An Information Age Enterprise Network

The Future 101 presents a story of twelve extraordinary events that, over the next thirty years or so, will  define an emergent global, Information Age civilization.  It is a bright, positive future standing in stark contrast to the dystopian and apocalyptic visions that we find all around us today.  While optimistic, it is not utopian;  problems will remain.  However, they will not present existential threats.  Our problems and our disputes will be real, but they will be manageable.  They will define neither us nor the contemporary milieu.

I offer you the opportunity for greater educational and professional involvement beginning with a subscription to The Future 101 where I discuss all aspects of The Transformation in much greater detail.  The cost is reasonable and the potential benefit for investors, Knowledge Class aspirants and polymathic intellectuals is significant.

As you read the abstracts on The Transformation, you will undoubtedly notice the opportunity for many new careers and enterprises.  As shown on the graph, these opportunities will place a layer of more entrepreneurial activities on a sharply declining supply of traditional jobs.  However, the Industrial Age image of an entrepreneur is that of a monomanic, visionary, highly self-promotional and intensely goal oriented. person.  This image doesn't fit most people.  If the employer-employee relationship will comprise a relatively small minority of the workforce in the Information Age, a new, more encompassing, paradigm for the entrepreneur needs to be developed.

That new paradigm can take many forms.  However, I am suggesting what I believe is the best, what I refer to as an Enterprise Network.  It can be defined as a bounded community that provides an enabling and opportunity rich productive environment for its members.  It can enjoy many of the economies of scale typical of large organizations while simultaneously keeping the flexibility and incentives of a smaller, more entrepreneurial enterprise.

First, let's get a visual picture of it.  The red rectangles are funding organizations that today might be called Venture Capital Funds.  The light blue are corporate overhead service providers, which may include accounting, human resource, IT, legal services, etc. on a consultative basis.  The green circles are the individual, independently owned and operated, enterprises.

The enterprises will tend to be much smaller than Industrial Age enterprises.  First, consistent with The Age of Boutique Everything and The Cultures of Affluence, they will be providing niche products and services.  Second, consistent with The Income Explosion and Technological Unemployment, they will have highly automated operations.

Each enterprise may also have contractual or equity relationships with other enterprises within the network that may be the result of a vendor or customer relationship..

Information Age companies have a theoretical  return on book value of 67%.  In fact, by using more aggressive financing and organizational models, many actually achieve results that exceed this.  So, let's look at a ten year result when an initial million dollar investment can productively retain and deploy its earnings.

Year	Beginning Book Value	Net Income at 67%
1	$1,000,000	$670,000
2	1,670,000	1,118,900
3	2,788,900	1,868,563
4	4,657,463	3,120,500
5	7,777,963	5,211,235
6	12,989,199	8,702,763
7	21,691,962	14,533,614
8	36,225,576	24,271,136
9	60,496,712	40,532,797
10	101,029,509	67,689,771
Ending BV	168,719,279

There are several methods for determining the market value of this enterprise after ten years.  We can imagine a P/E Ratio of around 15 (the four Information Age companies I use, at the time of this writing, averaged 15.8) which would place the value of the company, based upon its tenth year income, at about $1.0 billion.  This would imply a very conservative Price to Book Ratio of 6.  Both of these ratios, the second more than the first,  are lower than current industry standards for the reasons discussed in the article.

Now, on to the next step; let's assume that the passive investors in the Network will typically receive 20% of the equity for 100% of the investment.

Total Market Value	$1,015,346,565
Passive Investor Share	$203,069,313
Total Return	20,206.93%
Annual Rate of Return	70.04%

Let's look at it from the income stream viewpoint.  Suppose you, as a passive investor, put 10,000 2011USD into this business.  That will buy you 0.2% of the equity in earnings.  Therefore, after year ten, you can reap an annual income stream ≈ 170,000 2011USD (168,719,279 X 67% X 0.2%/132.94%CPI).  Clearly, that completely changes the investment dynamic and your expectations of and appetite for private investments.

However, before we go on to the entrepreneurs, we should consider that, as a passive investor, you are most likely investing in a managed fund and the fund manager will make the decision whether to invest in this particular enterprise.  For his superior analytical ability and business acumen, he will receive a portion of the portfolio value and income as compensation.  Typically, that cut is 2% of the fund value and 20% of the profit generated.  So, based upon a 67% return, the fund manager will earn about 23% of the total income or on each initial 10,000 USD investment, 170,000 X .23 = 39,075 leaving for the passive investor 130,925 USD.  That is still an extraordinary and very attractive outcome.

Looking at it from the Fund Manager's viewpoint the results are also exceptionally attractive.

Original Investment	1,000,000
Total Market Value	1,015,346,565
Fund Share	203,069,313
2% Management Fee	4,061,386
Total Profit Year 11	113,041,917
Fund Share of Profit Year 11	22,608,383
20% Thereof	4,521,677
Fund Manager Income	8,583,063

It is very likely that Private Equity Funds, enjoying very high returns and experiencing relatively stiff competition, will lower their fees.  In fact, pressure to do so has already been happening.  Because of the structure and prospects for private investments, it is likely that the annual management fees will increase to, perhaps, 3-5% and carried interest will decrease, perhaps to 10%.  Also, because the exit scenario, rather than being an IPO or buyout, will change to the generation of dividend streams, the specifics of fund management compensation will need to be modified.

Current Venture Capitalists will undoubtedly object to the notion of a 20% share for 100% of the investment funds in a start-up.  Few of them invest in start-ups at all and those who do will take much more than 20%. This, however, is about how things will be, not how things are.  These Venture Capitalists and 'Angels' will learn that a whole new breed of investor will be entering as competitors and they will be quite willing to accept the 70% annual returns calculated from a 20% equity share. That new breed of investor, by the way, will likely be you.

Look at it this way.  Suppose a relatively affluent person puts 10,000 USD in a different start-up every year for twenty years.  Suppose that 18 fail and only 2 succeed.  Then, some time, about twenty years from now, they will have acquired a 340K 2011USD annual dividend stream in perpetuity for a total 200K investment.  By comparison, 10,000 USD invested each year (increased for inflation) for twenty years, at the historical 11% annual return of the S&P 500, will return an income stream of 50,798 2011USD.

So, the rational decision for anyone who thinks that they can pick at least 10% winners is to divert investment funds from the public equity markets to the private equity market.  Furthermore, these new start-up investors will understand that Enterprise Networks, with their readily available investment sources, expert consultative services and the competitive advantage of economies of scale, are a success prone environment that will substantially reduce the failure rate of its member enterprises.  Success rates within Enterprise Networks will likely exceed 50%.

Now, let's look at our example from the point of view of, say, a six person management team sharing the equity equally.

Total Market Value	1,015,346,565
1/6 of Entrepreneur Share	$135,379,542
Annual Profit Year 11	113,041,917
1/6 of Entrepreneur Share	15,072,256
Approximate 2011USD	$11,215,174

The entrepreneurs will, of course, receive a salary with the equity in earnings being apportioned in a manner specific to the enterprise and its entrepreneurs.  In this scenario, for the first ten years, they will receive no dividends.  This is stylized and not realistic.  While the enterprise will likely grow at the maximum rate that can be internally financed for the first several years, at some point prior to year ten, the growth rate for most enterprises will slow down and an increasing share of the profits will be given out in dividends to the entrepreneurs and, parenthetically, to the fund..  This means that dividend income will start sooner and the ultimate value and earnings of the enterprise will be somewhat less. 

At this point, let's recap.  First, remember that the calculations here are based upon hypothetical results that are, however, consistent with actual Information Age companies and their share and financial performance.  Second, this clearly indicates that a wonderful new age of cooperation and long term commitment between entrepreneurs and the investment community is about to dawn.  Managing to next quarter's results will become a thing of the past.  Third, as we discuss in "The Rise of the Knowledge Class" the above begins to explain why prevailing incomes of over 1,000,000 2011USD in the Knowledge Class are realistic.  Fourth, you can see what at least a portion of the Knowledge Class will be doing to acquire such incomes.

Since Real GDP in the developed nations is going to increase at least ten-fold during the Transformation, 90% or more of the their 2040 GDP will need to be 'new business'. Additionally, what are currently considered to be 'developing nations', most notably Brazil, Russia, India and China (BRIC), will likely 'catch up'  Overall, Gross World Product will likely increase more than forty fold.

Consequently, while the markets in publicly traded securities will be bearish for the foreseeable future, the business outlook is strongly bullish and that will translate into a strongly bullish private equity market.  There is, essentially, a whole lot of business to get and the investors and entrepreneurs of the Enterprise Networks will be the ones who get it.

There are several reasons why the Information Age Enterprise Networks will replace the traditional hierarchical corporations.

First, they will out compete them because they will be more responsive to changes in the marketplace.  As the Income Explosion, The Cultures of Affluence and The Age of Boutique Everything rapidly change society, culture, economies and markets, the centrally planned and controlled, hierarchic corporations will not be able to respond quickly enough to take advantage of the new opportunities and to avoid the repercussions of the new threats.

Second, large, often multinational, corporations are creatures of the global public equity markets.  Their rates of returns, their structured equity sections, their management relationship with markets and market analysts define them.  As the investment dollars are driven to the private equity markets, with smaller scales and higher risk adjusted rates of return, they will not be able to provide the equity instruments and structures that the new investor wants.  In response, large corporations will likely decentralize and offer shares in subsidiaries and business units for sale in an effort to become competitive with Enterprise Networks.  Some will succeed.  However, they will no longer be what they were.  They will have essentially converted themselves into an Enterprise Network.

Third, Enterprise Networks are free to make superior long term decisions while publicly traded multinationals are driven by the need to 'deliver' on the next quarter's results.  Over time, this superior decision making environment will result in superior decisions.

On the other side of the coin, the best Knowledge Workers will prefer the relationship being offered by Enterprise Networks over what is offered in a traditional employer/employee relationship.  It is also far superior to the Contractor or Consultant relationship.  The astute reader has, perhaps, already caught that being an entrepreneur in an Enterprise Network does not require start-up capital.  It simply requires the ability to find a place in the structure.  Unlike the current entrepreneurial market, this will not require the participant to be a self-promoter or to possess a monomanic personality.  There are no dictates from on high.  The local management team, advised by expert Network consultants, is in charge.

Conclusion

The imminent transformation to a global, Information Age civilization, with its Income Explosion, Death of Capitalism, Age of Boutique Everything and Cultures of Affluence will destroy current markets and enterprise structures and replace them with new versions compatible with Information Age realities.  The Transformation will see the end of the multinational and hierarchical, Industrial Age corporation as the dominant business structure.  Volatile, publicly traded financial markets will lose significance as private equity funds, providing superior growth and high return dividend streams come to dominate the global economy.

Enterprise Networks will arise, replacing the large, hierarchical, publicly traded corporations of the Industrial Age.  The Networks will be bounded, enterprise communities rich in resources and opportunities.  They will be flexible, capable of responding quickly to changing technologies and market conditions, while capitalizing upon the economies of scale that come with strategic aggregation.

The significantly better incentives offered to participants will attract the very best Knowledge Workers.  Even in the very early stages of development, incomes characteristic of the Knowledge Class will be available to their members.

A new Knowledge Class will arise a portion of which will comprise the management teams and enablers of small, niche oriented providers of goods and services.  The design component of product price will come to dominate and creatives and designers will be the new, hot career.

Hopefully, the above discussion, has engendered in you a sense that an Enterprise Network is where you want to be.  For some, it is a practical alternative now.  For others, it may be necessary to work toward it over time. 

Capitalizing upon the superior knowledge of futurity, one will gain through subscription to The Future 101, those who choose to join InfoAge Enterprise Networks, will have the opportunity to create the first Enterprise Networks.  Let's face it.  The people who read and understand the articles here and then choose to move on to a more concrete action are people of extraordinary intelligence and vision.  They have demonstrated a risk taking, goal oriented outlook.  These are the people you want to know. Through our Enterprise Networks, you will learn about The Transformation and the opportunities it will present much more deeply.  You will have the opportunity to stay in contact with each other and consider, either as a collaborator or an investor, becoming involved in their enterprises. 

At this time, the first step is to subscribe to The Future 101.  From there we will be organizing the Enterprise Networks.