Diving into Venture Capital’s history.
As seen in the graphic shown above – designed by Felicis Ventures, Venture Capital is not the first step when building a startup. Throughout history, entrepreneurial ideas were financed through credit, not equity. But why was this the case?
You have probably heard that nowadays ‘Data is the new oil’, and the truth is that this could be true for the VC space. In the past, quality information wasn’t that available and tracking the company’s progress and state wasn’t that easy. Moreover, there was unlimited liability.
Imagine being a shareholder and having to deal with the company’s debt if it doesn’t not work. Entrepreneurship isn’t that exciting anymore, right?
In this regard, when limited liability became possible and normalised in companies (in NY, the US), the mindset between credit an equity changed.
Interestingly, maritime expeditions were one of the few investments that were done in the form of equity. Why? Well, if you send a boat to the sea it either sinks or gets stolen by pirates – hence all the money invested would be lost – or returns to the coast – where you can easily count the goods (Colin, 2016).
This industry also gave birth to carried interest (will discuss more in future articles).
We already have limited liability and reliable information systems in which equity can thrive. Nevertheless, providing funding was a luxury for a small percentage of people. Most investors traded in the public market, where big corporations issued their shares.
However, as highlighted by Nicolas Colin, there were some exceptions:
- The Railway Mania in the 1840s, where new railway companies were funded through equity. Think about it, if the venture didn’t work, you can still sell the assets and get back part of the investment.
- Have you heard about Goldman Sachs…? His son, Henry, came up with a different way to underwrite securities for those companies that ‘didn’t own tangible assets of substantial value’ (Colin, 2016).
Given this scenario, 20th century investments mainly revolved around railroads and telecommunication companies since they had tangible assets to reduce the investment’s risk.
But then, how about those with intangible assets? Well, they were for sure struggling. They couldn’t borrow from banks because there was nothing to show but they also couldn’t get money from investors because of the same reason. Therefore, due to the risk of the investment, technology companies relied on the rich through equity.
There’s undoubtedly much more to tell about VC’s history, such as the government’s role, important names, and the cycles it experienced throughout the years.
But quality content comes in small doses, doesn’t it? Keep an eye on upcoming articles.
Bibliography
Colin, N. (2016). A brief history of the world (of Venture Capital). Medium. Retrieved from: https://salon.thefamily.co/a-brief-history-of-the-world-of-venture-capital-65a8610e7dc2?gi=c2accd2898dc
