Free Audible VC: An American HistoryAuthor Tom Nicholas –

A major exploration of venture financing, from its origins in the whaling industry to Silicon Valley, that shows how venture capital created an epicenter for the development of high tech innovation VC tells the riveting story of how the industry arose from the United States long running orientation toward entrepreneurship Venture capital has been driven from the start by the pull of outsized returns through a skewed distribution of payoffs a faith in low probability but substantial financial rewards that rarely materialize Whether the gamble is a whaling voyage setting sail from New Bedford or the newest startup in Silicon Valley, VC is not just a model of finance that has proven difficult to replicate in other countries It is a state of mind exemplified by an appetite for risk taking, a bold spirit of adventure, and an unbridled quest for improbable wealth through investment in innovation Tom Nicholas s history of the venture capital industry offers readers a ride on the roller coaster of setbacks and success in America s pursuit of financial gain

14 thoughts on “VC: An American History

  1. Trey Shipp Trey Shipp says:

    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 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 than ten times 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, 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 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.

  2. David Shulman David Shulman says:

    Harvard Business School Professor Tom Nicholas adds some new insights into the history of venture capital in general and the role of the Silicon Valley venture capitalists in particular The story has been told many times before, but Nicholas adds some new insights Especially interesting is his view that the 19th Century whaling industry operated in a similar manner of venture capital today where specialized agents booked the captains and the ships and received funding from investors willing to take a chance for a big payoff Just as today the agents were experts in their field and were very active in recruiting talent and what is most interesting the level and pattern of returns in 19th Century whaling was very similar to that of the recent history of venture capital.Nicholas also discusses the all important role of government, first as a purchaser of high technology equipment and second in creating legal structure that enabled pension funds to invest in venture capital and allowing carried interest gains to have favorable tax treatment for the venture capital promoters He also discusses the now forgotten role of government sponsored small business investment companies that both created an interest in venture capital and developed executives who would go on to bigger and better things.He is quite good at describing the early roles of Georges Doriot s American Research and Development who hit it out of the park with its 70,000 investment in Digital Equipment later worth 350 million and such Silicon Valley greats as Arthur Rock and Tom Perkins He highlights the key mantra of the Silicon Valley venture capitalists as people, technology and markets Where he goes astray is that either some of his numerical examples of the gains achieved by the venture capitalists versus the market as whole is wither not clear or may even be wrong He also shines on the huge investor losses taken by public investors as a result of the 1990 s bubble The VC s were hardly innocent in this process Further he doesn t really go much beyond 2000 to gives us a picture of where venture capital is today To me it seems most VC s are chasing asset light software and although they talk a big game on green technology they are not really there Why Green technology especially carbon capture is extraordinarily capital intensive Lastly Nicholas has to make his obligatory pitch for gender diversity in the industry.Simply put Nicholas has given us a good history, but it could have been better.

  3. Daniel Horowitz Daniel Horowitz says:

    If you want to read a book on VC as in Viet Cong , look elsewhere But if you want to read a terrific book on VC as in Venture Capital , then this is for you Nicholas is an Oxford educated economic historian who teaches at Harvard Business School Writing in accessible prose but never abandoning scholarly rigor, Nicholas begins with wonderfully informative and often surprising chapters on whaling and textiles in 19th century New England He covers the 20th century extensively, tracking the eventual emergence of familiar patterns the importance of Silicon Valley the use of limited partnerships reliance of funding from sources such as sovereign funds and the endowments of non profit institutions the focus on specific high tech sectors and the promise of huge rewards from a very small percentage of investments placed He makes clear the importance of the federal government s policies and supports even as he makes clear the social value of entrepreneurship The tables alone are worth the price of admission Daniel Horowitz, posing as Helen L Horowitz

  4. A. Menon A. Menon says:

    The nature of venture capital investing has changed over the decades but the willingness to engage in broad based long tail investing seems to be a US category of investment which can be found in the countries earliest days Tom Nicholas writes about venture capital in its various forms with a focus on the case studies of the 20th century but is careful to include the similarities of modern venture capital to speculative investments of earlier days in the United States This is an informative book that takes the reader through how mechanisms for alignment of interest were formed and how legal structures were created to allow for the venture capital industry to thrive financially and be impactful in the US.The author starts out with a discussion of the whaling industry and its similarity to conceptual VC investing In particular the author goes through how the whaling industry return statistics displayed long tail characteristics in which there were few, but some expeditions which returned large multiples of their invested capital The author discusses how equity was split between the crew and the sponsor s how relationships mattered and how the investors diversified their shares in a variety of whaling expeditions The author discussed the cyclicality of the industry to some extent and the amount of money in modern terms that was swirling around in the whaling business, which was substantial There were distinct overlaps in distribution of returns for early whaling ventures as well as modern VC investing so the way the equity was structured give good perspective on how people were trying to solve alignment of interest issues from earlier times and how the solutions were broadly similar to today.The author moves into the modern world when industrial capitalists started to consider how to systematically invest in very early stage investments Concepts of social purpose were part of how philanthropy approached venture capital but the most significant advancement was the GP LP structure that has served as the foundation of modern venture capital investing The authors discuss the challenges faced by closed end funds and how the timing of investments and cycle of them did not bear itself as well for mutual fund type structuring of VC The development of the GP LP structure served as a solution with the capital draw and disbursement mechanism The author discusses the track records of VC pioneers and some of the early home runs that drove future ambitions It is interesting to note though that compared to public market returns for many decades of the 20th century VC industry lagged only to catch up abruptly when one event in the long tail distribution was added to the VC returns.The rest of the book goes through the success of VC in California as it tied up to the biotech space and substantially the semiconductor space Generally the home runs came from technology and certain VC investments earned over 1000x The glory years of VC are gone over as well as the main partnerships which drove the industry Its definitely quite entertaining and there were a variety of personalities and strategies which performed exceptionally The author discusses the overlap between government and private industry as well as the rotating door of Stanford and the entrepreneurs looking for VC capital The author argues that the VC industry provided a fertile ground to fund progressive concepts and such a system is non standard and required a combination of structured financial capital, entrepreneurial spirit and government conducive environment The author ends up by discussing the internet bubble and the extraordinary gains achieved through that period as well as an increase in notoriety as VC funds were on the selling side of a deceived public in many instances The author also highlights the relative returns vs public equity markets to remind the reader of the opportunity cost through the periods as well as the weak returns after the bubble burst.VC is an interesting history of long tail investing in the US It discusses the incentive mechanisms used to align the various parties contributing different things to form the investments It discusses the distribution of returns and the comparison to public markets, it discusses the uniqueness of American development of the space when it came to the 20th century So all in all one can get a good picture of both history and the modern environment for venture capital It is easy to read and interesting, though there are limits to how interesting this subject matter can really be made

  5. NSA NSA says:

    Bought the book with great interest and enthusiasm What followed was a book that was unusually dry, plodding, and academic His chapters on how the early whaling industry were a kind of proto VC were interesting That said, it felt a bit picayune I d argue there are countless worthy examples of early VC or things that exhibit a long tail risk reward profile the Nina Pinta Santa Maria, privateers, or wildcatting which, to be fair, he acknowledges I was also disappointed that the book ended in 2000, rather than continuing to the present day, where I argue VC has meaningfully changed from where he left off.More broadly, the book has a frustrating thread of has no practical understanding of venture capital running through it, that manifested itself in how he focuses on the wrong things, or fails to give helpful context or data For example, he seems obsessed with the trivial concept that VC s mitigate risk by staging their investments over time, to the point that I started rolling my eyes on the 10th or 11th mention of it Ditto with his novel observation that VC s found it helpful to develop domain expertise The book would have been much stronger if he had a few actual VC practitioners tag along read it give comments Going through his acknowledgements section, the amount of intellectual capital he drew on from the community was sorely lacking.

  6. R & W R & W says:

    There s a rich history of venture capital that is typically only picked up through friends sharing industry lore Tom does a great job compiling all of this history in a single book that walks us through the last 60 years from the early days of modern VC to give us a glimpse of what s happening today Perhaps not surprisingly, the book represents how VCs seek to project themselves than how the sausage is really made, and saying this as a VC, I believe VCs have far less influence on the outcome of great companies than they give themselves credit for.

  7. A A says:

    I have just started reading this but it seems to be a good academic piece of work that is accessible to all There are very few books about contemporary history that are written with this kind of rigor nowadays.

  8. Rusty McClure Rusty McClure says:

    Tom Nicholas sweeping account traces VC origins from 1600 s New England whaling agents funding methodologies through Farnsworth, Tesla and Henry Ford s investor issues to post dot com bubble burst mindsets and implications.Harvard Business School s ultra popular prof melds his Oxford PhD prowess with uber interesting case study analysis and narration, most effectively.Contrasting what pioneer investors considered important, with the investment musings of VC legends that include Lawrence Rockefeller, Mellon, Doerr and Arthur Rock, this most thoughtfully researched and narrated history delivers blueprints and perspectives for future entrepreneurs and their backers to consider.As Dr Nicholas maps Venture Capital coaching trees, he provides insights how Americans with investment capital, foresight, freedom and casino grade guts, changed the world.

  9. JC Reader JC Reader says:

    Comprehensive history of the venture capital industry Excellent analysis of how and why the industry developed A little dry but fascinating for anybody interested in the subject.

  10. Tim Tim says:

    Absolutely loved the content, would recommend this book to anyone who values the developing role of governance and the historic relationship between government and entrepreneurship Narration could have been fluid and engaging of a speaker, bit robotic, but certainly not unpleasant Working in Silicon Valley with both Venture community and government, this has improved my understanding and communication on the job Highly recommend.

  11. Emily M. Emily M. says:

    Great book on the history of VC in the US

  12. Rose M. Brandt Rose M. Brandt says:

    Great read

  13. Nicolás Mendoza del Solar Nicolás Mendoza del Solar says:

    This is a great book to understand VC industry nowadays.The book is heavy reading and very detailed but it is worthy.

  14. Customer Customer says:

    A comprehensive overview in an organized manner