Poker, Collaboration, and Funding Regenerative Agriculture
Part 2 of the article originally titled "How to spend $8.1 trillion and save the world"
TL;DR:
There’s only so much we can do alone. Nature shows us that collaboration helps us bring the performance of dynamic and complex systems towards ergodic performance levels.
Ergodicity invites us to consider profit-pooling as a strategy for increasing the success of investments
Gardening holds much wisdom for finance professionals and investors of all shapes and sizes.
As we uncovered in a past issue, ergodicity is one such nugget of golden wisdom.
Importantly, it is one that remains mostly unseen. We’re here to change that.
Let's recall quickly what the word ergodic means and a few of it's implications relevant to easing the investment process of Nature Based Solutions:
Ergodicity occurs when the time series average of a system is equal to its ensemble average.
Its definition shows us clearly that the real world operates in a non-ergodic way.
We know from Nature that collaboration helps us bring the performance of dynamic and complex systems towards ergodic performance levels.
What are some examples of dynamic and complex systems?
A Business
An Old-Growth Forest
A Booming Tech City
The New York Stock Market
An Impact Investment Portfolio
The Poker Example:
To illustrate further how useful ergodicity is for the long term sustainability of business and any other life endeavours, let's consider how professional poker players collaborate to bring their profession's performance to near-ergodic levels.
Poker is risky. To make it profitable, professional poker players have to find ways of decreasing their bets' risks and increasing their ability to take advantages of opportunities to make money.
For an infinite game, like poker, business, and life, winning means staying in the game as long as you can.
For a random infinite game like poker, reducing variance is a strong lever to overcome unknowability and stay in the game longer. But there's only so much one can do alone to reduce the variance of gains.
Alone, small bets over a long time might yield results (compounding). As highly leveraged investors know well, small buy-ins can lead to exceptionally profitable sells. But these are rare, and risky. And unless you win big or make enough money through some other strategy, you'll never be able to play in the more expensive tables.
To further reduce the effects of unknowability, a poker player might choose to count cards (controlling costs), play a different game (diversifying), create a poker playing bot (automating processes), or grow their poker playing skills (upskilling).
So how can poker players go beyond these individualist strategies to reduce that variance, stabilize their returns, and pay for food on the table?
The Ergodic Case for Collaboration
Players come together to pool a part of their wins with other players.
Let's call this group of poker players a profit-pooling ecosystem (PPE).
The portion of the earned revenue that players pool is whatever is above the daily average profit of the entire PPE. Whatever the difference is between the value of individuals' daily revenue or losses and the PPE's average profit, is called variance.
When players don't make more than the PPE average, they don't contribute earnings. Instead, they receive funds from the pool, bringing their daily profitability in line with the PPE average.
Minimizing the loss variance of individual players and growing their individual profitability to bring it closer to the PPE average is what optimizing the system towards near-ergodic levels means.
This profit pooling system stabilizes variance, increases profitability, creates a solidarically allocated capital net that can save players from unpredictable ruin, and enables them to stay in the game longer, giving them a better shot at success.
(Are you picking up on the parallels for business yet?)
So, how can ergodic profit pooling help the world effectively invest the $8.1 trillion we need to seed, grow, and scale Nature Based Solutions?
The IUCN defines Nature Based Solutions as actions to protect, sustainably manage, and restore natural or modified ecosystems, that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits.
In the previous article we discussed some of the issues preventing capital from flowing into Nature Based Solutions.
We'll put a pin on the currency mismatch and accounting issue and focus on addressing the financial attractiveness of Nature Based Solutions. But don’t be fooled by the strategic focus of my article: these two are deeply interlinked and must be addressed together when actually implementing these solutions.
Consider the case of CoopeRegenerativa, a regenerative cattle cooperative from Costa Rica using rotational grazing to sequester carbon, restore biodiversity, and grow healthy, happy, and nutritional beef.
How might a private investor approach funding CoopeRegenerativa for its powerful use of rotational grazing as a NbS?
First off, before even considering investing, such an investment must fall within the investor's mandate, if they have one.
Then, the critical question: does CoopeRegenerativa offer a robust business model to invest in?
Does your regenerative project have a business model? Without the business component, it’s going to fail to deliver what is needed.
Let’s quickly analyse CoopeRegenerativa’s business model and what it took to get there.
For the success of this project, intersectoral collaboration is vital. A key challenge cattle farmers faced was actually selling their products: it was a weakly developed competence. To solve this issue, cattle farmers came together into a cooperative (where they are also owners of the company).
Part of the job of the cooperative structure is to act as a sales interface. This way, farmers can dedicate themselves to what they do best: farming; and leave the sales of their products to a better equipped partner.
Rotational grazing brought many benefits. In one instance, the shift away from chemical pesticide use and the adoption of in-house organic pesticide production generated $400,000 in savings from not needing to buy chemical pesticides.
In another instance, rotational grazing enabled a farmer to save $156,000 in hay purchases; cattle was easily fed through the rotational grazing system and didn’t need external hay.
There were many other challenges.
Just to name a few: accounting for the biodiversity changes and carbon sequestration from the implemented changes, educating other stakeholders like butchers on the nutritional value of free range cattle and upskilling local farmer communities to learn the practice of rotational grazing.
As we can see, regenerative agriculture brings together many stakeholders bound by the success of a complex value chain in taking a good product to market.
Ensuring the effective alignment of all stakeholders around this value chain is a critical success factor. Traditional investment approaches (direct-to-company) fall short of seeing the entire ecosystem needed to ensure the enterprise’s success.
In the next and final part of this article, I will engage in a thought experiment applying ergodicity to CoopeRegenerativa. My hope is that you will see clearly the benefits of incubating, funding, operating, and scaling an NbS provider using a PPE.
Until then, I leave you with a few questions to reflect on:
Where in the value chain is my enterprise? Whose success does my success depend on?
How much can I do internally to optimize the performance of my business? What are the limits of that? Where do I need to think beyond the boundaries of my business and promote collaboration with other members of my value chain?
Does my business have a solid business model? Do I need help crafting that? (I can help you with that 😉 )
Thank you for reading! I'd love to hear your thoughts on this post and what kinds of topics you'd like to read about about the Economics of a Solarpunk future!
To our common best, now and always,
Stefan