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The Origin Story of Venture Capital
Demystifying Venture Capital #01: Moby Dick, The Traitorous Eight, and “liberation” capital like you’ve never seen it before
Author’s Note: This essay is part 1 of a 4 part series on Demystifying Venture Capital.
“Most people think improbable ideas are unimportant, but the only thing that’s important is something that’s improbable.”
— Vinod Khosla
Perhaps the story of venture capital is one that persists far beyond wealthy, middle-aged white men in Patagonia vests; beyond the unhinged glamor and terror of Silicon Valley; beyond, even, the wild and unpredictable Shark Tank tirades that transfix viewers in living rooms up and down the east coast.
Perhaps the story of venture capital is as malleable as Play Doh – evolving, morphing, transforming, becoming.
Perhaps venture capital is not quite what you think.
O’Shaughnessy Ventures has dedicated these next four weeks to throwing open the curtains of venture capital so you can peer inside. We’ve set out to demystify the industry for young creators who are maybe looking to get their feet wet, but still hanging out by the side of the pool, feeling plenty of reservations about submerging themselves fully.
And rightfully so. It’s a rather silly thing to jump into a pool when it’s crowded with strangers and you have no idea how to swim. But we invite you to wade in (just to your ankles – there, that’s good) so we can give you the truth.
As artists, creators, and innovators ourselves, we know that in order to see something for what it truly is, we must begin at the beginning.
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Whales as the original “high risk, high reward”
Venture capital was built on the backs of whales.
Starting in the 16th century, blubber and oil were increasing in consumer demand. These materials were used in cosmetics, candles, machine lubricant, and more, allowing whaling to become a lucrative commercial business. Of course, this meant more and more ships were venturing out, sailing the seas in hot pursuit of the ultimate high-risk, high-reward: sperm whales.
This was the very objective of the Essex – the famous whaling ship that inspired the story of Herman Melville’s classic novel, Moby Dick – when it set sail from Nantucket Island in 1819.
A year into its voyage, the Essex was rammed by a sperm whale and sunk. After the crew was lost at sea – and experienced rather horrific run-ins with cannibalism – only a handful of survivors were rescued. It was gruesome, to say the least.
But despite the potential horrors of whaling, it remained a booming industry. It was simply too profitable.
Of all the countries involved in whaling (Spain, Iceland, Denmark, Britain, The United States) there was one unassuming town that was raking in the most profit – New Bedford, Massachusetts. Not because of its affluence of sperm whales, but because of the funding behind the voyages.
“Agents would encourage these whaling expeditions by raising capital from corporations and wealthy individuals to fund the ship captains.”
“Agents” equal “venture capitalists”
“Whaling expeditions” equal “startups”
“Corporations” equal “partners”
“Ship captains” equal “entrepreneurs”
There it is: a fuzzy, but recognisable, first glance at Silicon Valley.
Not to mention, the 20% of profits VC and private equity firms normally keep (called “carried interest)” originated not from whaling ships, but from cargo ships. The captain and crew (or, entrepreneurs) got to keep a certain amount of money they made from the cargo they successfully carried – and the investors of the ships got their fair share as well.
There was one whaling syndicate in particular, Gideon Allen & Sons, that made returns of 60% a year. This magnitude of ROI was enough incentive to keep sailors venturing out into the unknown, time and time again, Moby Dick be damned.
Centuries later, the dramatic irony of whaling is not lost on the spirit of venture capital: the very thing the Essex was betting on became its demise. Many VC firms have shipwrecked in the same way (fortunately, without the cannibalism).
On the other hand, just like Gideon Allen & Sons, many VC firms have seen incredible returns that have skyrocketed everyone – whales, captains, and agents alike – to success.
But we’ll get into that soon enough.
For now, let’s talk about traitors.
God, Arthur Rock, and dollar bills
In 1956, a man named William Shockley was viewed as nothing short of divine.
He was a Stanford professor who won the Nobel Prize in physics for his co-invention of the transistor. When he hired researchers to come work for him, they admitted that getting a call from Shockley was “like picking up the phone and talking to God.”
But working for “God” turned out to be more like working for the devil.
Although he was novel and groundbreaking, Shockley’s favorite activity was to berate and belittle his employees. He was cruel, egotistic, disrespectful.
And in 1957, eight of his scientists had had enough.
At this time in history, venture-capital firms – initially dubbed “adventure” capital – existed, but they had just barely scratched the surface of what they could accomplish.
These firms were far more invested (literally) in large companies; funding for a group of young, wayward scientists (brilliant, but still wayward) looking to start their own company was rather laughable.
Maybe someone will back us, the eight scientists hoped. One of them – a man named Eugene Kleiner – secretly penned a letter to a New York investment firm he had connections with. The scientists waited anxiously for a response, knowing it was a long shot.
One of them was even quoted saying: “What would God think?”
This secret, scandalous letter traveled across the country and landed in the hands of none other than Arthur Rock – a young investor who would go on to be the first venture capitalist to ever make the cover of Time Magazine.
Intrigued by their skills, ambition, and entrepreneurial spirit, Rock was on a flight to San Francisco one week later to have lunch with this rebellious group of scientists who would soon be coined “The Traitorous Eight.”
Gathered around the table at lunch, the scientists admitted they would need $750,000 to get their business off the ground. Rock blinked. Surely, they would need at least $1 million.
The deal was sealed when Rock’s partner, Bud Coyle, pulled ten dollar bills from his wallet and passed them out, declaring every man sign it and treat it as his contract.
A story founded on money, in every sense of the word.
But unbeknownst to those men as they signed their dollar bills, something bigger and far more beautiful was taking shape.
Liberating human spirit through capital
From the start, The Traitorous Eight worked out of a garage; wore shorts to work; and pushed “the scientific frontiers at a pace Shockley would have never permitted.”
With the funding of The Traitorous Eight and their company, Fairchild Semiconductor, the traditional hierarchies of 1950’s business, tech, and finance had completely imploded.
These men possessed the skills, the brains, the ambition…all they needed were the means. No one was willing to take a chance on them. Until Arthur Rock. Thus, a new era of opening doors that no one knew existed in the first place was being ushered in.
“Engineers, inventors, hustlers, and artistic dreamers could meet, combine, separate, compete, and simultaneously collaborate, all courtesy of this new finance….Talent had been liberated. A revolution was afoot.”
This new form of finance was bigger than Moby Dick whaling syndicates; bigger than the initial “adventure” capital firms; bigger than all the William Shockley’s of the world combined.
This was liberation capital – a finance committed to the emancipation of the human spirit and the expansion of the future.
And while there are many pieces to this story, this is where it begins…with the stench of possibility heavy in the air.
Thanks for reading this week’s essay on Demystifying Venture Capital. Keep your eyes peeled for next week’s essay (hint: it’s about all things creator economy).