V2-4.03| THE MONEY SIDE| Sep 05|

V2-4.03| THE MONEY SIDE| Sep 05|

01| Everybody on the money side is buying something. The word buying is chosen against the alternatives — funding, supporting, backing, giving — because those words describe a relationship in which the person handing over the money has no standing to complain about what happens next. A buyer has standing. A buyer can say the work was not good enough, can refuse the next purchase, and can compare one barrio against another.

THE IMPACT BUYERSWho pays for the work in the barrio?

02| Impact Buyers are the base of the market. Impact Buyers are corporate responsibility departments, philanthropic foundations, family foundations, government development agencies and wealthy individuals. What an Impact Buyer purchases is a project — a specific piece of work, in a specific barrio, with a stated result. The money is committed in advance and released against work that meets the standard. A Maveriq therefore knows a project is paid for before the first day of work, and a project nobody wants to buy does not get built.

03| Impact Buyers grant the money. Impact Buyers do not expect the money back and do not earn a return on the money. What an Impact Buyer receives is the result of the project. And the Impact Buyer does one more thing that the money alone does not do: the Impact Buyer decides whether the project succeeded. We say that the purpose of IkoCiti is to produce Peoples' Impact, but the accurate word is Validated Peoples' Impact. Validation comes from the Buyer. The Buyer's judgement is what turns finished work into a proven result, and validation is what earns the Kikundi Teams their track-record points — the score that follows a team from one project to the next.

04| Two spin-offs come with the purchase, and both are crucial. The residents who built the thing now know how to build the thing, so the skill stays with the Maveriqs and their Kikundi Teams and turns up in the next project, which the Buyer did not pay for. And the PI Exchange — the marketplace where projects are bought and sold — creates a local labour market in the barrio, where a Maveriq can earn extra money on work that other Maveriqs need done.

THE DELEGATED BUYERSWho chooses the projects when the buyer is too large to choose?

05| A large buyer often does not have the time to read many project proposals from many different barrios. Many wealthy people have the same problem with the stock market: no time, and not enough knowledge. So wealthy people hire a professional and give the professional a contract that says what may be bought on their behalf. A Delegated Buyer works the same way. A Delegated Buyer is an impact portfolio manager who selects and monitors projects in the Legal Buyer's name, under a contractual mandate.

06| Delegated Buyers matter more than the mechanical convenience suggests. A Delegated Buyer builds a portfolio across barrios rather than picking one attractive project, learns which kinds of work deliver, and carries that judgement from one buyer to the next. A Delegated Buyer also raises the standard on the platform, because a professional selector rejects weak proposals that a sympathetic donor would have approved. The arrangement puts a critical decision-maker between the money and the work, and pushes the Maveriqs to keep improving the work.

07| The most valuable part of the arrangement happens before anything reaches the Exchange. A Delegated Buyer talks to the Maveriqs while a project is still being shaped, and says what the buyers at that level will and will not pay for. A project set on the wrong foot is caught in conversation instead of being rejected later as a finished proposal.

THE PI DEAL SPONSORSWho pays for the model rather than for a project?

08| PI Deal Sponsors are a different animal. A PI Deal Sponsor is a foundation with a large endowment, and the purpose of a PI Deal Sponsor is not to select projects. A PI Deal Sponsor funds a PI Deal, and a PI Deal supplies the initial Buying Power of a barrio — the money that stands ready to buy projects there before any ordinary buyer has shown up. A PI Deal is a multi-party contract between the global platform, the local CITI and the Sponsors. One Sponsor can carry a Deal alone, but the likelier shape is a lead Sponsor with smaller co-sponsors beside it.

09| Two features of a PI Deal matter above the rest: the duration of the commitment, and the annual Buying Power. Take a Deal of ten million dollars over ten years. The annual Buying Power can be flat, at one million every year. The annual Buying Power can also be shaped — one million in year one, two million in year two, one and a half million in year three — to match what the barrio can absorb while the barrio is still learning to produce.

10| A PI Deal is a kickstarter. The primary objective is to start the local PI market, with the expectation that once the CITI runs routinely, new buyers arrive and add Buying Power of their own, preferably with longer durations. The Sponsor is not meant to stay the only buyer in the barrio, and a barrio that still depends on the founding Deal in year ten has not worked.

11| A PI Deal Sponsor is therefore a strategic partner rather than a customer. A PI Deal Sponsor is involved from the pre-selection of the barrios through to the signing of the Deal, and no professional organisation commits money at that level without a real say in how the process is built. An Impact Buyer works within the design of the platform. A PI Deal Sponsor co-creates an important part of the design. The say has a boundary, and the boundary is firm: a PI Deal Sponsor shapes the specific CITI the Sponsor finances, never IkoCiti itself and never the rules that bind every other barrio.

THE IMPACT INVESTORSWho puts money in expecting to get money back?

12| An Impact Investor is not a philanthropist. An Impact Investor puts capital to work and expects a return for the risk the capital carries. The instrument we have developed for Impact Investors is the PI Success Bond, built on the social impact bond — an arrangement in which investors pay for the work up front and are repaid, with a return, only when agreed results are actually delivered and verified. Weak results mean a weak return. No results mean no return. The Impact Investor carries the risk that the Kikundi Teams do not perform.

13| A PI Success Bond does not commission projects of its own. A PI Success Bond co-funds projects that Buyers have already chosen, up to the issuance amount of the bond, which translates into a specific number of projects. The bond succeeds if an agreed percentage of those projects is validated — validated, not merely finished — and the bond fails if validation falls below a lower agreed percentage.

14| The advantage of the design is that the design needs no central verification apparatus. The unit of verification is the Buyer's validation, and nothing else. A Buyer does not know whether a particular project sits inside a bond, and the parties behind the bond have no sway over what a Buyer decides. Accept the Buyer's validation as the measure, and everything downstream becomes simple. We take a deeper look at the PI Success Bond in a later volume.

THE PI OUTCOME PAYERSWho pays the investors when the bond succeeds?

15| The projects cannot pay the investors, because most projects in a barrio earn no income. A school yard rebuilt by a Kikundi Team produces a better school yard, not a revenue stream. So somebody else has to stand behind the money that flows back to an Impact Investor, and that party is the PI Outcome Payer.

16| A PI Outcome Payer commits, before the bond is issued, to pay the investors their capital plus the agreed return once the bond reaches its validation threshold. Readers who know the social impact bond world will recognise the shape and should note the difference. In the classic structure a guarantor covers part of the investors' losses when results fail. IkoCiti works the other way round. The Impact Investor carries the failure risk alone, and the PI Outcome Payer pays when the work succeeds.

17| What a PI Outcome Payer buys is worth naming. A PI Outcome Payer buys validated results at a known price, and buys the proof that private capital can be repaid out of results produced by barrio residents. Philanthropic money at that level has been looking for such proof for a long time. The terms and percentages still have to be worked out, and we will state the terms once the terms are settled.

THE SOCIAL SPECULATORSWho judges a project before the project is finished?

18| Social Speculators are registered members of the platform — the Ikosi — who buy and sell micro positions on projects that are still in development. The mechanism is a prediction market: people put a small amount of money behind an opinion about whether a project will deliver what the project promises, and the prices those trades produce form a running estimate of quality. A market of many small opinions reaches an honest estimate faster than a committee of a few large ones.

19| The purpose is early warning, not entertainment. A project that is drifting shows up in the prices before the project shows up in a report, which gives the platform time to intervene while intervention is still cheap. A falling price is also an alert to the Kikundi Team that is developing the project: something substantial in the way the team is working needs to change.

20| Trading on the PI Dev Market is part of the job of an Ikosi, not an optional amusement. An Ikosi is expected to look at the projects in development and form an opinion, and an Ikosi who does not trade loses track-record points. A track record is the entrance to many good things on the platform, so the penalty bites.

21| The reward on the other side is large. A micro-share in a project in development converts into a percentage of the project once the project gets funded, and the return on a small early position can run past a hundredfold. The exact numbers still have to be worked out. What the Buyers receive for the cost is a supervisory system that sorts the promising work from the bad apples before any Buyer has to sign, and a filter of that quality is worth paying for.

THE CHARISMATIC BILLIONAIREWho pays for any of this to exist in the first place?

22| IkoCiti at concept stage cannot recruit the team the platform needs, and investors back teams rather than documents. That leaves one route: persuade a single person with money, a network and an appetite for long horizons to take the concept seriously enough to build it. Somebody who has built a platform business already understands marketplaces and network effects, which is most of what needs understanding here, and does not need convincing that a system built from the bottom can beat a system managed from the top.

23| The Charismatic Billionaire belongs on the money side and not in a chapter about company finance, because most of the money goes into the PI Exchange. The Exchange is the marketplace where Buyers and Maveriqs meet, and without the Exchange there is nothing for any of the other money on the money side to do.

24| The price of the route is stated plainly. Whoever puts up the capital becomes the true founder, takes a seat on the board, and shapes what gets built. The original founder becomes one voice among several. IkoCiti considers the trade acceptable and will not pretend the trade is costless, because any reader who has raised money knows exactly what the trade costs.

THE END