Rating: 7.3/10.
Book about the history of venture capital, which has existed in some form for a long time before evolving into its modern form. The earliest form was sponsoring ocean voyagers, before evolving into the current structure for tech ventures. The book explores the evolution of venture capital in different phases and the conditions that made it specifically successful in the US.
The capital structure of whaling expeditions in the 1850s had a startling resemblance to modern VCs. Voyages were long and risky, and many would fail, but a few generated outsized returns. The crew was rewarded with equity and not just wages, and agents would fund multiple expeditions and choose the best captains. Captains were generally well paid, but lower-rank sailors made little on average. Investors wanted diversification, but this often failed when the whalers went to the same places.
As whale oil dried up, the innovation moved to the cotton spinner. Around 1790, Samuel Slater arrived in New England with technical knowledge about cotton machines and worked an agreement with Brown to , who provided capital in a deal that is quite similar to modern VCs, with minority stake, profit share, time commitment, etc. Later, Andrew Mellon built a financial empire investing in various railroads and factories, but it is more similar to private equity than the VC model, as he owned majority stakes and used debt rather than equity financing.
The earlier 20th-century technology startups like Kodak and Ford were funded by informal family networks. Eventually, Laurence Rockefeller standardized the VC system of funding unproven ventures that had the potential to be massively successful, requiring a previous track record in the area. Some aviation and fertilizer ventures were funded this way. However, early VCs found that the returns were often less than the public market returns.
ARD, started in 1946 by Doriot, was the first modern VC and pioneered the structure as a closed-end fund, with progressively larger investments as the idea was proven, and providing founders with management expertise when needed. ARD needed to work with the government to loosen regulations on insurance company investments, fixing double taxation and capital gains tax issues, etc. The breakout investment was DEC, which went public and made the whole fund outperform the broader market, whereas without it the fund would have underperformed, setting a precedent and the structure for future VC funds.
Overall, I got through slightly less than halfway through the book before I stopped. The text is quite dense and academic and focuses a lot on the history of the legal and accounting mechanics, and little on the technology and why it mattered, so a lot of the text is quite dry for a reader not already familiar with term sheets and accounting structures of venture and equity deals.
