VC: An American History
In today’s fast-moving world where markets and businesses are constantly evolving, the role of venture capital (VC) in finding and growing companies has never been more important. While it’s apparent that the funding, address books and governance provided by VC investors was instrumental to the success of technology giants like Apple, Google, Facebook, and Silicon Valley more broadly, what’s less obvious is how the VC industry itself came into being.
As someone with a genuine curiosity for technology and the ecosystem that supports it, VC has always been a source of interest. During my research around the topic, I stumbled across the excellent VC: An American History, a book which explores the origins of the industry and the integral part it has played in creating some of the world’s most valuable companies.
Written by Tom Nicholas, the William J. Abernathy Professor of Business Administration at Harvard Business School, the author starts off in a seemingly unconnected place, 19th century New England, then the epicentre of the whaling trade. To those unfamiliar with it, the whaling industry was concerned with the act of hunting whales at sea, in the effort to obtain highly lucrative by-products like whalebone, whale oil and blubber. To fund the hunting expeditions, captains sought capital from wealthy investors who could accept the risk of failure, in return for potentially huge financial returns, something not dissimilar to what venture capitalists do today. Nicholas draws fascinating parallels between the whaling industry and VC including everything from financing, organisational structure right through to the incentivisation of the captain and crew.
Nicholas notes how some wealthy investors at the time moved on from the lower returns associated with a declining whaling industry to a new area of opportunity, cotton manufacturing. As an industry that was regularly innovating, especially in 19th century Britain, several wealthy capitalists saw a chance to create outsized returns on their investments. The author delves into some of the opportunities identified by cotton manufacturing investors and how capital was deployed to these areas. Nicholas examines the relationship between capital and governance, describing how the legendary financier Andrew Mellon coupled his capital injections into companies with an insistence on having an influencing position in those investments by taking board seats. The author also discusses how VC investors involved in the textile manufacturing business of the 18th and 19th centuries tended to cluster geographically just as they do today in places like Silicon Valley.
In VC: An American History, the author steps forward in time to the years immediately following the Second World War where New England, once again takes centre stage. Nicholas explains how the establishment of the American Research and Development Corporation (ARDC) in 1946 was pivotal in directing capital from investors into early-stage high-tech companies. The organisational structure of ARDC, the author argues was key to influencing how modern VC limited partnerships are organised today. An in-depth assessment of the important role that Silicon Valley played in the evolution of VC is also covered. With forward looking academic institutions like Stanford University supporting students to become entrepreneurs paired with the influx of human capital to meet the demand for skilled high-tech workers driven by increased military spend, the west coast of the United States quickly became a natural place for VC investors to inhabit, subsequently creating strong network effects and an increased concentration of capital in the area. On a lighter note, Nicholas argues that in some ways the success of Silicon Valley may be due in part to something even simpler, the favourable climate!
The author makes sure to investigate the impact of major VC firms like Kleiner Perkins, Sequoia Capital and the competition close by on the legendary Sand Hill Road who drove the industry forward to and beyond the devastating dot-com bubble of the late 1990s and early 2000s. One of the fascinating parts of the book was the assessment and analysis of the clear diversity problem that still exists within VC today. Nicholas shows that the industry continues to suffer from a lack of representation from many groups in society, especially women, which the author argues can be traced all the way back to the influential Harvard Business School professor Georges Doriot, a man who instrumental in the success of ARDC but also in creating early barriers to women breaking into VC.
As someone with a limited understanding of the origins of VC, this book was genuinely hard to put down. The author masterfully documents the history of the industry while also showing us how VC has evolved to become a critical component of today’s entrepreneurial ecosystem, and that more importantly it certainly has room for improvement.
You can find a copy of VC: An American History here.