6 ms·

How early American inventors funded their ventures

101 points by raleighm 7y ago

jedberg 7y ago
Skip to the summary at the end for the juicy bits (although the rest was interesting reading too). In the summary is this: "What there doesn’t seem to have been, at least in what I’ve seen so far, is any kind of structure around early-stage financing. I haven’t seen any formal networks of angel investors, and nothing comparable to venture capital. Funding seems very ad hoc, dependent on the circumstance and connections. If so, then the rise of institutional early-stage funding in the mid-20th century was a real revolution." And I think that is the crux of it. Most people back in the day had to find wealthy people they knew, but there was no "industry" around early stage financing. Now there is, which has probably been great for funding ideas that would not have otherwise been funded, but is also a double edged sword for entrepreneurs, as the institutions get better and better at extracting as much value as possible.
- vikramkr 7y ago
  I don't think it's a double edged sword, if there are more financiers there's more competition, and if it's institutionalized then terms and all become more easily compared. I think you're much more likely to get a good deal when there are multiple investors than when you have to count on the goodwill of the one investor you have access to
  - jedberg 7y ago
    It's an oligopoly though. The investors know each other's terms, they have no reason to compete on that aspect. They compete on other aspects, like their network with access to potential acquirers and access to subject matter experts. They don't really compete on terms, other than valuation. If anything, as things become more transparent, the deal terms are becoming more homogenized.
    - vikramkr 7y ago
      I don't think homogenized is a bad thing though, it standardizes the process, and with swings in the market (e.g. emergence and dissapearance of SoftBank) we see deals change accordingly. By all accounts terms have changed dramatically from what they used to look like in the 80s to now, and an oligopoly is not a monopoly. Founders have some semblance of market power now, and with increased transparency people know what they're getting into and are able to make sure they're getting a deal on par with what they deserve. The competition on valuation is probably the most important part now given that most other terms are standardizes and generally founder friendly (and I don't think terms are as homogeneous among all investors as you might think, there are some crazy termsheets out there...)
      - jedberg 7y ago
        The terms are founder friendly, but they are no longer employee friendly. All the value that used to go to employees goes to VCs now. It's a lot harder to hire good employees when they look around and see that they have a much better chance of an equity payout with RSUs from Google.
        vikramkr 7y ago
        And if that proves out to be problematic for companies (markets aren't instantly efficient, it takes time for information to be incorporated), I think we'll see terms shift to provide portfolio companies a competitive advantage in hiring
        jedberg 7y ago
        That’s not how the real world works. Just like employee wages don’t magically go up when a few employers pay more, it is unlikely that things will shift in employees favor. The situation now will just be the new normal.
        vikramkr 7y ago
        Then in that case, the employees aren't actually providing value to be worth the favorable terms in term sheets and aren't providing a real competitive edge and so aren't worth negotiating better terms for. I don't think that's the case, and if employees provide a real competitive advantage, then companies will need to be able to attract them to survive. I don't see a world where in the long run (and I admit that could be decades - it took that long for terms to become founder friendly) employees don't get more power if they actually bring value. All it takes is a few years of wework style Fiasco's where the founder walks away with a huge payday and workers get screwed before workers start negotiating harder, and founders that can oblige would be in a better position. And frankly, if that ends up not mattering for company success, then the employees clearly aren't worth getting employee friendly terms. I don't think that's the case though.
- gxqoz 7y ago
  The recent book VC: An American History by Tom Nicholas argues that the whaling industry in the early 19th century shared many characteristics with modern VC markets. The profits of whaling vessels had distributions similar to startups (most were not profitable, a few profitable, a very few delivered excess returns). Whaling captains were incentivized similar to startup founders (returns heavily tied to how much whale oil they harvested rather than a fixed salary). Many of the families that invested in whaling ventures branched out into other industries like textiles. https://www.goodreads.com/book/show/42449471-vc https://www.goodreads.com/book/show/42449471-vc
  - PakG1 7y ago
    Hah, you remind me of the scene at the beginning of The Perfect Storm where the owner of the boat explains to Mark Wahlberg's character why he gets paid so little while George Clooney's character gets paid so much. Compare sailors working the ship to the grunts working the startup.
    - gxqoz 7y ago
      Everyone on board the ship was actually paid a share of the profits. But yes, there were disproportionate rewards to those at the top, just like in a modern startup.
- TACIXAT 7y ago
  Is this really so different now? Every VC seems to want a warm introduction.
ozten 7y ago
I wish the article noted that $30k was in which year roughly, and value in today's currency. Interesting research!
- tzs 7y ago
  That plow was patented in 1797. If the $30k was $30k then, it would be about $450k now. I doubt, though, that it was $30k then. Blacksmiths in 1800 on average made under $1/day [1]. It would be very rare for a blacksmith then to be able to put $30k toward an invention. (For comparison, $25k/year was the salary of the President of the United States then). If the $30k is $30k now, it would have been about $2000 back then. That seems feasible for a blacksmith to save up in around a decade or so. [1] https://babel.hathitrust.org/cgi/pt?id=wu.89071501472&view=1up&seq=65 https://babel.hathitrust.org/cgi/pt?id=wu.89071501472&view=1...
  - gxqoz 7y ago
    Comparing values in the past to values today is tricky and comes down to judgement. "It helps if one understands how the comparators are constructed. They have two components. The first is prices of a range of goods which the ordinary person might buy, such as bread, meat, beer or clothing and possibly rent or the cost of fuel; these are gathered from a range of archives or surveys. These prices have to be added together in a way which reflects the proportions which these items formed in the spending of an average person. If – as was the case in the past – bread accounted for 25 per cent of what the average person spent, then the price of bread has to have an influence of 25 per cent on the overall set of prices. This is known, in the jargon, as its ‘weight’ and the weights add up to 100 per cent. A calculation is then done for each year, multiplying the price of each good by its weight, adding the results together and finally dividing by the number of items to get an average price of goods for that year. Then, if the result is a figure of, say, £10 in 1800 but of £767 in 2017, we say that prices rose between those two dates by about 77 times. Another way of putting it is that £10 in 1800 equates to – or has the same ‘purchasing power’ as – £767 today." https://www.historytoday.com/archive/feature/changing-value-money https://www.historytoday.com/archive/feature/changing-value-...
gumby 7y ago
Researched in a book by L Sprague de Camp! That explains some things in his fiction. Though strangely the origin of modern project finance seems to have evaded the author: seems to have evolved in New England where groups would band together to fund whaling and slaving missions (yes, abolitionist Massachusetts made a huge part of its wealth on slave missions and slave mortgages). These bands were themselves evolved from a European model, in particular England (later Great Britain), Portugal, and Spain.
redis_mlc 7y ago
I read the article, which is kind of clueless. Nice pics, though. Any history book of Silicon Valley details the origin of organized VC. After reading that, you can understand the overall context of informality before that. Also, saying Tesla was funded by Westinghouse is a strange way to look at it - his patents were used to create the company in the first place. If you're interested in seeing those "heavy metal" early inventions in person, I highly recommend the Henry Ford and Greenfield Village in Michigan: https://en.wikipedia.org/wiki/The_Henry_Ford https://en.wikipedia.org/wiki/The_Henry_Ford For a more modern example, Frank Robinson founded Robinson Helicopter in SoCal, which is the world's largest producer of helicopters by shipments. I think he self-funded his first R22 prototype, then a local businessman who was intrigued invested after that: https://en.wikipedia.org/wiki/Robinson_Helicopter_Company https://en.wikipedia.org/wiki/Robinson_Helicopter_Company Similar to SpaceX, Robinson had to in-source a lot of components to get the repeatable, aerospace-level reliability needed. The R22 and R44 are the dominant helicopters used in flight training, LEO and newsgathering in the USA and are about 25% of the cost of a Bell helicopter, so a real game-changer.

101 points by raleighm 7y ago

Skip to the summary at the end for the juicy bits (although the rest was interesting reading too). In the summary is this: "What there doesn’t seem to have been, at least in what I’ve seen so far, is any kind of structure around early-stage financing. I haven’t seen any formal networks of angel investors, and nothing comparable to venture capital. Funding seems very ad hoc, dependent on the circumstance and connections. If so, then the rise of institutional early-stage funding in the mid-20th century was a real revolution." And I think that is the crux of it. Most people back in the day had to find wealthy people they knew, but there was no "industry" around early stage financing. Now there is, which has probably been great for funding ideas that would not have otherwise been funded, but is also a double edged sword for entrepreneurs, as the institutions get better and better at extracting as much value as possible.

vikramkr 7y ago
I don't think it's a double edged sword, if there are more financiers there's more competition, and if it's institutionalized then terms and all become more easily compared. I think you're much more likely to get a good deal when there are multiple investors than when you have to count on the goodwill of the one investor you have access to
- jedberg 7y ago
  It's an oligopoly though. The investors know each other's terms, they have no reason to compete on that aspect. They compete on other aspects, like their network with access to potential acquirers and access to subject matter experts. They don't really compete on terms, other than valuation. If anything, as things become more transparent, the deal terms are becoming more homogenized.
  - vikramkr 7y ago
    I don't think homogenized is a bad thing though, it standardizes the process, and with swings in the market (e.g. emergence and dissapearance of SoftBank) we see deals change accordingly. By all accounts terms have changed dramatically from what they used to look like in the 80s to now, and an oligopoly is not a monopoly. Founders have some semblance of market power now, and with increased transparency people know what they're getting into and are able to make sure they're getting a deal on par with what they deserve. The competition on valuation is probably the most important part now given that most other terms are standardizes and generally founder friendly (and I don't think terms are as homogeneous among all investors as you might think, there are some crazy termsheets out there...)
    - jedberg 7y ago
      The terms are founder friendly, but they are no longer employee friendly. All the value that used to go to employees goes to VCs now. It's a lot harder to hire good employees when they look around and see that they have a much better chance of an equity payout with RSUs from Google.
      - vikramkr 7y ago
        And if that proves out to be problematic for companies (markets aren't instantly efficient, it takes time for information to be incorporated), I think we'll see terms shift to provide portfolio companies a competitive advantage in hiring
        jedberg 7y ago
        That’s not how the real world works. Just like employee wages don’t magically go up when a few employers pay more, it is unlikely that things will shift in employees favor. The situation now will just be the new normal.
        vikramkr 7y ago
        Then in that case, the employees aren't actually providing value to be worth the favorable terms in term sheets and aren't providing a real competitive edge and so aren't worth negotiating better terms for. I don't think that's the case, and if employees provide a real competitive advantage, then companies will need to be able to attract them to survive. I don't see a world where in the long run (and I admit that could be decades - it took that long for terms to become founder friendly) employees don't get more power if they actually bring value. All it takes is a few years of wework style Fiasco's where the founder walks away with a huge payday and workers get screwed before workers start negotiating harder, and founders that can oblige would be in a better position. And frankly, if that ends up not mattering for company success, then the employees clearly aren't worth getting employee friendly terms. I don't think that's the case though.
gxqoz 7y ago
The recent book VC: An American History by Tom Nicholas argues that the whaling industry in the early 19th century shared many characteristics with modern VC markets. The profits of whaling vessels had distributions similar to startups (most were not profitable, a few profitable, a very few delivered excess returns). Whaling captains were incentivized similar to startup founders (returns heavily tied to how much whale oil they harvested rather than a fixed salary). Many of the families that invested in whaling ventures branched out into other industries like textiles. https://www.goodreads.com/book/show/42449471-vc https://www.goodreads.com/book/show/42449471-vc
- PakG1 7y ago
  Hah, you remind me of the scene at the beginning of The Perfect Storm where the owner of the boat explains to Mark Wahlberg's character why he gets paid so little while George Clooney's character gets paid so much. Compare sailors working the ship to the grunts working the startup.
  - gxqoz 7y ago
    Everyone on board the ship was actually paid a share of the profits. But yes, there were disproportionate rewards to those at the top, just like in a modern startup.
TACIXAT 7y ago
Is this really so different now? Every VC seems to want a warm introduction.

ozten 7y ago

I wish the article noted that $30k was in which year roughly, and value in today's currency. Interesting research!

tzs 7y ago
That plow was patented in 1797. If the $30k was $30k then, it would be about $450k now. I doubt, though, that it was $30k then. Blacksmiths in 1800 on average made under $1/day [1]. It would be very rare for a blacksmith then to be able to put $30k toward an invention. (For comparison, $25k/year was the salary of the President of the United States then). If the $30k is $30k now, it would have been about $2000 back then. That seems feasible for a blacksmith to save up in around a decade or so. [1] https://babel.hathitrust.org/cgi/pt?id=wu.89071501472&view=1up&seq=65 https://babel.hathitrust.org/cgi/pt?id=wu.89071501472&view=1...
- gxqoz 7y ago
  Comparing values in the past to values today is tricky and comes down to judgement. "It helps if one understands how the comparators are constructed. They have two components. The first is prices of a range of goods which the ordinary person might buy, such as bread, meat, beer or clothing and possibly rent or the cost of fuel; these are gathered from a range of archives or surveys. These prices have to be added together in a way which reflects the proportions which these items formed in the spending of an average person. If – as was the case in the past – bread accounted for 25 per cent of what the average person spent, then the price of bread has to have an influence of 25 per cent on the overall set of prices. This is known, in the jargon, as its ‘weight’ and the weights add up to 100 per cent. A calculation is then done for each year, multiplying the price of each good by its weight, adding the results together and finally dividing by the number of items to get an average price of goods for that year. Then, if the result is a figure of, say, £10 in 1800 but of £767 in 2017, we say that prices rose between those two dates by about 77 times. Another way of putting it is that £10 in 1800 equates to – or has the same ‘purchasing power’ as – £767 today." https://www.historytoday.com/archive/feature/changing-value-money https://www.historytoday.com/archive/feature/changing-value-...

gumby 7y ago

Researched in a book by L Sprague de Camp! That explains some things in his fiction. Though strangely the origin of modern project finance seems to have evaded the author: seems to have evolved in New England where groups would band together to fund whaling and slaving missions (yes, abolitionist Massachusetts made a huge part of its wealth on slave missions and slave mortgages). These bands were themselves evolved from a European model, in particular England (later Great Britain), Portugal, and Spain.

redis_mlc 7y ago

I read the article, which is kind of clueless. Nice pics, though. Any history book of Silicon Valley details the origin of organized VC. After reading that, you can understand the overall context of informality before that. Also, saying Tesla was funded by Westinghouse is a strange way to look at it - his patents were used to create the company in the first place. If you're interested in seeing those "heavy metal" early inventions in person, I highly recommend the Henry Ford and Greenfield Village in Michigan: https://en.wikipedia.org/wiki/The_Henry_Ford https://en.wikipedia.org/wiki/The_Henry_Ford For a more modern example, Frank Robinson founded Robinson Helicopter in SoCal, which is the world's largest producer of helicopters by shipments. I think he self-funded his first R22 prototype, then a local businessman who was intrigued invested after that: https://en.wikipedia.org/wiki/Robinson_Helicopter_Company https://en.wikipedia.org/wiki/Robinson_Helicopter_Company Similar to SpaceX, Robinson had to in-source a lot of components to get the repeatable, aerospace-level reliability needed. The R22 and R44 are the dominant helicopters used in flight training, LEO and newsgathering in the USA and are about 25% of the cost of a Bell helicopter, so a real game-changer.