Some thoughts on the building of The Panama Canal and venture capital
As I write this, a lazy snowstorm mixed with occasional sunshine is breaking the persistent Utah winter inversion. The dissipating inversion is a hopeful sign (as I am sure that you agree!) reminiscent of what has been a very encouraging quarter — easily our best yet — hope things are tracking for you as well!
Recently I have been doing some thinking about the historical context for venture capital. Technology has certainly changed but most of the success/ failure in the world of venture capital is determined by the delicate business of people making good decisions based on limited data. One really interesting case study is the building of the Panama Canal. This is top of mind for me because I recently finished reading The Path between the Seas by David McCullough. Putting aside for now the questions of the role of government in such endeavors, I believe that the learnings are fundamental and very applicable for our 21st century startups.
There were 2 major eras in the building of the Panama Canal — the French era and the American era. We all know how the story ends — the French fail and sell their assets on a fire sale basis and the American successfully build the canal. But why? The French at the time were undisputed leaders in the engineering in the world. How was it that the Americans succeeded where they failed?
The French Era. The French effort was led by Ferdinand de Lesseps, a charismatic, heroic figure in France at the time because of his success in building the Suez canal which at the time was arguably the most impressive engineering feat in the history of the World. De Lesseps called a world-wide congress of experts and announced the historical effort to create a company to build a sea-level canal in Panama. Based on his experience at Suez, de Lesseps had a firm conviction that the canal needed to be a sea level canal (instead of a lock-system) and largely ignored the information provided by the Americans who had spent significant time in Panama building a railroad and were familiar with climate conditions. Furthermore the information regarding the impact of disease conditions of Yellow Fever and Malaria were largely ignored as important factors for the work. He also ignored the cost estimates and engineering limitations produced by his own French engineers including the role of Chagras river — a river that ran right through the proposed site and could rise as much as 40 feet during the floods of the rainy season. De Lesseps raised a record $400MM (over the life of the project) largely from ordinary French citizens in support of his grand effort promising that the canal would be dug in a mere 6 years and would be enormously profitable. There was such demand to invest at the time that he turned away 30%+ of the money he raised.
The Results. With historical perspective the results are not surprising: the cost in blood, treasure and lost prestige was enormous for France and its citizen-investor base. An estimated 22,000 people died in the eight years that the French company worked on the project, many of them were the best and brightest of the French engineering schools at the time. The company repeatedly went back to raise additional capital with rosy and exaggerated claims of the progress being made. This extended the life of the company but eventually the truth surfaced and things unwound quickly. The company finally went bankrupt with only 2/5 of the canal having been dug in 8 years (2 year longer than planned), de Lesseps’s reputation was destroyed and the assets were eventually sold to the Americans for $40MM.
Key Statistics[1]
French PeriodAmerican PeriodTime8 years9 yearsBudget (Actual)$120MM ($400MM)$352MM ($375MM)Casualties22,0005,609
The Americans were able to learn extensively from the mistakes of the French and under the leadership of Theodore Roosevelt (although he didn’t live to see it completed) were able to set a course that led to the successful completion of the canal. Probably more surprising was how close the Americans came to making the exact same mistakes as the French but for the bold decisions of a few influential leaders.
Here are my “lessons learned” in comparing the French and American experiences in Panama and thinking about the implications for our work at Kickstart.
Visit in the rainy season (better to know the worst case scenario). Being an optimist is a given in our line of work. However, ignoring the risks or negative realties nearly always spells failure for companies and venture capitalists. Due diligence matters even though much is intangible and ambiguous in the early stages of a company. When De Lesseps visited Panama, he came during the idyllic conditions of the non-rainy season in order to reinforce the picture that he had painted for investors and stakeholders. He didn’t see the mudslides and the outbreaks of yellow fever and the havoc that was wreaked on equipment during the downpours that could bring floods in a few hours and most of all he didn’t see the Chagras river in flood. In contrast, Teddy Roosevelt made it a point to come to Panama in the rainy season and experienced Panama at its worst. He learned from the French mistakes. There were strong political factions within the US that wanted to push President Roosevelt to repeat the French mistakes. These factions pushed for a sea-level canal for no other reason other than national pride. Unlike the French, Roosevelt listened to the protests of his engineers on the ground. It took some time and a Yellow Fever scare that led to a wholesale evacuation from Panama before the Americans were willing to give unlimited resources to William Gorgas to test the “Mosquito Theory” of the source of Yellow Fever and Malaria. The slowness in adopting the “Mosquito Theory” is one of the more baffling examples of the challenges of taking on conventional wisdom with science. Prior to the French era there were multiple scientists that were advancing a theory that Mosquitos were the cause of Yellow Fever and Malaria. These ran contrary to the prevailing wisdom that these diseases were caused by the noxious vapors of the swamp and the earth. One illustrative account is of an American army doctor that talks about how his expedition to Panama remained impressively free of disease largely because their Mosquito netting “blocked the noxious disease-causing vapors.” What is obvious now was not obvious then. Ultimately President Roosevelt insisted that the American do their homework, opting to listen to the engineers and the physicians instead of the politicians which lead to a workable canal plan and a much more healthy workforce than the French.
We believe that due diligence matters a lot despite the nascent nature of much of what we invest in at Kickstart. We have structured the culture and our team around this belief. A Kauffman study showed that due diligence was the most important factor in explaining return differences in Angel investments.[2] Due diligence often involves learning from the failures of others whenever possible and being willing to test and examine long-held conventional wisdom.
Seeking only for confirming data. We all want to be right and we are naturally more sympathetic and excited to hear from those that agree with us. Ignoring disconfirming information as it surfaces is as common as it is deadly. From the beginning, de Lesseps’s thesis was that he was going to build sea level canal come Hell or High Water. (turns out they both came and he refused to change his mind till it was too late). There was ample disconfirming data from the very beginning to the end (death tolls, difficulty in digging, over budget, behind schedule etc…) and he chose to explain it away and precede full steam right into the wall. In contrast, the US finally starting listening to the scientists about the “Mosquito Theory” when an epidemic of Yellow Fever had workers fleeing from the Isthmus. Yellow Fever went from claiming upwards of 20% of the lives of workers under the French to being eradicated from Panama under the Americans.
In our companies we are constantly evaluating whether our investment thesis in the company is being proven or disproven and iterating as appropriate. Given the financial and emotional investments that we have in these companies it can be challenging to acknowledge when disconfirming data necessitates a strategy change, team change or even a shutdown of the company. With our use of an outside investment committee, our use of a monthly dashboard, and our culture of team ownership of every investment we have gone to great lengths to combat this bias.
Beware of learning the wrong lessons from success. De Lesseps was a hero. He had the confidence, the financial backing and the hearts of entire nation behind him. He had just pulled off the most impressive feat of engineering in the world. There was every reason to believe that he would be successful. Far more frightening for the investor, De Lesseps believed his own headlines (and perhaps felt they were understated). He surrounded himself with other “true believers” who rarely questioned him. De Lesseps belief was that French bravery and skill could overcome any obstacle. There were fundamental flaws with his Panama plan that could not be fixed by any amount of bravery or charisma — most importantly the geography and climate of Panama. A sea-level canal was essentially impossible given the technology of the day. Without eradicating disease no canal would be possible.
If things aren’t working — hard work often isn’t the problem. In our experience every startup venture has enough unique circumstances and challenges that our key concern with successful CEOs is often — are they still humble enough to listen to the market and the advice of the board and others. The trick is investing in managers that are transparent enough to acknowledge and understand where things are as quickly as possible while pivots are still available.
Remote-CEOs don’t work. De Lesseps spent his time in Paris and didn’t empower his local management to change or adapt the plan as it became obvious that it wasn’t workable. Panama was dangerous and trying and it was really hard to get talented managers to move there to direct the work. For the French, their leaders kept dying from disease. An interesting question is if De Lesseps himself had been living in Panama would the French have made disease eradication a higher priority? I think so. The American’s made the same mistake initially. In their effort to avoid any potential graft or waste they created an enormous bureaucracy that didn’t allow Panamanian leadership to make decisions to move the work along. Thankfully, Roosevelt listened to his team on the ground, streamlined the bureaucracy, and put his top man on the ground in Panama.
The analogy to the startup world is direct. I have probably have had direct experience with 8+ startup companies that employed remote-CEOs and have not seen a single one work (product failures, major milestone-misses, several shutdowns) even with the impressive array of technology that we can use to collaborate. The cost in team coordination, travel, engineering and other deadlines is just too difficult to overcome for an early stage company.
