Whale's tooth scrimshawed by my uncle, Rune Ronnberg.In yesterday’s ramble I noted that my 3 Quarks Daily column for December would be about the current state of AI and that I would open with the following conceit:
Would you invest in a whaling voyage captained by someone who knows all there is to know about his ship, and is able to helm it in a day sail to and from home port, but whose knowledge of sailing on the open ocean, of the weather, of navigation and, above all else, of whales and whaling, is no greater than that of the typical landlubber?
I then went on to explain how that conceit applied to the AI business and a bit of why I thought it appropriate.
But that’s not what this post is about. Why’d I pick whaling? When the conceit first occurred to me it wasn’t about a whaling vessel; it was just about a sea-going ship. It was only later that I decided it should be a whaler.
Why? Because, Marc Andreesen, the well-known venture capitalist, billionaire, and blatherskite tech-optimist, likes to talk about whaling, specifically, how the financing of whaling ventures is like venture capital financing. That’s next part of this post. I conclude by looking at the overall value of whaling as an investment medium.
Whaling and Venture Capital
Here’s what Andreesen said in a recent interview with Noah Smith:
There’s something very old about what venture capital is -- Tyler Cowen uses the term “project evaluation”, the process of sorting through many possible configurations of people and ideas and then picking a few to back with money and effort to try to create something new and important in the world. In venture capital, this idea traces back to the whaling industry of centuries past, where independent financiers would fund captains and ships to hunt whales -- legend has it this is the origin of the term “carried interest”, which originally meant the share of the whale carried by the ship and kept by the captain and crew. The same “project evaluation” pattern has played out repeatedly for centuries, for many kinds of large-scale, risky projects, from colonial settlements like the Plymouth colony, to music/film/television projects, to the world’s largest private equity transactions.
But of course there’s also something very new about what venture capital is -- we fund the most cutting edge ideas and projects in the world, brand new conceptions of what technology makes possible. The founders we fund routinely break rules and create new models that people think are impossible until they happen. This includes many of the leading edge crypto ideas I discussed above, many of which assume a very different form of industrial organization than a classic joint stock company.
So we sit at the vortex of this combination of the very old and the very new. It’s certainly possible that venture capital itself gets pulled into this vortex and comes out the other side radically transformed, and in fact this is what some of the smartest crypto experts are predicting. And yet...there is, at least so far, no substitute to someone doing the work of sorting and filtering all of the potential projects and making big and risky bets.
Just set aside those last two paragraphs as they play no role in the rest of this post. I just included them for resonance, if you will.
So, whaling was a risky business and so is venture capital. It is thus no accident that they share a similar financing structure. That’s the sort of thing that would have appealed to one of my undergraduate professors, Arthur Stinchcombe, who devoted a book to the relationship between the structure of organizations and the uncertainties they faced, Information and Organizations (1990).
The Overall Value of Whaling as an Investment
What about profitability? What about ROI? A recent article by Barbara L. Coffee in the International Journal of Maritime History sheds some light on that. Her article contains this interesting paragraph:
Historically, whaling was presented as a prosperous industry and one that the country (Americans) should support. For instance, Daniel Webster, on 3 May 1828, gave a Senate speech supporting the construction of a breakwater at Nantucket: ‘There is a population of eight or nine thousand persons living here on the sea, adding largely every year to the amount of national wealth by the boldest and most preserving industry.’ Whaling was also presented positively in the business magazines of the time:
The importance of this traffic, not only in its profits, which have, perhaps, been greater than those of any other single object of our national enterprise, the capital which is invested in its expeditions, embracing nearly one tenth part of the tonnage of the country, the importance of the moral interests which it involves, comprising the conditions of that large and valuable class of seamen who are its active agents, and the circumstances bordering on the sublime which attend its hazardous expeditions, all render it an interesting subject to our commercial and mercantile population.
In its importance as augmenting the wealth of the country, it is not equaled by any other species of traffic, and presents a marked example of productive labor.
... and the luxurious edifices which adorn many of the cities, attest the enterprise of those who are engaged in the traffic and the success of their labors.
In his speech to Congress on 1 May 1844, Grinnell stated: ‘Commercial History furnishes no account of any parallel; our ships now outnumber those of all other nations combined, and the proceeds of its enterprise are in proportion, and diffused to every part of our country.’
Coffee’s work, achieved by benefit of comprehensive hindsight not available to investors in the 19th century, shows quite a different picture. She concludes:
The nineteenth-century American whaling industry is steeped in tales of great wealth, tragic losses and considerable fortitude. While rich in stories of voyages good and bad, the whaling lore is poor in the accounting of the financial stakes and returns of the thousands of voyages that took place. The goal of this article was to establish the financial facts behind the legends. To accomplish this, the financial returns of the owners of nineteenth-century whaling vessels were reviewed using materials that have been born digital, sources that have been digitized and those still only in print. [...]
The current article takes the financial appraisals of Davis et al a step further by expanding the number of voyages analysed, and by reviewing more years and more harbours. Its main finding relates to risk premiums, which may be defined as the additional return to compensate investors for tolerating risk greater than a risk-free asset. During the nineteenth century, US government bonds, a risk-free asset, returned an average of 4.6%; whaling, a risky asset, returned a mean of 4.7%. This shows 0.1% as the risk premium for whaling over US government bonds.
Think about that. Coffee examined 11,257 voyages undertaken from 1800 to 1899 and found that, for all the risk it entailed, investing in whaling ventures was only slightly better, a 0.1% risk premium, than investing in US government bonds. I wonder what the risk premium is for the venture capital business taken as a whole?
People in the nineteenth century would not have had all that data, along with the analysis, available to them when considering where to invest their money. Note that we’re not just talking about wealthy people, people who can afford to lose some money. Coffee quotes a remark in Moby Dick (Chapter 16: The Ship), “People in Nantucket invest their money in whaling vessels, the same way that you do yours in approved state stocks bringing in good interest.” Their decisions may well have been biased by anecdotes about successful voyages, while forgetting those voyages that lost money or worse, were lost at sea. These days investors in tech ventures are no doubt attracted by stories of unicorns, but at least the law limits investment in venture funds to those who can prove they have the means to do so. You and I are safe from losing our money in that particular way.
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