How Have Private Markets Evolved Over the Years?

If you think about it, private markets are much older than their public counterparts. We can trace it right back to ancient civilisations and the oldest recorded instances of assets changing hands.
However, partly because of the air of mystery and lack of access that always shrouds the private markets, we don’t generally associate alternative assets with historical investments.

The evolution of private markets takes us right through the different stages of progress, innovation and economic development. In this module, we’re going to take a deeper look into how the private markets have evolved over the years. Join us as we journey through the ages and explore the development of the alternative investment space. This first chapter is dedicated to tracing the roots of venture capital.

Long before the term “venture capital” was coined, the ancient kingdom of Abyssinia, (now modern-day Ethiopia) was demonstrating the principles. This kingdom was founded in the 13th century and it continued till the early 20th century. To date, it remains the only African country to avoid colonialism!

Of course, the early applications of venture capital look quite different from what we envision it to be today. But at the core, the premise remains the same. Wealthy individuals would provide capital to merchants and fund their traditional expeditions to different areas.

The expectation? It was quite simple — they received a portion of the profits.

Imagine an explorer, if you will, who wants to discover what lies beyond the mountains. He expects to find more settlements and more food sources. But, he will need enough supplies for at least a month. How will he arrange for that?

He runs to the wealthiest man in the village and asks to borrow from his store. As for the repayment, he agrees to share whatever he finds on his quest in equal proportion. So, too, the deal is finalised and the explorer sets off on his journey!

If this sounds familiar, it is because this is still how we function. Wealth has long since been concentrated in the hands of a few people. But to make this wealth productive, it has to be used to fund business ventures. This can range from trade expeditions to building a new mud hut to excavating for a new kind of material.

Abyssinia, with its strategic location in the Horn of Africa, was a bustling hub in the ancient trade networks. Its economy thrived on commerce, extending from the interior highlands to the Red Sea coast, connecting Africa to the wider world through trade routes that spanned across the Arabian Peninsula and beyond to India.

Abyssinia’s traders were the venture capitalists of their time, investing resources in expeditions across challenging terrains and perilous waters. These ventures were fraught with risks, from the unpredictability of weather to the threat of bandits, mirroring the uncertainty faced by modern startups. The rewards, however, were substantial. Goods such as gold, ivory, and frankincense were traded, bringing wealth and prosperity to those who dared to invest in these risky endeavours.

The Voyage of Christopher Columbus: A Risky Investment with the Possibility of a High Payoff

The year was 1492, a time of kingdoms and explorers when the known world was ripe for discovery. Christopher Columbus, an ambitious navigator, approached the Spanish throne with a daring proposal: a westward voyage across the Atlantic Ocean in search of a new route to Asia.

Columbus’s plan needed substantial support, and it found favour in the eyes of King Ferdinand and Queen Isabella of Spain. The Spanish monarchs, intrigued by the potential of expanding their empire and gaining a competitive edge in the lucrative spice trade, decided to finance his expedition.

The Agreement

The terms of the agreement, known as the Capitulations of Santa Fe, were negotiated in April 1492. Columbus was promised a tenth of all riches found, the governorship of any lands encountered, and the title of Admiral of the Ocean Sea.

The Spanish crown provided three ships – the Niña, the Pinta, and the Santa María – and a crew. The total cost of the voyage is estimated to have been about 2 million maravedis (a Spanish coin), equivalent to roughly $100,000 today.

The Outcome

This investment was a significant gamble. The risks were enormous – many believed Columbus would simply sail off the edge of the world or perish in uncharted waters.

Columbus’s voyage did not lead to the discovery of a new route to Asia. Instead, it led to the unintended discovery of the New World, opening up the Americas for European exploration and colonisation. He returned with gold, exotic plants, and Indigenous peoples. The voyage also laid the groundwork for Spanish colonisation in the Americas, leading to immense wealth for Spain in the following centuries.

According to Harvard professor Tom Nicholas,

“Although other industries across history, such as gold exploration and oil wildcatting, have been characterized by long-tail outcomes, no industry gets quite as close as whaling does to matching the organization and distribution of returns associated with the VC sector.”

In the 18th and 19th centuries, whaling expeditions can be compared to investing in high-risk high-reward tech startups. It was the allure of the ultimate mother lode, an immense source of valuable whale oil and baleen. This is what attracted investors to fund whaling expeditions despite the obvious risks. They would equip ships and crews, in exchange for a portion of the profits.

The probability of payoff, in this case, was low, to say the least. But when you did get that payoff, it was worth it. The success of a whaling voyage depended on numerous variables, making each investment a gamble. Yet, this did not deter investors.

The Power Law in Action

This is a concept in venture capital that suggests a small number of investments will generate the bulk of returns. Just as a single successful whaling expedition could cover the losses of several failed ones, a single successful startup can return an entire venture fund.

The power law was as true for whaling as it is for today’s tech ventures. Not every ship returned laden with whale oil, but those that did often brought wealth beyond measure. This early application shows the fundamental allure of venture capital: the pursuit of outsized returns through high-risk investments.

As the 20th century dawned, the landscape of venture capital began to morph from ad hoc investment adventures into a more structured and formalised industry. This era was marked by the entrance of some of the most influential families in America, who saw the potential in providing capital for ventures that promised high risks but equally high rewards. Among these pioneering investors were the Rockefellers, the Whitneys, and the Vanderbilts, among others.

The Rockefellers, for instance, extended their investments beyond the oil industry, exploring opportunities in emerging technologies and new companies. Laurance S Rockefeller, son of John D. Rockefeller Jr., played quite a pivotal role in the development of the venture capital industry. In the 1930s, he invested in companies like Eastern Airlines and McDonnell Aircraft.

In 1969, Venrock was established to formalise the investing activities of the Rockefeller family. Venrock was not just another venture capital firm — it focused on long-term value-driven partnerships with innovative companies.

Under the leadership of Laurance Rockefeller and later, Peter Crisp, a Harvard Business School graduate, Venrock financed numerous companies. By 1998, it had financed 262 companies, which together employed some 440,000 workers and had total revenues of $110 billion, resulting in a market capitalisation in excess of $600 billion!

Venrock: A Series of Fortunate Events

The company started in 1969 with a modest capital of $7.6 million. It made a few risky early bets in startups you may have heard of — $500,000 for 10% of Apple Computers, and $600,000 for 10% of Intel. As you can imagine, it made quite a killing on these investments.

Multifold Returns in a Matter of Days

Venrock’s investments in Neoforma.com and Niku.com grew exponentially in a very short span of time. The former involved a $6.5 million investment that grew to $275 million. The latter saw a $10.5 million investment grow to $700 million.

Current Position

Venrock has established a position for itself as a top venture capital fund in the US. Most recently, the company closed its new fund, the Venrock 10, with $650 million in funding!

Similarly, the Whitneys created J.H. Whitney & Company in 1946, one of the first venture capital firms in the U.S. John Hay “Jock” Whitney, alongside Benno Schmidt, put up $10 million after World War II to finance entrepreneurs. The aim was to institutionalise the venture capital industry so that innovative businesses that were deemed too risky by banks, got enough access to funding.

One of the firm’s most renowned investments was in Florida Foods Corporation. This company, which later came to be known as Minute Maid orange juice, was sold to the Coca-Cola Company in 1960!