Where do companies that change the Future come from? These days the answer almost always begins with the seed of an idea, followed soon by an infusion of Venture Capital. Silicon Valley legend has it that the VC phenomenon is an American concept, a mid-20th century phenomenon that paired the founders of companies like Fairchild Semiconductor, Intel, and HP with George Doriot and his proteges. As always, it depends how you look at it, but I'll argue that venture capital is much older and much more interesting.
As an entrepreneur, I've always thought of starting companies in nautical terms. It starts with an idea. (For me, I can usually tell it's decent if I'm still thinking about it weeks or months later). Once the idea becomes an obsession, all the seafaring metaphors begin. A voyage must be planned, the ship designed, a crew assembled and finally, when the winds are right, launched. If you're lucky, fortune smiles and years later, you return from distant shores with the hold laden with exotic treasures. Or you're never heard of again and people assume that the Davy Jones, the sharks or cannibals got you. But before any of this is conceivable, someone's got to foot the bill. To invest.
In yesterday's post, I brought up the Golden Age of Holland; an era marked by an explosion of scientific and economic innovation. At the heart of this innovation was the Dutch East India Company, the world's second multinational corporation (the British East India Corporation was formed 2 years earlier in 1600). It was also considered the world's first Megacorporation (just in case you were wondering - it's a real term). The VOC, as it was known, survived for 200 years and paid an 18% annual dividend to shareholders over that period. In modern terms, that's the equivalent of extrapolating Warren Buffet's performance at Berkshire Hathaway (current market cap is $198B) for another 150 years. Not bad.
So why would I call the VOC the first VC's? Firstly because of the way it was structured and secondly in the nature of its operations. The VOC was more than just a company, it was one of the earliest corporations (it's really a matter of where you draw the line in determining earliest - technically the first was Kopparburg in Falun Sweden - it was started around 1080AD, survived until 1992 and supplied 2/3 of Europe's Copper)
Before getting into VC's and how they bet on the future, let's look at the definition of a corporation to understand why they exist. The word comes from the Latin "corpus" and means a "body of people". There are a couple of essential ideas at work here and they both relate to pooled interests and time: First, it is insured that an incorporated entity can would survive longer than the lives of any particular member, existing in perpetuity. Secondly, by limiting liability, the company can take risks without threatening any of the investors with losses greater than their purchased shares.
So it's clear that the VOC was a corporation. It's directors, in choosing which voyages to underwrite were the VC's and shareholders were. . . shareholders. But here's the big difference, the folks taking the real risks, the entrepreneurs or ship's captains and crews, did not share in the upside. They were employees (I believe - I'll check this tomorrow and update if needed).
Tonight, I'm going to raise more issues than I resolve -- I'll be picking up where I leave off with tomorrow's post -- "Rolling the Dice and the Power of Chance". So here are some of the ideas swirling that I'm going to use as a lead into the next installment.
First, why does society need Venture Capital at all? I think the answer is that some pursuits are just audaciously hard; they require many people and won't pay off for a long time, if at all. I've thought a bit about how the transition occured that moved this burden for large scale collaboration from tribes to town to nations to churches/religions to organized crime syndicates to companies, but that's a different post.
So I'll end tonight with a similar metaphor to the one with which I began. When launching companies, either as an investor or as the entrepreneur, the odds are hard to assess or manage. We try to be as smart at predicting which ventures will succeed or fail, but as Michael Kahneman wrote in his recent essay "The Hazards of Confidence", we are notoriously bad at it. So pooling risk, letting a "thousand flowers bloom" is smart, if only because we are so bad at seeing the future.
There's an old saying "It's better to be lucky than smart". I've had to settle for neither. ;-) But tomorrow, I'll look at luck and examine how the concept of chance has affected the way in which we think about the future.