Tuesday, January 29, 2013

Whaling Venture Capital

In the new semester I’m enrolled in a course on the history of Venture Capital with Felda Hardymon and Tom Nicholas.  The fist case traced the history of the industry back to the swashbuckling day of hunting whales for oil (sorry PETA).


At that time there were three parties involved (aside from the whales):

  • Investors – wealthy individuals (doctors, lawyers, merchants) looking for investments more exciting than banks and mortgages can offer.
  • Captains (entrepreneurs) – they ran the ships and were the operational engine behind the venture.
  • Agents (VC) – the folks that coordinated captains and capital to get expeditions funded and underway.

Sound familiar?  This system, pioneered with the advent of new money (folks who can finance ventures that aren’t kings) required a new kind of coordinator who could aggregate capital and link it to strong capital.  Enter the Agent (aka VC). 

This model is a very high fidelity echo of the world we work in today.  Everything from the risk distribution (your ship sinks/you catch a whale) to the distribution of returns (the few most successful enterprises reaped the vast majority of rewards).

What’s fascinating is how economically impactful this model was.  Of the 900 whaling ships at the peak of this industry (which could bring in almost $100M 700 were American.  Why?  America was the country that truly embraced the Venture Capital Model.  To this day, Venture Capital is by far the most effective way to translate capital into job growth.

The hall marks of the VC asset class are:

Persistence.  This means a successful firm will likely continue to be successful.  Making investments in companies is very difficult to externally verify.  A huge amount of trust and instinct goes into the decision making process on all sides.  Subsequently, personal relationships are at the core of this industry.  As you are successful and grow – so do your relationships.  This also exists in Private Equity – making VC/PE the most persistent investment classes (by far!).

Cyclicality.  Whaling, like startups, follows a boom and bust cycles.  Either you catch the great white whale or you don’t.  Boom or Bust.  The returns on these investments (adjusted for risk) far outweigh those of any other class.  However, investors need to be able to whether the storms (aka losing all your money).

If nothing else we can all feel a little more rugged and seaworthy – as we are the whaling captains of modern day.  Just avoid being Ahab!

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