Debt, Pensions and Capitalisation: Funding schol comms innovation
One of the things that has been bothering me for some time is the question of finding the right governance and finance models for supporting both a core set of scholarly communications infrastructures and shared innovation spaces. I wrote about those issues in the wake of the Elsevier purchase of Mendeley and really my view hasn’t changed very much since then. While I realise this post will just reinforce the views of some that I am too interested in financial instrumentalism, in this post I wanted to think about how we bridge the funding gap from promising pilot to community infrastructure.
Some of the most exciting services and systems being developed in the scholarly communications space are venture or commercially funded for-profits. This model allows large scale experimentation, and rapid scale up when things appear to be working. But the end game for investors is to sell and there are only three or four likely purchasers in our space – and the community as a whole does not trust these players because our interests do not align. There’s nothing wrong with that mis-alignment but we shouldn’t expect an Elsevier or a Thomson-Reuters or a Nature or an EBSCO to have the same interests as each other, or of an institution or single researcher.
Some of the most important services and systems in our space are constructed as not-for-profits so as to ensure that this doesn’t happen and that control remains with the community. Governance structures are very important here. The challenges of setting up ORCID as a trusted community organisation demonstrated that. But equally challenging for an organisation like ORCID is getting from establishment to financial sustainability. Particularly for those organisations founded as not-for-profits success can be a major financial challenge. Without the opportunity to raise capital investment, funding the growth of systems, services and mostly staff that are required to reach break even can distract an organisation from exactly the focus on systems and services that are crucial to success.
At the London Book Fair I ran into Lucy Montgomery from Knowledge Unlatched which is facing just this kind of issue. They have just run a successful pilot in which library consortia pledged to cover the costs of making 28 books freely accessible in electronic form. Making the platform sustainable requires a significant scale up and will take time and money. KU is a UK Community Interest Company, an equivalent of the US 501(c)3 that is familiar in this space which means that it can’t take on private equity investment.
This isn’t a revenue problem, its a capital problem. As an organisation like this grows it needs investment to grow its resources, its capital, until it can generate the revenue to cover its costs. For a for-profit this can come from outside investors who expect (sometimes) to make a return. But again the problem in our space is that for an investor to realise that return the equity that they buy into has to be sold. In the wider start-up world an IPO can release that money but in our space the options are limited in practice to selling to a small number of companies.
So we are left with the question – can we structure the governance of a for-profit so as to ensure alignment with community values and needs, while not scaring off investors. Or can we find other forms of financing that work in the not-for-profit space? The first question still seems very hard to answer positively, the structure and culture of start-up investing is driven by the big pay-off, and control for investors is a crucial part of maximising that pay off. But there are some potential options for the second.
In 2009 a large for profit network of child care centres in Australia collapsed. The company was wound up and the assets purchased by a new not for profit called Goodstart Early Learning. The purchase and further development was funded largely through debt issued by the not-for-profit. This was an interest bearing loan that enabled social investors to take an interest and gain a financial upside. The risks in the investment are relatively low, at least compared to start up investing, and consequently the returns are not as stellar but as part of a portfolio this can be a good investment. It can also be a particularly attractive form of investment for those looking to make socially responsible use of their capital.
Could debt financing or similar tools work in scholarly communications innovation? This would require us to understand the relationship between the capital requirements, the growth potential and where any subsequent value is created. For a service or innovation in our space the capital requirement can vary wildly but with a pilot or proof of concept in hand scaling up in many cases could cost from $1M – $15M. These are not huge sums.
What returns would an investor want? And who would those investors be? The claim for many new services is that they will generate efficiencies, and therefore savings in the longer term. Academic institutions, mostly through libraries, fund these activities in part to realise future savings. But libraries often can’t make investments. It would seem obvious that we should structure any debt offering in a way that does allow libraries and institutions to buy in, perhaps through memberships. At the same time we don’t want to raise all the money from within our community, and that means packaging up some of the potential financial upside, and yes, selling it in effect. A package that offers future discounts for early members and interest for investors could perhaps work – the details are beyond me but on the surface it looks plausible.
But are there investors out there? There are social entrepreneurs and investors interested in this space, but the risks may be too high and the returns too low, or at least too long term for many to be interested. But there is a class of investors looking for long term investments, that has concerns about social responsibility and actually has an interest in academic institutions. Lucy’s stroke of genius was to identify that University Pension funds could be a source of investment for academic innovation. Many are looking right now to re-consider their stance on ethical investing but perhaps most important this tends to be our money.
If we believe in the potential for change – if we are invested in the view that efficiencies are possible and will make the institutions that many of us work in a better place – then perhaps we can and should invest in making that happen.