For a certain sort of nineteenth-century person—the sort with high risk tolerance and little revulsion to brutality—a natural career lay in whaling. The odds of success here were, by almost every measure, poor. An expedition first needed to find whales in the vastness of the oceans. If it succeeded, it had to approach the whales in silence, with a small craft; strike with a harpoon; stay afloat, intact, engaged, and oriented as the poor creatures thrashed about, sometimes for miles through iceberg-laden water; row back to the main ship with the carcasses; harvest the baleen and render the oil; and survive the journey home. “On the eve of a Nantucket voyage, I regarded those marble tablets, and by the murky light of that darkened, doleful day read the fate of the whalemen who had gone before me,” Ishmael says, in “Moby-Dick.” “Yes, there is death in this business of whaling—a speechlessly quick chaotic bundling of a man into Eternity. But what then?”
For those who made it through the earthly trials, there could be riches in tow. A captain’s cut of the takings ranged from five to twelve per cent; a first mate’s, three to seven per cent; and so on, down the line. A captain with some skill could spend a few years leading expeditions and retire rich. In 1853, the Times described the whaling town of New Bedford, Massachusetts, as “probably the wealthiest place” in the United States.
The people on the boat, however, weren’t the largest earners. Dispatching a whaling voyage cost between twenty and thirty thousand dollars, a small fortune in the mid-nineteenth century, and an industry emerged to get these expeditions off the dock. Specialized agents in whaling-industry towns invested their own money, pooled cash from rich investors, did due diligence, and worked with captains to develop winning strategies and to plot uncrowded routes. In most cases, their efforts were fruitless: data from a couple of whaling ports in Massachusetts in 1858 suggest that fully two-thirds of returning expeditions were unprofitable; another study found that a third of the whale ships in the New Bedford fleet never made it home. A lucky outing, though, could return with a hundred and fifty thousand dollars in goods, a fortune several times the outlay, and for many investors this was enough to justify the risk.
In “V.C.: An American History,” the Harvard Business School professor Tom Nicholas sees whaling as the first practice of what we now call venture capital: collecting large pots of money and using it to invest in young companies, while also getting involved in their management, in the hope of guiding growth and generating huge returns. Venture capitalists fill these cash pots, or funds, with money from large-scale investors—foundations, pension funds, university endowments, and other passive contributors. They take a management fee, drop a bit of their own money into the mix, and, like the whaling agents, promise expertise. They, too, make predominantly bad bets: about eighty per cent of venture investments don’t pay off. Occasionally, though, there is a wild success, and, since the nineteen-seventies, such successes have transformed American business. Venture capital backed Apple and Intel. It funded Google, Amazon, and Facebook before any of them turned a profit. In principle, venture capital is where the ordinarily conservative, cynical domain of big money touches dreamy, long-shot enterprise. In practice, it has become the distinguishing big-business engine of our time. [Continue reading…]