The Enterprise Network

An Enterprise Network is an opportunity rich and success prone productive environment that shares investment communities, technologies and customer base.  Over the next twenty years it will replace the more rigid and hierarchical corporation as the dominant enterprise structure of the Information Age.

As you contemplate the significance of The Transformation, you will undoubtedly realize that there is enormous opportunity for many new careers and enterprises.  As shown on the graph, these opportunities will place a layer of more entrepreneurial activities on top of the sharply declining supply of traditional jobs caused by the approaching wave of profound technological unemployment.

The news media will undoubtedly focus on the depressing and inexorable loss of traditional jobs, while more sophisticated media will emphasize the more moderate loss of participants in the economy.  If, however, one makes the shift to the entrepreneurial mindset the outlook is rosy to the point of exciting.

As GDP per capita explodes, people in traditional jobs will find their compensation determined by supply and demand.  Because of advancements in robotics and A.I., for decades it will be a hirer's market and employees will find that their compensation, in real terms, will remain flat and even decrease, in many cases dramatically.  Entrepreneurs' income, on the other hand, will explode right along with GDP per capita.

This very high characteristic income for Information Age careers is an important source of the increasing income and wealth disparities that are developing, especially in the U.S. where the Transformation is most advanced.

There is one serious problem, however.  The Industrial Age image of an entrepreneur is that of a monomanic, visionary, highly self-promotional and intensely goal oriented person.  
The Industrial Age entrepreneur was confronted with a series of obstacles to be overcome with high income coming with success, but also bankruptcy the result of failure.  Consequently, the rules of the entrepreneurial game have been constructed so that success does, indeed, require this personality type.  

However, most people don't fit the entrepreneurial personality type.  We see that, unavoidably, 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 is expressed within an Enterprise Network which, rather than presenting obstacles, is a success prone environment.  

First, let's get a visual picture of it.  The red rectangles are funding organizations that today might be called Venture Capital Funds. However, in the Enterprise Network, they will be informal communities of crowdfunders.  Some will have crowdfunding as their primary productive activitiy while most participants will be 'coming along for the ride' and engaged in a different primary productive activity themselves.

The light blue are corporate overhead service providers, which may include accounting, human resource, IT, legal services, etc. on a consultative basis.  In the Industrial Age corporation, corporate departments tell the operating units what to do.  In Enterprise Networks operating units procure counsel as needed, but are free to proceed as they choose.

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, or a strategic partnerships.  

A few of these enterprises will provide the essential access to markets often on a cash flow positive, percent of sales basis.  What that means is that the enterprise will have the option to pay for access as a percent of their revenue and from the proceeds of sales.  In Internet marketing this is referred to as affiliate sales.  Historically, retail malls have done something similar with a base rent and then a percent of sales after the fact.

This is a significant part of what makes the Enterprise Network a success prone productive environment.  It substantially lowers start up equity requirements, allows for higher internally funded growth rates and greatly simplifies and accelerates profitability. 

The Death of Capitalism
As we explore in The Death of Capitalism, Information Age companies have a theoretical  return on book value of 67%.  In fact, by using more aggressive financing and organizational models, many young enterprises actually achieve results that significantly exceed this.  One study found that young Information Age enterprises can, and do, grow at 200% and many of them will be able to .

From this we can project the following for a startup with $500,000 initial funding:

Year                          Book Value
0                               $       500,000
1                                $   1,500,000
2                               $   4,500,000
3                               $ 13,500,000
There are many ways to estimate market value of an enterprise.  For Information Age enterprises, a 12:1 market to book value is conservative.  Which means that at the end of year three a conservative estimate of market value would be $13,500,000x12=$162,000,000.  If equity crowdfunders are given 20% equity, their year three market value will be $162,000,000x20%=$32,400,000 for an annual return of 300%.  A team of five will have an average net worth at the end of year three of $162,400,000x80%/5=$25,900,000.

In year 3, income will be $13,500,000x67%=$9,045,000 of which equity crowdfunders will earn $1,809,000 and the five team members will average $1,447,200.  Of course, active team members will also receive a salary as well.

While Industrial Age enterprises generally returned 5% to 10% of revenue (turnover in Europe), Information Age enterprises typically return 20% to 30%.  Consequently, total revenue in year three is estimated at $9,045,000/.25=$36,180,000.  While this provides substantial returns to a limited stockholder base and $1.5+ million per year income to the owner/operators, it is still a microcap enterprise with small caps usually defined as between 300 million and 2 billion USD.

In the Industrial Age, because returns on equity were relatively small, the objective of early round funding was to capitalize upon the market to book value premium (usually 2:1 to 3:1) that is created by a profitable enterprise.  Consequently, the 'exit strategy' was key to venture capital.  There are two reasons why this will change in the Information Age.

  1. An investment that has grown 64X in three years, upon exit, requires re-investment in 64 new enterprises.  This quickly becomes impractical.  This forces the venture capitalist to chase ever larger deals and larger positions within each deal.
  2. In the above example, if the position is not liquidated, annual income is 3.6X initial investment.  Each success, therefore creates the need to find three new investment opportunities per year every year.  Even this quickly becomes impractical and the portfolio, in addition to rapid growth also becomes cash flow positive.  Liquidation of positions would be counter-productive.
This means that equity crowdfunders will return to a portfolio management investment strategy where mature investments will produce positive cash flow which will be used to fund newer enterprises.

Scope of Opportunity  
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, 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 privatestors 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, hierarchical 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 incentives 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.

1 comment:

  1. Very informative and interesting post.It is really a big help. Thank you so much for sharing it with us. I would like to read more about Enterprise network switch in your further posts.