In the nineteenth century, there was a lot of money to be made tracking down sperm whales off the coast of Massachusetts—harpooning them, melting down the fat into oil, and bringing the bones ashore. A single voyage could bring in $100,000, the equivalent of over $3 million today. But it wasn't easy. In 1858, around two thirds of whaling ships that pushed off from New Bedford and Fairhaven returned without making a profit. It turns out whales are hard to find, and even harder to kill. The average whaling boat spent over three years at sea. This created a dilemma for the rich families of Massachusetts: How to kill the whale, sell the fat and bones, but not lose money paying crews and hiring out extra boats for long, failed voyages?
In 2012, Harvard Business School devoted a case study to this conundrum: Whaling Ventures used the nineteenth century whaling industry to teach about American venture capital. These cases are basically adult versions of the Encyclopedia Brown mysteries, to which the solution is always: Make more money. Whaling agents devised a number of clever techniques to make the investments profitable. They studied which captains had the best records, helped rich families spread their money between multiple whaling ships, hoarded knowledge about whale hunting grounds, and drew up profit-sharing agreements to incentivize crews to stay out at sea.
These agents, students learn, created the model for contemporary Silicon Valley venture capital firms. Just imagine the crew of each whaling ship as a pod of quirky engineers, who may be developing an app we can't live without—or may be working on Juicero, the high-tech juicer company which raised $120 million in VC investment before imploding.
Harvard Business School Professor Tom Nicholas co-wrote Whaling Ventures in 2012, and has now expanded it into a new book VC: An American History. He argues that although not the only society to encourage risky investments, the United States did pioneer special firms for that very purpose, a move that may have been crucial to America's role as a technological powerhouse, and most certainly linked technological innovation and the investor class in the American imagination. A detailed, fact-filled account of America's most celebrated moneymen, the book ably presents the logic of VC financing: It's common sense that most technological innovations start out as long-shot ideas, with a low probability of success. If a society only invested in those ideas which had already proven to work, then new technology would never get off the ground, and new ideas would die on the vine.
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