The Ancient History of VC and How It Shaped Innovation
It is a story as old as time itself. An inventor comes up with a crazy idea that can change the world, they get ridiculed by their peers and traditional investors, yet through sheer perseverance and hard work, they turn their visions into reality and make the world a better place.
However, this does not answer the most fundamental question. If those, inventors were laughed at by their contemporary investors, how did they manage to get the resources they need to actually change the world? Here is the story of the adventurous group of people, who are always investing in a brave new world; Venture Capitalists.
The story actually begins thousands of years ago in the heart of the Arabian Desert. After the trade revolution that happened through the domestication of camels, finally allowing humanity to trade over vast distances and through harsh environments, a bigger financial problem appeared.
Due to the high risk of the venture of trading over long distances, poorer merchants found themselves in a perilous situation, where they can lose everything on any given trip. The toll of this risk was so huge, that poorer merchants would undergo a suicidal ritual called i’tifad in which they starve themselves to death if they happen to lose their goods!
However, it was out of this misery that one of the most brilliant financial models was born; Qirad, an ancient predecessor of what we now call Venture Capital. The idea was relatively simple! Rich merchants would provide the capital needed to buy the goods and fund the trip and young entrepreneurs, who lacked the resources, would embark on the adventure of actually going on the trading trip. If the venture was successful, then the investor gets his money back and 75% of the profit, and the entrepreneur gets 25% profit on the carried goods. If the venture fails, then the investor loses his money, and the entrepreneur would lose nothing but his time and effort.
This model was so powerful, that it kept reappearing in history under different names and across geography. For example, the same system, under the name of Mudarabah, would play a critical role in propelling Baghdad to its golden age in the Middle Ages. It would later reappear in Venice, under the name of Colleganza, catapulting Venice to become an economical powerhouse. Then again in the US during the 1950s, under the name of Venture Capital, and yet again propelling the US to being the richest nation in history! As Peter Thiel puts it in his book Zero to One:
“After all, less than 1% of new businesses started each year in the U.S. receive venture funding, and total VC investment accounts for less than 0.2% of GDP. But the results of those investments disproportionately propel the entire economy. Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP” — Zero to One, Peter Thiel
Similar to their ancient counterparts, modern VCs are adventurers at heart and perform a very similar job. Let’s say you are a young entrepreneur with an idea that could transform the world we live in. To realize your vision, you need money, lots of it. However, since you are daring to do something new, there is an enormous risk associated with your venture. So, what can you do?
Your first thought might be to go to a bank and get a loan. But, if your idea is actually innovative, there is no way any bank is going to give you the money. They would just think it is “too crazy” as they always did and if they do give you the money, you will have to suffer from a huge interest rate.
Which leaves you with the second option. Simply, find someone as crazy as you are, who believes in your vision, and actually has the resources to provide capital for your adventure into the uncharted territory of innovation!
This is where venture capitalists shine. A VC is an investor that provides capital to a company in its early stages in exchange for shares, which makes them your partner in good and bad. That’s why they will always put your long-term interests before anything else since your success is their success! If you build the next Google, they win big! If you build an online pet store, well they will still be at your side as you both lose everything.
This has been the way, innovators throughout history used, to achieve their visions and create a better world for all of us. VCs might have had different names and backgrounds throughout history, but they always had one thing in common; taking bold risks into the future and supporting entrepreneurs who dare to dream big!
Luckily, there is now more money deployed in VC than ever before! In the next articles, we will dive deeper into how VCs work and how you can benefit from it 🚀
Originally published at http://omarhedeya.com on October 22, 2021.
