As expected, this book tells the legendary stories of how VC firms like Greylock Partners, Kleiner Perkins, and Sequoia launched companies such as Intel, Genentech, and Google. But Nicholas also goes back to the early 1800s, beginning with the financing of whale ships. Whaling agents operated similarly to today’s VC firms. And like high-tech investing, a few big hits paid for the unprofitable ventures.
From this history, Nicholas describes why VC developed as it did in America. If you are only interested in the stories, you may find the more theoretical sections slow going. But I enjoyed the insights into the nature of early-stage investing, the history of why it thrived in America, and where it might go in the future.
SOME INTERESTING POINTS FROM THIS BOOK:
• By the middle of the 1800s, nearly 75 percent of the 900 whaling ships in the world were American. One reason for this was that American whaling agents had figured out a way to finance risky whale oil ventures. Just as VC firms intermediate between entrepreneurs and limited partners with capital to invest, whaling agents intermediated between captains and crew with wealthy investors. The payoff of whaling was very similar to venture capital today.
• Every whaling voyage had significant exposure to downside risk -- literally sinking! Most ships would only earn a small to modest profit, but a few ships would return full of barrels of oil that would compensate the investor for the other losses.
• Nicholas overlays a histogram of the distribution of returns for the whaling industry during the 1800s versus the VC industry from 1981 to 2006. They are incredibly similar.
• Nicholas recounts how men willing to risk their capital for higher returns used VC-like financing to build America’s first factories. A particularly good story describes the Brown family of Rhode Island who financed Samual Slater, a 21-year-old immigrant from England, who had a working knowledge of the technology to use water power to spin cotton into thread. He was, as Nicholas recognizes, what we today call a “technical co-founder.” As an interesting addition, Nicholas includes in the book the agreement between Slater and the Browns. In it, we see a thoughtful balance between the VC’s maintaining control while giving Slater, the entrepreneur, the right incentives to maximize profits.
• During the 1900s, several wealthy families established investment arms to make VC-style investments. These included the families of Andrew Mellon, Henry Phipps, Laurance Rockefeller, and Jock Whitney. Laurance Rockefeller’s chief goal was to fund innovation in scientific areas he had an interest in, such as aviation (he would fund Eastern Airlines and McDonnell Aircraft). Interestingly, the pain associated with early-stage investing would nudge all of these families towards later-stage private equity investments.
• The need for military innovation during World War II, followed by the GI bill, spurred America’s scientific and technological development. But the capital available for start-ups from individuals and family offices was far less than needed. Recognizing this, the New England Council in 1946 created the American Research and Development Corporation (ARD) to seek capital from the large asset owners: investment trusts and insurance companies. The returns for the first ten years were disappointing. Then in 1957 ARD invested $70,000 ($600,000 today) to fund the start-up Digital Equipment Company (DEC). By 1971 that investment was worth $355 million and DEC was Massachusetts’ largest employer.
• Nicholas includes a colorful chapter that recounts how Silicon Valley became Silicon Valley and the epicenter of venture capital investing. He tells the stories of Arthur Rock (Davis & Rock), Tom Perkins (Kleiner Perkins) and Don Valentine (Sequoia Capital). Through the founding of Intel, Apple, Genentech and other companies we see the principles that made these funds successful. Rock emphasized the quality of management. Perkins looked for good technology. And Valentine stressed the need for big market demand. I liked how Nicholas refers to the investing principles these VC firms wrote down at their founding.
• Venture capital took off with the rise of the personal computer during the 1980s. And by the year 2000, there were more than ten times more VC firms than there had been in the mid-1980s. Investors couldn’t help but notice how Netscape rose 100% from its IPO price on the first day of trading. But later came Pets.com, which dropped from over a $300 million valuation to $0 in less than a year. When the bubble burst, VC firms received blame for financing and bringing to market bad companies. But the asset class was far from done.
• This is a history book, so Nicholas doesn’t do much analysis of the last ten years. He knows we need more distance to form an objective view of recent times.
• A good quote on why VC investing is hard: Chuck Newhall said about an investment in a West Virginia equipment maker: “I lost 25 percent of my life for five years and I wasted months in exhausting, useless travel.”
In the end, Nicholas reminds us that early VC leaders like Georges Doriot, Jock Whitney and Laurance Rockefeller had larger goals than making money: they wanted to build new companies that would grow America’s economy and advance technology and science. In the long-tail, their plan paid off.
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