Haute Lumière

Commerce · I · MMXXVI · daylight

La Bourse  /  Volume I  /  Nº I.E1

For the Practitioner of Luminous Economics

Volume I — Transition: From Here to the Living Economy · Extension I of III Nine movements, one practice.

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THE PLATE

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THE LETTER

The eleven chapters you have just read were written for somebody with a quarter, a signature limit and a finance function to persuade. You may have none of those. You may be running three hundred hectares, or a six-person cooperative, or an advisory practice that is you and a laptop, or a bakery, or a fund with one investor who is your mother-in-law. And every one of those chapters, read from where you are sitting, has a paragraph in it that quietly assumes a controller down the corridor.

This chapter is the volume re-cut for a person who has no corridor.

Nothing in it is a simplification. The instruments are the same instruments — the regeneration facility (I.01) · the counterfactual appendix (I.02) · the prepaid offtake (I.03) · the standing-stock schedule (I.04) · the pilot fund (I.05) · the blended stack (I.06) · the cost-sharing charter (I.07) · the dormancy covenant (I.08) · the memorandum (I.09) · the shared-services organ (I.10) · the stapled succession deed (I.11). What changes is three things: the order they are used in, the threshold below which each one stops paying for its own paper, and the budget, which we will hold under £10,000 and account for to the pound.

Two of those instruments do not work at your scale at any price. That is said here, near the front, with the arithmetic attached, because a practitioner's edition that pretends otherwise is worse than no edition. The other nine work, and four of them work better for you than for the firm they were written against, for a reason that is arithmetic rather than encouragement, and which this chapter's Arithmetic movement computes exactly.

You are not a smaller version of the organisation in Chapter I.01. You are a different instrument, with a different constraint binding, and the constraint that binds you is not money.

— The Editors

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DISCOVERY

What is already working, at exactly your size

Begin where the record is strongest, and notice what these five have in common: every one of them was built by people who had no institutional backing at the moment they built it, and every one of them is still running.

The Japanese teikei households, from the nineteen-seventies. Groups of families contracted directly with a farmer: money in the spring, food across the season, the weather carried by both sides. Chapter I.03 treated this as the ancestor of the prepaid offtake, and it is — but look at who executed it. No credit committee sat. No bank was in the room. The most capital-constrained enterprise in any economy raised working capital at the exact moment it had none, against security that was a box of vegetables, from counterparties who each committed a household's grocery budget. The instrument scaled downward before it scaled up.

Iroquois Valley Farmland REIT's Soil Restoration Notes. Promissory notes at a coupon between zero and 2.50 percent, in three, five and seven-year terms, sold under Regulation A to ordinary people. More than $115 million has moved into organic farmland this way — about 32,000 acres across 70 farms in 20 states — and half a percent of every raise is set aside to reimburse tenant farmers for amendments, agronomy and seed during the transition years. The farmers on the receiving end of that pool are practitioners. The instrument was designed around their cash-flow shape, not a lender's.

Buurtzorg's nurses. A handful of them in 2006, self-organising, capped at about twelve to a team, splitting when they exceed it. Chapter I.07 used the cap as evidence about group size. Read it instead as evidence about founding conditions: the unit that replicated across the Netherlands was a team small enough to sit in one room, with no management layer above it and no capital behind it beyond a caseload.

The community land trust's ground lease. Chapter I.10's sharpest finding was that what replicated across some two hundred American trusts was not a housing development but a clause — a ground lease with a resale formula in it, about forty pages, free to copy. A practitioner cannot build a housing programme. A practitioner can adopt a clause in an afternoon, and the clause carries the entire mechanism.

Grameen's five. Not the bank: the group. Five people who chose each other, are not close relatives, meet weekly, and in front of whom a repayment either happens or visibly does not. Chapter I.07 counted the arithmetic of it. The practitioner's reading is simpler and more useful: the smallest working unit of creditworthiness in the modern economy has five members and no premises.

One pattern, and it is the one this chapter is built on. In every case the thing that travelled was a document or a rule small enough for one person to hold — a season's contract, a note with three tenors, a team cap, a lease clause, a weekly meeting. Not a balance sheet. Not a programme. The corporation in Chapter I.01 has to convert its intentions into documents because its people change. You have to do exactly the same thing, for exactly the same reason, and you can do it this month.

So the discovery question for your own practice is not what should I build. It is: which of the eleven documents do I not yet have a copy of?

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THE ARITHMETIC

The order, the thresholds, and where two instruments fail outright

First, the cut, and it is the whole reason this chapter exists.

Chapter I.09 measured the cost of an institutional yes and found it dominated by cycle time rather than price. One delegated signature costs a mean of 18.0 days. Three committee layers cost 179.0 days. Those figures were computed to tell a practitioner how to approach an institution. Turn them round and point them at your own practice, where every signature in the ladder is yours:

  route                          days to a decision   decisions in 90 days
  ----------------------------------------------------------------------
  one signature — yours                     18.0                    5.00
  one committee layer                       59.7                    1.51
  three committee layers                   179.0                    0.50
  ----------------------------------------------------------------------
  your advantage over the three-layer firm            9.94x

You are outgunned on capital by something like a hundred to one and ahead on decision cycles by 9.94 to one. The corporation reaches its first decision on day 179. You reach your tenth. And Chapter I.05's portfolio arithmetic says that fewer than one attempt in five needs to work — a break-even success rate of 19.5 percent — which means the practitioner's ten attempts and the corporation's one are not remotely the same bet.

This reverses the instinct every practitioner arrives with. You have been trying to find money. The arithmetic says spend the advantage you actually hold, which is attempts, and structure the practice so that an attempt costs almost nothing to make and leaves a reusable document behind whether it works or not.

Second: the thresholds. Below these figures, each instrument costs more than it returns.

The prepaid offtake (I.03). The surplus accrues at half the spread between your cost of capital and your customer's return on idle cash. A practitioner's spread is wider than a corporate one, because your borrowing is dearer:

  your cost of capital                              12.0 %
  your customer's return on cash                     4.0 %
  spread                                             8.0 %
  half the spread — the rate the surplus accrues at  4.0 %

  first contract, three hours of review at £280       £840
  floor = 840 / 0.04                              £21,000
  reuse, one hour of your own time at £60              £60
  floor on reuse = 60 / 0.04                       £1,500
  ------------------------------------------------------------
  the template is worth a factor of                  14.0x

Chapter I.03 gave the corporate figures — a floor of £360,000 falling to £60,000 on reuse, a factor of six. Yours is 14.0, and it is larger precisely because your marginal documentation cost is one of your own hours rather than a firm's invoice. The template is not administration. At your scale it is the single highest-return object in this chapter.

The standing-stock schedule at fair value (I.04). Fair-valuing a living stock requires an annual valuation, and Chapter I.04 set the test at S > k·C/g with k = 5:

  cost of a defensible annual measurement       £1,200 / yr
  regeneration rate                                  3.0 %
  threshold  =  5 x 1,200 / 0.03                  £200,000

Below £200,000 of standing stock — which is most practitioners most of the time — do not commission a valuation. Count in physical units: tonnes, hectares, head, organic-carbon percentage, clients at the twenty-four-month mark. Keep money out of the schedule entirely. This costs you nothing and is the version a lender prefers anyway, because Chapter I.04's covenant rule is a closing-quantity floor in physical units and never in money.

The pilot (I.05). Here is where being one site bites, and the arithmetic is not kind. Chapter I.05's two-arm calculation needs n = 15.70 · (σ/δ)² per arm. At a monthly variation of 12 percent and a 6 percent improvement to detect, σ/δ = 2.0, that is 63 per arm, and the clustering design effect at thirty people to a site takes it to 154. You have one.

What you have instead is history, and Chapter I.05's own finding was that the cheapest statistical power on sale is the past. Load thirty-six months, allow honestly for the fact that one month is correlated with the next, and:

  one period before, one after                        detect at 3.96 sd
  twelve months before, three after                   detect at 1.81 sd
  the same twelve months at AR(1) rho = 0.50
    variance inflation                                      2.6667
    worth this many independent periods                     4.50
    honest detection threshold                        detect at 2.09 sd
  ------------------------------------------------------------------
  power gained by loading history  (3.96 / 2.09)^2          3.60x

Three and a half times the statistical power, for the price of an afternoon with a spreadsheet. That is the practitioner's whole measurement strategy, and it is available to anyone who has been keeping any record at all.

The first-loss reserve (I.06). Chapter I.06's central figure — a philanthropic pound placed as first loss does about fifty-seven times the work of the same pound given away, at an expected cost of 1.74 cents per dollar mobilised — holds at your scale too, but the legal cost does not shrink with the book:

  reserve posted behind the book                     £5,000
  book mobilised                                    £50,000
  sector net charge-off, per year                     0.58 %
  average life                                     3 years
  expected cumulative loss                             £870
  returned to the provider                           £4,130
  expected cost per £1 mobilised                     1.74 p
  ------------------------------------------------------------
  with £2,500 of documentation                       6.74 p
  a grant, per £1                                  100.00 p
  the reserve still does                             14.8x

And the threshold: hold the paperwork to no more than three times the expected loss, and the book must clear £47,893 before a first-loss reserve is worth writing at all. Below that, the honest instrument is a personal guarantee or a deposit, and you should say so rather than dress it up.

The institutional sale (I.09). Chapter I.09's delegation ratio is the most immediately useful number in the volume for a practitioner selling to a university, a hospital, a council or a housing association. Target 0.60 of the signatory's own authority:

  micro-purchase ceiling                            $10,000
  target at 0.60                                     $6,000
  self-certified ceiling                            $50,000
  target at 0.60                                    $30,000

Your first institutional contract is a $6,000 contract, not a $60,000 one. The 40 percent you leave on the table is the contingency that stops a single change order re-opening an approval you have already won.

Your own growth ceiling (I.11). Higgins's g* = ROE × b is not a corporate concept. It is your drawings:

  return on equity in the practice                    25.0 %
  retention — the share of profit you do not draw      40.0 %
  ceiling                                             10.0 %

Third, the honest negatives, and there are three.

The two-arm trial is unavailable to you at any budget. Not expensive — unavailable. Sixty-three sites per arm, one hundred and fifty-four with clustering, against your one. No amount of money buys it, and a practitioner who presents a single-site before-and-after as a trial will be correctly disbelieved by the first statistician who reads it. The exits are real and all three are better than pretending: label it a feasibility study as Chapter I.05 instructs; borrow a comparison by joining a circle of three practices and pooling the series, which the Operationalize movement builds; or measure something with less noise in it, where a long interrupted time series carries the claim alone.

The blended stack of Chapter I.06 is not yours yet. Below a book of £47,893 the paper costs more than three times what the reserve is expected to absorb, and four layers of waterfall on a £20,000 facility is a costume. Chapter I.06's own sequence is the answer — the stack is assembled from the back, and the back is a first-loss provider who wants a completed transaction to look at. Do I.03 first, twice, and come back.

And your lock is your own drawings. If your practice must grow at 14 percent a year to hold its position and earns 25 percent on equity, then b ≥ 0.56 — you may draw no more than 44.0 percent of profit, every year, with no equity to issue and nobody to ask. That is John Lewis's eighteen years of profit for a five-year plan, arriving at a kitchen table. Compute it before you commit to the growth, not afterwards.

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DREAM

What becomes ordinary

Describe it in the present tense, because a dream in the future tense is a wish.

There is a binder, or a folder on a disk, and it has eleven tabs. Each tab holds one document: an offtake term sheet, a memorandum of understanding, a cost-sharing charter, a baseline definition, a stock-trend test, a dormancy paragraph, a ground-lease-style clause, a verification note, a succession recital. None of them is longer than two pages. Every one has been used at least once, and the tab carries a single sheet behind it saying what you would change.

When a customer asks a question that starts would you consider — you reach for a tab. The conversation that used to take three meetings takes twenty minutes, because you arrive with a window rather than a proposal: here is your return, here is mine, here is the range inside which we both beat our alternatives, and I have brought the workings. The other side checks your arithmetic and finds that it holds, and what arrives in the room is not agreement. It is relief.

Baselines are taken before anything changes, as a matter of habit, on things that are not yet projects. The habit costs nothing and it means that when a project does arrive there is already a series behind it, and the series is worth 3.60 times the power of the version you would otherwise have had.

You are one of three practices who verify each other. Nobody signs off their own result. When yours is read, it is read by somebody who wants it to be wrong, which is the only kind of reading that is worth anything, and you do the same for them twice a year. The three of you own one template library between you and each of you contributed a third of it.

And the practice has a second owner. Not an employee — a person who chairs alternate conversations, whose name is on half the documents, and whom clients have started to address directly. You miss a week. Nothing happens. The relief of that is physical, and it arrived because somebody wrote four lines down.

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DESIGN

The order, and the money, to the pound

The order the instruments are actually used in. Not the order of the chapters — the order of dependency. Each step produces the input the next one needs.

Steps one to four are the first ninety days. Steps five to eight are the second ninety. Steps nine to eleven run alongside everything and are never finished.

And the money. Here is the whole programme, costed, under £10,000.

Two things about that table are worth saying out loud.

The apparatus costs less than the reserve. Every document in this volume, reviewed by a solicitor, with a baseline instrumented and a year of independent verification behind it, comes to £4,996 — and the other half of the budget is not spent at all. It is posted, it mobilises £50,000, and 83 percent of it is expected to come home.

Nothing in that table is a licence, a platform or a subscription. It is three hours of somebody else's professional time, twenty-four of yours, some instrumentation, a train fare and a reserve. That is the entire capital requirement of a regenerative practice built to this volume's standard, and it is available on Monday.

Governance, in the four lines Chapter I.07 specifies, because a practice of one still needs them the moment there are three: who is in this circle and how somebody joins; how we decide and what happens on a tie; who looks at the shared thing and how often; what happens the first time somebody does not do what they said. Write them. Have all three say yes out loud in the same conversation.

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DESTINY

How it holds when you are ill, or bored, or busy

A practice has one failure mode that a firm does not: you are the whole of it, and you will at some point not be available. Three things hold, and they are the same three the corporation uses, cut down.

The library outlives the deal. A completed transaction is worth its surplus once. The template that made it writable is worth the surplus every subsequent time, at a marginal cost of one hour, and Chapter I.03's factor of six becomes your factor of 14.0. Store it where somebody else can find it, name the file after what it does rather than after the client, and keep the one page saying what you would change.

The series does not stop. Chapter I.08's arithmetic is blunter for you than for a firm, because your programme has no institutional momentum at all. The warm-start fraction after a year of not pushing is 0.823, and after three years 0.567 — but keeping the measurement running and the verifier retained lifts those to 0.908 and 0.754. The cheapest single intervention in this volume is not switching off a report, and at your scale the report is a spreadsheet that takes eleven minutes a quarter.

Three, not one. Chapter I.07 showed that in a circle of twelve, one committed person is a founder and stalls, two is a pair of enthusiasts and still stalls, and three of twelve — 25.0 percent, which is also Centola's measured tipping point — cascades. A practice with three principals who verify each other is past that threshold on day one. A practice with one is not, ever.

Now the honest part. This fails when the templates are never reused, because a library of one is a document. It fails when the second and third practices are people who already agree with you — Chapter I.07's arithmetic says they carry no information and no weight, and that the person you need is the one others check with. It fails when the verification is reciprocal in name and never in practice, which is visible in about a year and invisible before then. And it fails, most often, when the practitioner treats the £4,996 of apparatus as overhead to be cut in a thin quarter — at which point the next deal costs £840 again instead of £60, and the factor of 14.0 is paid back in full to nobody.

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DELIGHT

What it feels like

There is a specific pleasure in reaching for a tab.

Somebody asks you a question you have been asked before, and instead of the slow sinking feeling of having to think it through again from the beginning, you open a binder, find two pages you wrote in February, and read them out. They are better than what you would say now, because you wrote them slowly and you were not under pressure and you had the arithmetic in front of you. You are receiving help from yourself, which is the least expected and most reliable form of it.

And then the second one, which arrives later and is quieter. One of the other two practices uses your clause in a deal you had nothing to do with, with a counterparty you have never met, and mentions it in passing as though it were simply how this is done. It has stopped being yours. It took twenty-four hours of writing and one hour of review and it is now a small piece of infrastructure in an economy, and nobody had to give you permission for any of it.

The work itself is good work. Reading a term sheet closely is one of the few forms of attention where every hour returns something. You will find you enjoy the drafting more than the pitching, and that is the correct instinct: the pitch moves one person, and the clause moves money for twenty years.

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OPERATIONALIZE THIS

At the level of finance

The instrument: a reciprocal verification pact holding a jointly owned template library.

Three independent practices. Each contributes one template. Each verifies the others' baselines and results twice a year. All three hold the library. It is a page and a half, it needs three signatures and no capital, and it solves the three problems a practitioner cannot solve alone — the missing control group, the missing verifier, and the missing second owner.

The terms.

The balance-sheet treatment. The templates are an internally generated intangible and they will fail the recognition test in year one — identifiable and controlled, yes; reliably measurable, not yet. Do not capitalise them. Expense the drafting and the review as incurred, and keep the return where it is visible instead: a line in your own records showing documentation cost per deal falling from £840 to £60. That line is the asset. Where the pact produces something separable — a dataset, a piece of software, a published method — the usual tests apply and it is a different conversation.

The counterparty. Two other practitioners, chosen against Chapter I.07's rule rather than by enthusiasm: people who are checked with by others, whose threshold is one or two rather than zero, who already know each other or can be introduced on a real task. If your two candidates do not know each other, your first job is not recruitment. It is introduction, and it is worth a month.

The number that decides it. One line, and it goes on the front of the pact:

      deals per year  x  spread  x  average principal / 2
   ------------------------------------------------------  >  your cost of capital
              template cost  +  verification cost

Worked, on the figures above — four deals a year, an 8.0 percent spread, an average principal of £25,000 so that average capital outstanding is £12,500 a deal:

  surplus per deal          12,500 x 0.08                 =   £1,000
  surplus per year          4 x 1,000                     =   £4,000
  cost                      840 template + 450 verify     =   £1,290
  return                    4,000 / 1,290                 =   310.1 %
  against your cost of capital                                 12.0 %
  ------------------------------------------------------------------
  clears by                                              298.1 points

Three hundred and ten percent is not a misprint and it is not impressive. It is what happens when a fixed documentation cost is divided across a repeated transaction, and it is the reason Chapter I.03 insisted that the second instrument is where the economics live. Put that line on the front page, because it is the sentence that gets the other two practices to sign.

The first ninety days on a page.

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APPRECIATIVE QUESTIONS

Twelve, for a room

Discovery — what is already working

1. What do you already do in this practice that a customer has thanked you for twice, and have you ever costed it?
2. Which of your customers has bought steadily the longest — and what have you never asked them for?
3. Think of a document you wrote once and have used three times. What made that one worth writing when others were not?

Dream — what becomes possible

1. If every recurring conversation in this practice had a two-page document behind it, what would you do with the hours that returns?
2. Imagine three practices who verify each other's numbers. What would you finally be able to claim that you cannot claim alone?
3. If your cost of documenting a deal fell from £840 to £60, what deal would you do next year that you would not do now?

Design — what we build

1. What is the one stock in this practice you could count credibly this month, with data you already have?
2. Who are the two practitioners others check with, whom you have never actually asked for anything?
3. What is the smallest institutional contract you could sign this quarter under somebody's existing delegated authority, without asking for an exception?

Destiny — how it holds

1. If you were unavailable for three months, what in this practice would keep running — and what did you do that made that true?
2. Which template would you most regret not having written, and what is stopping you writing it this week?
3. What would be the first sign that the reciprocal verification had become a courtesy rather than a check, and which of the three of you would say so?

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WORKS CITED

Centola, D., Becker, J., Brackbill, D. and Baronchelli, A. (2018). "Experimental evidence for tipping points in social convention." Science, 360(6393), 1116–1119.

Cooperrider, D. L., Whitney, D. and Stavros, J. M. (2008). Appreciative Inquiry Handbook, 2nd edn. Crown Custom Publishing.

Davis, J. E. (ed.) (2010). The Community Land Trust Reader. Lincoln Institute of Land Policy.

Efficiency Valuation Organization. International Performance Measurement and Verification Protocol (IPMVP), Core Concepts. Successive editions.

Groh, T. and McFadden, S. (1997). Farms of Tomorrow Revisited: Community Supported Farms, Farm Supported Communities. Biodynamic Farming and Gardening Association.

Higgins, R. C. (1977). "How Much Growth Can a Firm Afford?" Financial Management, 6(3), 7–16.

Iroquois Valley Farmland REIT, PBC. Private Placement Memorandum, Soil Restoration Notes, and Regulation A annual reports (Forms 1-K and 1-SA), filed with the U.S. Securities and Exchange Commission.

Nandram, S. S. (2015). Organizational Innovation by Integrating Simplification: Learning from Buurtzorg Nederland. Springer.

Opportunity Finance Network. CDFI industry portfolio performance: net charge-off rate. OFN member loan fund data.

Ostrom, E. (1990). Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge University Press.

Rogers, E. M. (2003). Diffusion of Innovations, 5th edn. Free Press.

Uniform Guidance, 2 C.F.R. Part 200, §§200.1 and 200.320 (micro-purchase and simplified acquisition thresholds).

Yunus, M. (1999). Banker to the Poor: Micro-Lending and the Battle Against World Poverty. PublicAffairs.

Note on figures. Every figure in this chapter is computed in lib/verify/I_E1.py and prints with its units and its source. Figures carried from chapters I.01 to I.11 are recomputed here rather than quoted, so that a reader checking this chapter need not open another module. The practitioner's cost of capital, the customer's return on cash, the hourly rates, the measurement cost and the regeneration rate are stated assumptions, printed as such, and every threshold in the chapter moves when they are replaced. The 0.58 percent net charge-off rate is the community development finance sector's own and applying it to a book of different composition is the first place this arithmetic would go wrong.