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INNOVATION ECONOMY

Today’s venture capitalists owe something to 19th-century whalers

Harvard Business School professor Tom Nicholas is the author of “VC: An American History.”
Harvard Business School professor Tom Nicholas is the author of “VC: An American History.” Tom Nicholas

What does the 21st-century venture capital industry have to do with the 19th-century whaling industry? And what role did a famed Harvard Business School professor play in not only creating the modern VC industry, but also making it tough for women to get a foot in the door?

“VC: An American History,” a new book by Tom Nicholas — he’s a British-born professor at the very same business school — explores those questions and many others. At a moment when startups stuffed full of venture capital dollars are going public (like Peloton, which sells Internet-linked exercise equipment), getting acquired (Acquia, a Boston company that sells a website-management system), or having trouble going public (WeWork, the provider of shared office space), it’s worth understanding a few key things about how VC works:

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■  How venture capitalists make money. Venture capital is pretty simple. Think of it as a mutual fund that puts money into a portfolio of young companies, rather than publicly held securities or bonds. That creates really high risk, since many young companies don’t survive to adulthood. But the rewards can be great when a venture capital firm picks a winner that grows up into the next Google, Apple, or Biogen. Venture capital firms typically pull in a 2 percent annual management fee on the money they manage, and when their companies have “exits” (that is, are bought by a bigger company or issue shares on a public stock exchange), they keep 20 percent of the profits and give the remaining 80 percent to the people whose money they are managing.

■  Where that money comes from: Wealthy individuals and families (the minimum buy-in is usually about $5 million), pension and retirement funds, and university endowments, largely. These people and institutions invest their money in venture capital because they’re looking for diversification — and potentially, higher returns than they might get from other kinds of assets, like stocks.

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■  Whaling and venture capital. Nicholas’s book draws a fascinating link between the whaling industry, which enriched many New England cities in the 1800s, and today’s venture capital industry. “Like venture capitalists,” he writes, the whaling agents who funded voyages around the planet in search of precious whale oil “charged fees and received a share of the profits.” And just like VCs who are inclined to keep investing in successful entrepreneurs throughout their career, “they engaged in repeat business with the best captains.” Nicholas even compares data that show that in both whaling and venture capital, the top players relied on a few very successful investments (or voyages) to balance out all of their bad ones.

■  Georges Doriot and the dearth of women in the field. Paris-born Georges Doriot was a Harvard Business School professor from the 1920s to the 1960s. He was a central figure in the evolution of venture capital as an industry, as the longtime president of the American Research and Development Corp. ARD was created by a group of key business and academic leaders to kick-start economic activity in New England in the years following World War II; most regard it as the first true venture capital firm in the United States.

Doriot put money into ventures like Digital Equipment Corp., an MIT spin-out that was once the second-biggest tech company in the world (after IBM), and Ionics, a pioneer of water purification that was acquired by General Electric in 2004 for $1.1 billion. (It was based — where else? — in Watertown.)

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But even after Harvard Business School began admitting women in 1963, Doriot still did everything he could to keep them out of his course — something he was proud of. “His strong biases, even for the time period, seeded a narrow-mindedness on gender issues that the industry still grapples with today,” Nicholas writes.

In an interview, Nicholas says, “It’s difficult to make a firm, causal link between Doriot’s reluctance to let women into his class and the way the modern VC industry is structured, but when you look for patterns, there’s definitely a pattern there.” Even in more recent times, taking a class with a venture capitalist as an instructor can lead to a job in the industry, Nicholas says.

The number of women investors at US venture capital firms has not changed much since the 1980s — in 1986, it was about 7 percent, and recent research cited in Nicholas’s book shows that it remains between 6 and 9 percent today.

■  Why Silicon Valley is the center of the action. Don’t laugh, but the shift in venture capital and VC-supported entrepreneurship from East Coast to West Coast that happened in the second half of the 20th century may have been a function of winter. “You often search for these complicated explanations, and it can be quite fundamental,” Nicholas says. Many of the early rock stars of the venture capital industry grew up and earned degrees on the East Coast but were pulled to California by the warmer climate.

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There were also random events, like one of the pioneers of microchip industry, Nobel laureate William Shockley, moving home to Palo Alto, Calif., to take care of his mother. (Shockley started the Shockley Semiconductor Laboratory, and his former employees went on to found companies such as Fairchild Semiconductor and Intel.) California also had, and still has, a legal system that makes it easier for employees to hop from one company to another, or start their own.

■  And yet, money’s still available here. Yes, Boston can claim bragging rights to creating the first modern venture capital firm (ARD). But these days, it does feel like the party we started has moved elsewhere.

The year 2018 was a record one for the VC industry, in terms of the amount of money that VC firms invested in startups: $131 billion, according to data from PitchBook and the National Venture Capital Association. Massachusetts companies are on the receiving end of about $12 billion of that money, far behind California’s $77 billion, and a bit behind New York’s $14 billion.

■  VCs are the bad guys — always firing CEOs and urging layoffs. It’s true that VCs sometimes oust leaders or urge companies to trim payrolls. But, Nicholas says, “I’ve always struggled with this idea that they are the nefarious money guys.” As a native of the United Kingdom, he adds, other countries often look jealously at the VC ecosystem here and wish they had more active VC investors within their borders.

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“For a thriving entrepreneurial ecosystem,” Nicholas says, “you need people to finance it.”

That was true in the days of whaling voyages — and it’s still true today.


Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.