Value Investing

History’s Investor-Entrepreneurs

Joe Carlen, author of the acclaimed The Einstein of Money is out with a new book, A Brief History of Entrepreneurship. Joe’s guest post followed by full bio at the bottom of the post.
As I was writing my recent book, A Brief History of Entrepreneurship, I had many discussions with a patent attorney friend of mine about the inventor-entrepreneur. The latter, like 18th century Britain’s James Watt and modern America’s Elon Musk, is a particular type of entrepreneur who stands at the intersection of profit-seeking and profound technological innovation. Yet, as it turns out, from antiquity until the present, the investor-entrepreneur is at least as prominent and significant as the more celebrated inventor-entrepreneurs. This piece, drawing partly from my recent book, highlights some compelling aspects of the intersection between investment and entrepreneurship.

History's Investor-Entrepreneurs

Entrepreneurs

One Shekel of Your Private Silver

The heading above is drawn from an actual exchange between entrepreneurs in ancient Mesopotamia, an economy powered by a surprisingly diverse array of credit and equity instruments. In fact, it is possible that the very concept of credit was the brainchild of the Mesopotamian entrepreneur, otherwise known as a merchant-adventurer.

The origins of passive equity, arguably the central premise of modern finance, are traced to Mesopotamia: The merchant-capitalists and/or other parties would enter into agreements with the merchant-adventurers. These contracts would stipulate that the idle party (the merchant-capitalists) would provide the capital required by the merchant-adventurer who was undertaking the work and travel. Then, upon conclusion of the trade expedition, the profits would be split between the two parties.

The Via Sacra – The Wall Street of Ancient Rome

In stark contrast to Mesopotamia, ancient Rome was the antithesis of an entrepreneurial society. In fact, the patrician class who wielded the power in that civilization so detested entrepreneurial activities that they were delegated to the lowly plebeians and even to slaves. Regarding the former, those who met a threshold of property ownership were granted horses to serve as legionaries in the Roman army and thus this group became known as equitibus, equestrians.

These higher class plebes recognized that, due to patrician disdain for entrepreneurship, many profit making opportunities were theirs for the taking. So, as the Roman Empire proceeded to expand throughout the known world, not only did equestrian contractors develop many of the largest foreign building projects but they took the initiative to sell shares in those projects to Roman citizens, generally patricians and fellow equestrians. Soon, a substantial number of these horseback entrepreneurs found themselves working as stock promoters and investment bankers on Rome’s Via Sacra, the Wall Street of antiquity.

Capitalist Monks

As entrepreneurship languished in Europe during the Middle Ages, it found greener pastures further east in the emerging civilization of Islam and, even further east, in Tang and Song Dynasty China. In fact, the latter still stands as one of history’s most definitive examples of an entrepreneurial society. The span of those two dynasties (618 – 1279) was also a time of tremendous creativity in Chinese society: Notable innovations included paper money (mid-800’s), canal locks (984), the compass (1044), gunpowder (1044), movable type (1045), mechanical clocks (1092), and playing cards (1122).

This inventiveness also transformed the realm of investment, particularly during the Song Dynasty. Curiously, many of the change agents were found among the country’s half-million Buddhist monks whose institutions were among the most prevalent and creative sources of loan capital and investment opportunities. They were so adept at devising profitable financial instruments which, in turn, funded their pawnshops and other businesses, that these monks amassed enough wealth to arouse the envy of dynasty rulers – a sure sign of great success.

The “long-life treasury” investment is among the more remarkable examples of this monastic ingenuity. It is a form of what was known as dou-niu, “collecting and tying.” The latter is a term denoting the pooling or collecting of resources from multiple passive investors and then tying everyone’s capital to the same set of rules, like much of modern finance. Unlike some forms of dou-niu, the long-life treasury, detailed in a chapter entitled “Flying Money and Capitalist Monks”, had elements of both an equity investment and a loan. However, a boat-building company, a teahouse, or a number of other prominent categories of businesses in the Song dynasty would employ the dou-niu arrangement to sell shares representing real business ownership. At least in China, medieval investor-entrepreneurs were surprisingly sophisticated.

World Conquest and Share Certificates

To a large extent, the European colonization of the Americas and Australia, along with much of Africa and Asia, was the handiwork of investor-entrepreneurs. In 2010, a prominent business media outlet revealed that one of the original 1606 share certificates of the Dutch East India Company (DEIC) had just been accidentally unearthed in Holland. The writer of the piece observed that such a document carries enormous historical importance, not to mention an estimated auction value of more than $760,000. After all, aside from the fact that the share is probably the world’s oldest extant stock certificate, the DEIC helped establish the world’s first fully-fledged stock market, the Amsterdam exchange.

Just as the DEIC employed investor funds to establish trading stations and forts throughout Asia, so too did the French East India Company. However, it was the private entrepreneurs behind the British East India Company (BEIC) that really mastered the art of large-scale equity fundraising. Even at its inception in the early seventeenth century, more than 90% of BEIC shareholders had invested less than £300, i.e. less than roughly $90,000 in current funds – investments modest enough allow a wide swath of the British merchant class to participate. As well, the directorship of the company was composed chiefly of private merchants.

The many successful expeditions of the BEIC continually enlarged its shareholder pool, enabling the directorship of the BEIC to raise the modern equivalent of tens of millions of dollars as needed. Through such share-granting entities as the Hudson’s Bay Company (in modern-day Canada) and the Royal African Company, enterprises throughout Britain’s expanding empire were being organized by private investor-entrepreneurs. As well, it should be noted that the overwhelming majority of these shareholders were not government employees, let alone politicians. In fact, the BEIC foreshadowed both the benefits and pitfalls of the modern system of large-scale entrepreneurship backed by a wide pool of investors.

Of course, both the prevalence and impact of investor-entrepreneurs would expand exponentially over the succeeding four hundred years. These dynamics, along with such investors as Warren Buffett and John Bogle, are also addressed in A Brief History of Entrepreneurship. However, as highlighted in this piece, the phenomenon of investor-entrepreneurship extends much further – in terms of both time and place – than we often realize.

Joe Carlen

Joe Carlen is a Certified (business) Valuation Analyst and the author of The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham (2012) and his current title, A Brief History of Entrepreneurship (Columbia University Press, 2016).