoff less than your valuation, but you earn the rest of your valuation if your company performs as well or better than it has in the past.

An earnout seems to be a clever way to potentially reach an agreement between the buyer and seller of a business when there is a valuation disagreement. There are hazards, however, to cutting such deals. Mark Mcleod came out strongly against them arguing that earnouts almost never work due to alignment issues they can cause between the buyer (who doesn't want to pay the earnout) and seller (who wants the earnout). Mark suggests you treat an earnout provision like a lottery ticket with no strong expections that you will receive it.

Two other issues with earnouts have to do with potential litigation and negative tax consequences. Litigation often arises because there is a dispute as to whether the relevant earnout milestones were achieved and the seller may object that they were blocked in some way from achieving their earnout targets because of the buyers actions. One also has to consider whether the money paid as earnout money is treated the same as the capital gains arising from selling your business or part of it. Often earnout money is subject to higher taxes. These issues are discussed in more detail in lawyer Roger Royse's article The Problem with Earnouts.

So while earnouts would appear to be a clever bargaining technique in arriving at an agreement between a buyer and seller of a business, there are some negative consequences that all parties should be aware of and make allowances for if they still want to use an earnout to resolve valuation disagreements.

The purpose of this blog was to raise awareness of the concept of an earnout and some of the concerns that cause bloggers and lawyers to often speak poorly of this bargaining technique.

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Nasser Al Arayedh Warning [Site News
Posted on January 25, 2016 @ 02:43:00 PM by Paul Meagher

Nasser Al Arayedh has never been a registered investor with this site or with the Dealflow Investment Network.

Nasser Al Arayedh is listed as the CEO of Al Arayedh Group Holding.

We have received reports that Nasser Al Arayedh has been contacting some entrepreneurs and has been offering to fund their deals. Our advice is that you NOT deal with Nasser Al Arayedh because he is not a registered investor with our site or network and is operating in a highly suspicious manner by using a conspirator (who he would not reveal) to refer deals to him. One entrepreneur has also reported him to the Canadian RCMP which is sufficient grounds for us to strongly advise you not interact with him.

We provide an Investor Verification tool that allows entrepreneurs to enter an investor's email address to verify that they are registered with our network. We advise all entrepreneurs to use this tool and if an investor is contacting you who is not registered (or clearly associated with a registered investor) you 1) should not deal with them, and you 2) should report such activity to us so that we can take the appropriate measures to address the issue.

We considered reporting this issue online or to other authorities but decided that the fastest way to reach the people we needed to reach was through a blog posting warning people not to deal with Nasser Al Arayedh.

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Highest Use of Capital [Finance
Posted on January 22, 2016 @ 09:02:00 AM by Paul Meagher

In my last blog on the principle of highest use, I wondered whether we might apply the highest use principle to investment capital. The basic idea is that we would want investment capital to serve its highest use first but also subsequently enjoy other uses that our investment capital might have. The purposes of this blog is simply to explore how we might apply the highest use principle to investment capital. I think it is an idea worth exploring and hope this blog encourages you to come up with your own views on the highest use of capital.

We might begin by listing all the uses of investment capital. When I googled "uses of capital" one result that was helpful was the Uses of Capital page on the Virginia Capital Partners' website. They list 8 uses for their investment capital. These uses are listed below (visit this page for details on each use):

  • Growth Capital
  • Acquisition Capital
  • Geographic Expansion
  • Startup Capital
  • Public Company Assistance
  • Restructuring
  • Shareholder Liquidity
  • Recapitalizations
  • Management Buyouts

This is a good list of uses for a venture capital firm's investment capital. Many of the businesses that use this website to raise capital seek capital for one or more of these these reasons. Unfortunately it is difficult to order this list and say that one use is higher than the rest. It is also difficult to see how employing capital for one use leaves you with the ability to enjoy other uses for the capital unless you derive a return on your investment that leaves you free to invest in other desired uses. For example, if you invest in helping a company grow, the return from that investment might in turn be sufficient to finance the acquisition of a company or geographical expansion for the company. The highest use principle might suggest the best initial use for your investment capital.

Another way to think about the highest use of capital is to reflect upon your own experiences investing in your business. You definitely want your capital to satisfy as may uses as possible. If you had the choice between purchasing a tractor or a piece of land, what is the highest use of capital? That might be determined by the number of uses I have for the purchased object and whether those uses can return capital that would allow me to re-invest into other uses. The highest use of capital in this case might be a tractor because having the land alone without a machine to work it is not likely to return capital back to me as quickly as having a tractor that can be used for many revenue generating activities and also to develop the land. The revenue generated from using the tractor might allow me to subsequently buy the land and have a tractor to work it which preserves my wealth and potentially allows me to re-invest my capital again. So the highest use principle might help us figure out which of several potential investments is the best use of our capital based on whether one of those investments is more likely to allow us to invest in the other uses for our capital.

Another way to think about the highest use of capital is in terms of maximizing positive impact while preserving wealth. Some call this social impact investing. In this case you look beyond just the monetary returns of you investment to how the investment impacts the lives of workers, the community, and the environment. Henry Ford, for example, said "The highest use of capital is not to make more money, but to make money do more for the betterment of life." Henry Ford may not have been totally philanthropic when he used his capital to raise workers wages as it lead to his workers being able to afford to buy the cars he was producing. Using capital for "the betterment of life" can feedback and create a virtuous cycle of investing that ensures your money enjoys many uses in other hands before it is finally exported from the community for some commodity that cannot be purchased locally. Ford's capital investments had significant social impact while also preserving his wealth. Some might say the preservation of capital is not required in social impact investing. If not, then we have to ask whether this is the highest use for our capital because once it is used up there may no longer be capital available for other uses.

Anytime we invest money we are concerned with making the best use of our investment capital. The highest use principle encourages us to look beyond the initial use of investment capital to anticipate how the investment might lead to other uses of capital either in your hands or in the hands of others. Ideally you want your investment capital to be preserved so it can be used again for the next best use of capital.

Social impact investing is another way to frame the highest use of capital and the highest use principle might be even more applicable to this form of investing. If you are an investor considering a social impact investment you might want to invest in a project that represents the highest positive use of your capital while also ensuring that your capital will be preserved for the next highest use in the future. Entrepreneurs receiving such funds should realize that the objective of the investor may not be to simply to spend their money on a good cause, but to create enough revenue from their investment to preserve their wealth for the next best use and to create the maximum number of uses in the community where the money is being invested.

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Principle of Highest Use [Design
Posted on January 18, 2016 @ 08:01:00 AM by Paul Meagher

One of the books I'm currently reading is Toby Hemenway's book, The Permaculture City (2015), which I also mentioned in my last blog.

I am a couple of chapters in. These 2 chapters were worth the price of the book as they are filled with insights on systems thinking and design, a couple of topics that are of perennial interest to me. These chapters reaffirm a suspicion I've held for awhile now, that anyone looking for advice on coming up with ideas and approaches to starting a business can look to Permaculture as much as to Lean Startup Theory for advice and inspiration on how to proceed. With the publication of this book, I think that there is now a solid case for doing so.

The book is not about starting a business per se, but starting a business is just one example of where good design comes into play. You also need good design to grow a productive garden, to raise good kids, to construct a successful investment portfolio, to build a house that you will be satisfied with over the long term. Why should the theory on how to start a business be viewed as separate from the theory on how to design anything well? Toby views Permaculture's design principles as general design principles.

The Principle of Highest Use is one such principle which Toby discusses in chapter 2. This principle advises us to consider all the uses that X might have and to structure our usage to ensure that we extract the highest use along with many of its other uses as well. We employ the highest use principle, for example, with our use of clothing. When our clothing is shiny and new we wear it in situations where it will be put to its highest use, at work or at school for example. Once the clothing gets a bit tattered and smeared, it might become clothing we wear around the house and in the garden. Once it gets really beat up we might wear it on a messy job that makes even its use around the house unacceptable. At that point we might cut it up into rags and continue to use it. Our clothing has all of these potential uses, but we want to make sure we enjoy its highest use, its next highest use, and so on before eventually discarding it or recycling it. This may sound like an ecological principle with a scope limited to telling us how to treat physical objects, but what Toby does well in this book is illustrate how Permaculture principles have much wider relevance:

Many people, consciously or not, apply highest use to their work habits. At the beginning of my workday, my brain is at its best, so I do the most intellectually challenging tasks, such as studying new material that I need to master. When that part of my mind feels stuffed full, I move to writing and other creative work. Once my creative juices are spent, I answer e-mails and make phone calls. It takes even less brainpower to sort, file, and organize tasks and materials so I do that next. When my brain has deteriorated to an inert mass, I find physical work to do. Somehow that work pattern manages to preserve some social energy, which often fills my evening. ~ p.33

This way of illustrating the principle is provocative and made me reflect on whether I am making the highest use of my brain. Makes me appreciate why watching TV is a guilty pleasure. Is my brain really that dead that all I can do with it is watch tv?

The highest use principle is useful for thinking about manage a business. If your startup is doing poorly is it because you aren't making the highest use of your employees? Are you only getting their second or third highest use? How do you structure your workplace so highest use is managed appropriately. If your programmer's highest use is programming, when should they be attending meetings? At the beginning of the day when they are potentially at their most productive or at the end of the day before they leave work for the day? What may be convenient from a management perspective may be disastrous from a highest use perspective.

According to Toby:

Highest use tells us how to connect design elements or activities in time by linking their functions or uses in a sequence. It tells us what to do first. ~ p.33

The assimilation of a design principle usually involves 2 aspects:

  • Bill Mollison, the co-founder of Permaculture, observed that design principles are usually formulated as as imperatives to do something. In this case, we might formulate the highest use principle as the imperative to "Evaluate and Apply Highest Use".
  • Toby advises us to turn this imperative into a mantra so that it becomes ingrained in our consciousness.

I hope this discussion of just of one of the many Permaculture Principle discussed in this book helps to convince you that Permaculture might have something useful to say about alot more things than how to grow a garden, which it also offers good advice on. It can also be used to give us practical ideas on how to start and run a business or how to invest in such businesses. What is the highest use of investment capital? What are all of its potential uses?

I don't want to leave you with the impression that I think Lean Startup Theory is not worth studying. It is. It is no longer the only game in town, however, and many Lean Startup principles are derivable from Permacuture's larger set of design principles. Where they fundamentally differ is that Permaculture's principles also include 3 ethical principles (i.e., Earth Care, People, Care, Return of Surplus to Earth and People) where Learn Startup Theory is not so constrained - let the free market be the judge. Ultimately I think there should be more crosstalk between Learn Startup Theory and Permaculture to see if we can't move both frameworks forward even further. I think Toby's book is a good resource to spur some of that crosstalk.

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Ecological Accounting [Systems Thinking
Posted on January 15, 2016 @ 09:18:00 AM by Paul Meagher

I finished up Sim Van der Ryn and Stuart Cohen's book Ecological Design (2007, Tenth Anniversary Edition).

Overall I found it a worthwhile read. It is a well crafted discussion on what ecological design is and what its main principles are. Many of the ideas in this book have been assimilated into mainstream sustainability thinking so the ideas are probably not as novel as they were when first articulated. Something that has started to sink in after reading the book is the idea that ecological design informs not just how we do building, landscape and urban design, but can also inform everyday decision making such as how to source food for your family and what type of soap to buy. It is when we try to apply some of these principles outside of the usual built environment context that things become more challenging and interesting.

According to Sim and Stuart, the 5 main principles of ecological design are:

  1. Solutions Grow from Place
  2. Ecological Accounting Informs Design
  3. Design with Nature
  4. Everyone is a Designer
  5. Make Nature Visible

In today's blog I wanted focus on the second principle, that "Ecological Accounting Informs Design". I am a bit hesitant to discuss this principle for a couple of reasons. One reason is that I'm not much of an accountant (I do, however, prepare and file my own personal taxes) so can't draw upon a deep knowledge of the accounting field. This would be useful. The second reason that I am hesitant is because it is challenging to understand how ecological accounting might be implemented in a practical way. I've decided to tackle this challenge today and see where it goes.

The basics of ecological accounting involve setting up accounts for the different types of "impacts" you want to manage - soil, water, energy, pollution, biodiversity, etc... You can already see that putting such a system into practice might be difficult. Estimating and measuring all the different types of ecological impacts associated with your design is not a trivial undertaking. In practice, we might only be worried about a few of the most obvious impacts. If we limit our scope, the prospect of performing an ecological accounting becomes more realistic. We can always add another dimension when we have management of the obvious impacts under control.

Ecological accounting comes into play when we are evaluating design alternatives. There is not much point of doing ecological accounting on a product or process just for the sake of doing it. Ecological accounting is useful for evaluating whether you should go with one design alternative over another because it minimizes some impacts (e.g., co2 emissions) or maximizes some benefits (e.g., improves soil) which collectively suggest which design is the most appropriate.

One important dimension to include in your accounting is the cost dimension. You may have a great ecological design but what happens when you discover that it costs alot more than a less ecological design? How do we manage the tradeoffs? How do we equate costs and levels of pollutants? Is one more ton of co2 produced equal to -$44 USD in your balance of accounts?

Putting a price tag on ecological services is a big field these days. The Natural Capital Project has a huge number of Ph.D researches developing software to estimate the value of the many ecological services that nature provides.

Ecological accounting can also be viewed as a way to engage in design that specifically involves 1) life-cycle analysis and 2) following the flow.

A life-cycle analysis involves an examination of impacts over time and encourages us to examine what happens to the design after it has served its useful life. What will become of it? If one design generates landfill waste and another involves composting, then the latter design is to be preferred.

Follow the flows means understanding the material flows, energy flows, transportation flows, pollution flows, heat flows, and water flows that are required for one design versus another.

Following the flows encourages us to ask questions such as:

  • Where do the materials for the product come from?
  • How much transportation is required?
  • How much energy will be used at each stage of production?
  • How will waste streams be managed?
  • How will water usage be managed?
  • How will heating be managed?

When we follow the main flows we have better ecological accounting to use for evaluating our design alternatives.

How do we find designs that have the best ecological accounting?

One approach would have us carefully evaluating our design with respect to all our ecological accounts and picking the design with the best ecological accounting score. I don't think the process of ecological design is or has to be this rational to succeed. Instead it can rely upon heuristics that while not guaranteed to produce good ecological accounting scores often end up doing so.

Here I enter uncharted territory. I'll propose a couple of practical heuristics for your consideration:

  1. Do it cheaply. Within reason.
  2. Apply zonation.

The heuristic that you should do it cheaply forces you to act under resource constraints that often produces a design with good, and sometimes optimal, ecological accounting. The "within reason" part is a reminder that if you are too cheap you may sacrifice quality to an unacceptable extent. You might have to back off from the cheapest design for this reason but finding the cheapest design is a worthwhile design activity to engage in to find a design with good ecological accounting to begin with. You can back off from there to optimize on other dimensions that are important to you besides cost.

The second heuristic that will often lead us to finding a design with the best ecological accounting is to apply zonation. Zonation is a concept from Permaculture and is generally used to design the layout of a farm in a way that minimizes travel time based upon how frequently we have to visit different parts of the farm. So put your garden, which you must attend to everyday, in zone 1, which is next to your home, which is in zone 0. Put the apple trees which you need to tend to visit less in zone 3 or 4, just within the zone 5 which is your wild zone which you need to visit even less frequently.

Toby Hemmenway has been creatively applying zonation to many different areas from transportation to foodsheds. His zonation of foodsheds has resulted in a foodshed design that arguably has better ecological accounting along many dimensions than our current foodshed design. This is a diagram from Toby's new book, The Permaculture City (2015), which is also about ecological design but from a more permaculturally inspired perspective.

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Seed & Venture Capital [Venture Capital
Posted on January 13, 2016 @ 06:55:00 PM by Paul Meagher

In the last few days I came across a couple of relevant guides that I though I would share with you. And a YouTube video.

For those new to some of the lingo and concepts around raising early stage capital, the Guide to Seed Fundraising might be useful.

The issue of equity compensation in a startup company can be quite complex. The Open Guide to Equity Compensation will help you understand some of the relevant lingo and concepts. What is also interesting about this guide is that it is a living document on GitHub. There are 12 contributors so far.

On the issue of venture capital, I found this video interview between Oren Klaff and Jeremy Glaser on "How Venture Capital Really Works" to be entertaining and informative. Both Oren and Jeremy are involved in helping companies to raise venture capital. This video has a useful discussion of the differences between the Seed Round, the A Round, and the B Round and how the meaning of these fundraising terms are changing.

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Price to Earnings Ratio [Finance
Posted on January 8, 2016 @ 10:40:00 AM by Paul Meagher

The price to earnings ratio, or P/E, is a important investment concept.

One reason it is important is because it provides a way to think about how to value the worth of a company. If your company is generating profits then you can use those profits to establish a value for your company. The value of your company is some multiple of those profits. The size of the multiple is the tricky part to figure out.

One factor that determines the size of the multiple is whether you are a private or publicly listed company. The economist Paul Samuelson calculated that, in a bull market, the multiple for a private company was 3 and a public company was 5. He used gross revenues as his measure of "earnings" instead of "profits".

Not all revenue streams are created equal. A profit in one industry might be worth more than the same amount of profit in another industry which would be reflected in higher Price/Earnings ratio in the former industry than the latter. Investors may see more potential for earnings growth in the former industry than the latter.

Yahoo Business publishes an Industry Summary that gives you a rough idea on the P/E for various industries. The "Catalog & Mail Order Houses" industry has an astounding P/E ratio of 955.60 (on Jan 11/2016) which, if you dig deeper, you see mostly reflects the value of Amazon in that industry segment.

The P/E value for different industry segments might tell you something about how to value your revenue stream. Shop around for what might be the best estimate of P/E for your industry. Again, using industry level P/E is only one way to guesstimate what your P/E might be.

My interest in P/E ratios was spurred by reading Marjorie Kelly's analysis of how public companies of the "extractive" type work (see my last blog on Generative Versus Exractive Ownership Design). In particular, I've been studying her systems diagram on some of the main factors influencing profit in a public company and the role that P/E plays.

In this diagram she illustrates how public company Profits can be increased by adjusting the factors in the bottom loop which can be magnified by the factors in upper loop. If Amazon increases it's profit by 1 million then this gets multiplied by a P/E of 955 which results in a 955 million increase in the valuation of the company. One can see that when Amazon declares a profit it has a bigger effect on company valuation than most companies in the world.

I think it is worth studying Marjorie's diagram for awhile to see if you agree or disagree with her analysis of how Profits in (extractive) public companies are determined - what she calls "the secret of the magic". I also think it is worth studying Marjorie's diagram because it will give you a richer understanding of the P/E ratio by relating it to other economic factors. A definition of the P/E ratio gives you one type of understanding, but seeing how it might work in a systems diagram gives you another type of understanding.

I do want to conclude, however, by pointing out that the P/E ratio is one tool you might use for the purposes of thinking about company valuation.

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Generative Versus Extractive Ownership Design [Design
Posted on January 7, 2016 @ 08:49:00 AM by Paul Meagher

Today I finished reading Marjorie Kelly's book Owning Our Future (2102) which I first blogged about last October. My first blog was more concerned with highlighting the idea that there was another type of design that we should be concerned with, ownership design, and that startups and businesses might do well to consider this aspect of design when setting up and managing their business. In this blog I want to summarize the main message from the book which is to contrast two types of ownership design - extractive and generative. Most of our economy is governed by an extractive ownership design but there are examples of successful generative ownership designs as well. Her book involves rooting out generative companies and telling their story and why they are examples of generative ownership design.

We can differentiate these 2 types of ownership design on the basis of 5 contrasting patterns that typify extractive versus generative designs.

In extractive ownership designs we have (p. 18):

  • Financial Purpose: maximizing profits in the short term
  • Absentee Membership: ownership disconnected from life of enterprise
  • Governance By Markets: control by capital markets on autopilot
  • Casino Finance: capital as master
  • Commodity Networks: trading focused solely on price and profits

By contrast, in generative ownership designs we have (p. 18):

  • Living Purpose: creating the conditions for life over the long term
  • Rooted Membership: ownership in human hands
  • Mission-Controlled Governance: control by those dedicated to social mission
  • Stakeholder Finance: capital as friend
  • Ethical Networks: collective support for ecological and social norms

It would be difficult for me to elaborate further upon these differences in this blog as the purpose of the book as a whole was to provide case studies that elaborated upon these differences. I recommend buying the book if you want to know more details.

One impressive generative company discussed in the book is the John Lewis Partnership which operates retail and grocery shops in the UK. Their financial performance is quite good (from Wikipedia):

Financial year Turnover Profit before tax Net profit Partner bonuses Profit retained
2013-2014 £10.2 billion £376.0 million
2012–2013 £9.54 billion £509.0 million £409.6 million £210.8 million (17%) £198.8 million
2011–2012 £8.73 billion £393.3 million £353.8 million £165.2 million (14%) £188.6 million
2010–2011 £8.2 billion £431 million £367.7 million £194.5 million (18%) £173.4 million
2009–2010 £7.4 billion £389 million £306.6 million £151.3 million (15%) £155.3 million
2008–2009 £7 billion £279.6 million £580 million £125.5 million (13%) £146.0 million
2007–2008 £6.8 billion £379.8 million £320.4 million £181.1 million (20%) £198.7 million
2006–2007 £6.4 billion £319.2 million £263.2 million £155 million (18%) £164 million
2005–2006 £5.7 billion £251.8 million £215.1 million £120.3 million (15%) £94.8 million
2004–2005 £5.3 billion £215.3 million £175.9 million £105.8 million (14%) £70.1 million
2003–2004 £5.0 billion £173.5 million £148.8 million £87.3 million (12%) £61.5 million
2002–2003 £4.7 billion £145.5 million £108.6 million £67.6 million (10%) £41.0 million
2001–2002 £4.4 billion £141.5 million £103.3 million £57.3 million (9%) £46.0 million
2000–2001 £4.1 billion £149.5 million £120.4 million £58.1 million (10%) £62.3 million
1999–2000 £3.7 billion £194.7 million £161.0 million £77.8 million (15%) £83.2 million

The employees are "partners" who have ownership in the company. The most significant manifestation of this is the yearly bonuses they receive which are based on 50% of the net profits of the company. On good years this can be up to 20% of their yearly wage (see the 2007-2008 financial year). The company has elaborate policies, structures and people in place to ensure that the idea of the company as a partnership is kept alive and well.

The company came to be owned by employees when the original owner, John Spedan Lewis, decided to sell his interest in his company to employees as he neared his retirement (this is a simplification of the process as it involved setting up a trust with a fair shares charter at the core of the future business). On his death he ceded his property over to the company as well.

Marjorie points out that our current demographic situation means that many baby boomer business owners are reaching retirement age and one choice they may opt for in order to maintain their legacy is to sell their business to their employees rather than to the highest bidder who might run it according to an extractive ownership design which often leaves no legacy or not the legacy the owners wanted to leave to the workers that helped him/her succeed. Marjorie's book is a useful resource for those interested in making the move towards a generative ownership design - what it means and examples of how it might be done.

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Ecological Design [Design
Posted on January 5, 2016 @ 08:23:00 AM by Paul Meagher

Anyone interested in ecological design might want to familiarize themselves with the writings of Sim Van der Ryn. He did alot of pioneering work in the late seventies and early eighties which resulted in two influential books: The Toilet Papers (1978) and The Integral Urban House (1982). It is worth studying the cover art, especially the second cover which is more detailed and which envisions an appropriate design for an urban house.

In the nineties Sim and Stuart Cowen published another influential book, Ecological Design (1996), that articulated 5 principles of ecological design.

  1. Solutions Grow from Place
  2. Ecological Accounting Informs Design
  3. Design with Nature
  4. Everyone is a Designer
  5. Make Nature Visible

The book devotes a chapter to each principle and in a future blog I may discuss each principle in more detail. I wouldn't do it as well as the authors as the writing quality is very high. This book is often suggested reading in architecture schools.

More recently, Sim has written a book called Design for an Empathic World (2014). The book includes a number of his own watercolor paintings which, I'm guessing, is one way Sim creates an empathetic relationship to the world.

The concept of "Empathy" is becoming more of a focal point in many people's work. The Culture Of Empathy website is a good resource for learning about the different ways the concept is used.

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Small Campers & Farms [Trends
Posted on January 4, 2016 @ 08:03:00 AM by Paul Meagher

Checking out Kirsten Dickson's YouTube Channel last night and found this interesting video of a guy who built a microcamper using as his main building material plastic from used election signs (aka Coroplast).

One trend we might see in 2016 is a move towards design for smaller and more organized versions of things that exist at a larger scale. Living spaces may become smaller as a result of increasing ownership/rental costs and design to accommodate this may launch successful companies. Students in dorms are an existing group that is often space constrained.

Will the small truck market pick up in 2016 or will consumers continue investing in big trucks?

In the context of traditional farming, a farm of one or two acres would often not be considered a "farm" but rather a "garden". It is increasingly possible, however, to apply a systematic approach to managing one or two acres and make as much or more than a farmer who manages 100 acres or more. Jean-Martin Fortier in his book, The Market Gardener (2014), offers up a concrete example on 1.5 acres that grosses 150k (with the added benefit of supplying healthy nutrition to workers and the community).

The book includes many interesting images. One I studied a bit because of its Permacultural excellence is this map of their farm.

Again we see the importance of good layout and organization when going "small".

Another motivation for going small in 2016 would be as an adaptation to climate change. If you have a smaller house, vehicle, or farm you don't need as many resources to build and maintain it. A smaller footprint.

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