Completely Out of the Box
Jack Wheeler
Strategic Investor, July 2001
The origin of the phrase “thinking out of the box” comes from an intelligence test called the Nine Dot Box. Imagine three rows of three dots, each equally spaced some distance apart on a regular piece of paper. The task is to connect the dots with a minimum number of lines drawn by a pen or pencil. The only rules are: you must draw a line through every dot once and only once, all lines must be straight (no curves), and your pen/pencil cannot leave the paper.
Most people cannot figure out how to do it in less than five lines. Only those with superior intelligence and creativity realize that it can be done if they go “out of the box.” That is, most people assume there is an imaginary box outlining the square of dots beyond which their dot-connecting lines cannot go. The really smart folks question this assumption and see that if they draw lines extending outside the imaginary periphery, they can do it in only four connected straight lines.
Yet four lines is not the true minimum. Once in a great while, someone of peak creative genius questions the assumptions further, and realizes that if they don’t restrict their thinking to the two dimensions of a flat piece of paper but go three-dimensional, rolling the paper into a cylinder then torquing it so the dots are at an angle to each other, all the dots can be connected in one single continuous straight line around the cylinder.
And then comes the literal one-in-a-million thinker who sees that the dots can be connected by no lines at all — by folding the paper into sections so that the dots are all stacked up on top of each other, and poking the pen/pencil point through the stack. This kind of thinking is not simply out of the box — it is completely out of the box.
Perhaps the most succinctly profound statement ever made on man’s relationship to reality was that of Sir Francis Bacon: “Nature, to be commanded, must be obeyed.” Creativity and innovation do not come from wishes or whims. The key to out-of-the-box creativity is not by asking “How do I break the rules? What can I get away with?” It is by paying incredibly focused attention on what the rules of reality say, and asking, “Are there any rules here that I am making up? What restrictions am I placing on myself that I don’t have to?”
It follows from this that societies and cultures that value individual freedom to question and challenge assumptions are going to innovatively flourish far more than those that do not. As we discussed last month, societies that promote emulation rather than envy possess the key to prosperity. Societies dominated by envy and the fear of being envied extinguish innovation. As the world’s premier emulation culture, America’s capacity for technological innovation is leaving cultures unable to de-envy themselves — such as Tony Blair’s England, Gerhard Schroeder’s Germany, and naturellement the French — in the economic dust. Thus the explosion of European envious resentment towards the U.S.
Well, that’s Europe’s problem. It’s 43’s job to handle them (“43” is what the White House Staff call their boss, the 43rd President, while his father is termed “41”: thus the bumper stickers you see in Washington, “Viva 43!”). The question for you as a small private investor is: “How do I cash in on America’s unmatched capacity to innovate?”
Getting in on Microsoft or IBM when they were fledgling private start-ups is the perennial investor fantasy. Stock in an early-stage pre-IPO company that explodes can result in a 50 or 100 times return. Yet plunking down a pile of dough on one of the many companies that end up in the tank for every single business success is the ubiquitous investor bad dream. The commonly-accepted way to spread out an investor’s risk in the market is via a mutual fund: betting on a professionally-selected group of public companies with the winners hopefully outpacing the losers. Less risk — and a lot less gain. So here’s an out-of-the-box question: Why isn’t there a mutual fund for private start-ups? If there were, you could have less risk and a lot more gain.
It turns out there is. A group of bright folks in Bethesda, Maryland have set up a completely out of the box venture capital fund. Most venture capitalists are tightly anal guys. Going outside of the boxes within which they confine their thinking is congenitally impossible for them. They put all their eggs in just a few baskets, sinking large amounts of capital into a handful of companies for huge pieces of equity. They then insist on reducing their risk by “managing” (i.e., controlling) the entrepreneurs involved — which is like herding cats. The entrepreneurs in turn look upon them resentfully as “grab-as-much-as-you-can” Vulture Capitalists. The Artemis Strategy Fund does things differently.
Artemis starts out being win-win, not greedy. Working collaboratively with its portfolio companies, it comes up with a realistic valuation that everyone (especially investors) will accept. Innovation requires capital. Since it costs money to raise money, the cost of raising capital is funded with a bridge loan from Artemis. The loan is repaid quickly out of initial funds raised, Artemis receives 2% of the company’s stock (not bad for a short-term bridge), and the repaid funds are rolled over into a bridge loan for the next company.
Artemis has developed a proprietary screening process (over 40 specific, measurable factors for predicting ultimate success) for identifying high potential start-ups. Three to six companies are selected each month because success is a numbers game — a certain percentage of well-selected companies will reach liquidity, while another percentage will be “home-runs” with phenomenal returns for investors.
Bethesda lies at the heart of the famous “I-270 Corridor” of life science companies — so Artemis focuses (although not exclusively) on biotech and biomedical start-ups developing out-of-the-box breakthroughs in genomics, proteomics, bioinformatics, and genetically based medicine. One Artemis portfolio company, Capital Genomics, is leap-frogging over billion dollar market cap Affymatrix with a technology that incredibly accelerates identifying individual-specific drugs designed to work only upon the patient’s genetic profile (and no one else’s, thus FDA approval is not required as it is not a drug for public use). Another portfolio company, Aixlee Pharmaceutical, has a breast cancer vaccine in Phase I clinical trials. But Artemis is diversified — Modern Maritime, for example, has a proprietary software that enables the $720 billion maritime industry to navigate the ocean of international shipping regulations. Logical Fashion has a technology that identifies what objectively looks good on a woman, then connects her to what is available in fashion catalogs and stores.
Now with a track record, Artemis is starting to attract attention from big funds that see Artemis as a promising acquisition — with 40-70 new companies each year it’s the perfect feeder for new pre-screened investments. More likely, however, is that Artemis will be going public with an IPO because the increasing share price of stock in its portfolio companies creates such an enormous increase in unrealized earnings over the next few years. Artemis seems to have hit upon an out-of-the-box way to make out-of-the-box profits from the creatively free business and scientific genius driving America’s economy.