Business Blog: A whale of a VC tale

How whaling ventures in the 1800s shaped venture capital as we know it

July 8, 2024

It's hard to know much about someone born 228 years ago, but we know quite a bit about Charles W. Morgan.

Morgan was a Quaker with five siblings and resplendent penmanship, and he was a partner at a risk-hungry Philadelphia mercantile firm. And Morgan, born in a distant 1796, could be the first well-documented venture capitalist in the United States, the prototype for so many of you reading this in 2024.

The Fourth of July is meant to make us think about where we come from. So, as we shake off the holiday weekend, it seemed like the right time to do one of my favorite things in the world: Go all the way back to a long-faded beginning. That's exactly what Tom Nicholas does in his excellent book VC: An American History, where he makes this case: The venture capital industry we know today has its deepest origins in whaling ventures of the 18th and 19th centuries.

Yes, you read that right—actual whales, like Herman Melville's Moby Dick. Whaling voyages were risky and expensive, and most expeditions failed. But when they succeeded, the returns were outsized and able to offset the deluge of defeats.

And though whaling was pioneered in the 1500s by Icelandic and Spanish sailors, less than one hundred years after the American Revolution, it was dominated by Americans. New Englanders especially became known for their innovative ship designs, robust talent networks, and appetite for remarkable risk: "By around 1850, almost 75 percent of the nine hundred whaling ships worldwide were American registered."

Whaling was gruesome but adventurous, unpredictable but patterned, and high-risk but high-reward. It was also definitionally a long haul—if ships were at sea for 18 months, that was an incredibly short trip, and it wasn't uncommon for voyages to last a decade or longer. The goal was to snag as many whales as possible, in pursuit of their highly valuable whale oil (extracted from blubber), sperm oil, and whalebone.

The goal was also to come back alive, which was far from a given—there were lots of ways to die whale hunting. You could easily catch tuberculosis, dysentery, or scurvy. You could get catapulted overboard while pursuing a whale or in the throes of a vicious storm—drowning possibly close to triumph. Sailors even died in duels, since personal beefs had a way of bubbling over as the years at sea dragged on.

In this corollary, the sailors are VC-backed founders, who today are (I hope) not risking life and limb as they're building their startups. But what could fell an expedition then is a different flavor of the same things that can fell a startup now: Pods of whales were scarce and hard to find, crews could implode into mutinies or desertions, and even the most seemingly upright expedition could capsize in unpredictably violent weather. But if you were a sailor and you made it back with your hard-earned whale oil in tow, you'd get a huge incentive bonus—many sailors and captains had early forms of equity in the voyages they undertook.

And if you're thinking that this sounds brutal and wondering why anyone would do this at all, consider: The goal was always astronomical returns, and the numbers reflect that those were rare but very possible. Nicholas in the book delightfully juxtaposes historic whaling industry returns and Preqin's calculations of the net IRR of VC funds between 1981 and 2006. It's not a perfect apples-to-apples comparison, but it is uncanny: By Nicholas' calculation, about 34% of whaling voyages kicked back a zero or less return, and 32% of VC funds across that data generated zero or negative net IRR.

But someone had to make it possible for a ship to get out to sea at all, and that's where Charles W. Morgan, our beta version of a VC, came in. Morgan was known as an agent, responsible for financing and organizing long-term whaling ventures. A huge part of his job was due diligence and pattern recognition, so Morgan kept a mountain of logbooks. He tracked what and who was succeeding and made the best guesses he could as to what the best hunting grounds were at any given time. Morgan eventually had his own fleet (and an eponymous ship).

He was also a stickler for secrecy. As he entrusted a trade-secret-filled logbook to one of his captains, he also instructed: "This book is given into your charge with the full understanding that its contents will be kept by you in the strictest confidence, and that you will make a point of honor not to communicate any of its contents."

An NDA, more or less. Morgan was a prolific documenter, and that makes it possible for us to know and remember him a little. And as I read through some of his journals, I wondered if, in another 200 years, there will be someone like me, reading tweets and memos, reconstructing what some particularly chatty VCs did every day during the AI boom of the early 2020s.

And, right after Independence Day and at a breathlessly torrid moment in American politics, it's strangely nice to remember that we have many different kinds of ancestors—and even more possible futures.

See you tomorrow,

Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
Submit a deal for the Term Sheet newsletter here.

Note: The deals section will return tomorrow.