One of the most enduring analogies for describing venture capital is the rich backers of whaling ships that prowled the Atlantic, Pacific and Arctic oceans from the 1500s to the early 20th century.
It’s a very fitting analogy that explains not just the “venture market” empire dominated by staid Quakers, but also illustrates how enterprise markets coalesce, form around and render venture markets obsolete.
The “Nation of Nantucket.”
Nantucket is the home setting of the Essex, the ill-fated whaling ship that inspired Herman Melville’s novel, Moby Dick. From an isolated grassy island, Nantucket became a leading whaling port after a largely mythological figure, Ichabod Paddock from Cape Cod, was hired to teach the islanders how to kill whales.
By 1774, Nantucket controlled 150 of the 250 whaling vessels in New England, creating fertile ground for new businesses, “enterprise markets” that transformed the island from a small community of small farmers and sheep herders to a bustling commercial center. Whaling ships “exited” their latest voyage by selling “stock”, whale oil and spermaceti wax for candles to mainland refineries.
Nantucket enabled and thrived from the enterprise markets that depended upon and sprung up because of the island's ventures. And the private “adventure capital” from the Quakers saw huge returns.
A note about enterprise markets. Very often enterprise markets begin to form at the edge of venture markets. They are often secondary markets that serve as off-takers for venture products. Like the soap makers that bought oil from whale blubber. Or secondary markets that supply ventures like the blacksmith that made the 200 harpoons needed for a voyage. As Derek Thompson puts it in The Atlantic, “Sperm oil could lubricate fancy new machinery. Inferior whale oil could light up a room. Baleen, or whale cartilage, could hold together a corset.”
However as the venture market manufactured and matured the thriving enterprise markets in the port towns back home, they lost touch with “What the markets really wanted.” And inevitably fell prey to the rushing tide of Industrial revolution technology.
In this case, the markets did not care for whale oil as it was not a primary or mass market product. The mechanics wanted cheap and effective lubrication oil, the street lamp lighters and city governments wanted lighted streets, and the women wanted reliable corsets. Blubber just happened to be the most reliable source - until kerosene, plastic and fashion changes dealt the death blow.
The whaling industry enabled the industrial revolution. It literally lubricated the wheels of the Industrial Revolution. And there were many wheels, I can easily and rightly imagine the Industrial revolution as the Great Era of Wheels and other Spinning Things. But while whales fed the enterprise markets on the mainland and became an enterprise market itself (with the introduction of explosive harpoons, mechanized chaser boats that made the adventure less arduous), technology and society swept past Nantucket, New Bedford, and the other whaling stations in New England.
That is the problem.
Technology is the primary driver and enemy of the venture market. Just as the technology of the day relied on whaling products to make everything from lubricants to home lighting, miners’ headlamps and light the streetlamps every evening, technology perhaps more than regulation killed whaling “ventures” and kickstarted a different type of value prospecting - the wildcatters of America.
Uber, for example, was supposed to dominate the world. But the technology that enabled it - the Internet - also empowers rival whale hunters, or e-hailing apps looking to harpoon the entire market. Unfortunately, that technology also empowers Uber’s users (drivers and passengers alike) to escape and swipe from one app to another.
To bring this down home, African fintech, for example, evolved from the need to power fast payments and settlement systems. However, if it settles on fishing this close to shore, it may quickly lose its edge to the newer trustless crypto systems. The whalers hunted some species to near extinction, they didn’t quite kill them off, but they came close to. In Africa, the technology that powers fintech ventures or web 2.0 as the Twitterati calls it, has not been fully exploited, but a so-called web 3.0 is threatening.
And private adventure capital, globally is already reacting.
Lesson #1: technology is a merciless beast.
The technology cycle is:
1. Enable prospecting or “venture” building
2. Transform the venture market to viable thriving businesses.
3. Threaten #2 above by enabling a disruptive market making venture.
As a result, the enterprise that wins constantly plays at the edge of #3 while still fully engaged in #1 and #2.
Africa perhaps more than most is an enterprise-first economy. This is why a lot of our entrepreneurs build in the enterprise space. It’s also a small danger around the edge of our current ecosystem. Why?
Because developing/emerging markets are relatively faster to adopt new technology, especially if the technology has a mass market appeal. PayStack’s exit was a watershed moment because in terms of what is possible, it validated the idea that African ventures are ships that can sail to other ports.
My point is, if multiple startups are coming up every single day that do not compete on anything other than a new logo, you clearly have the makings of an enterprise market, not a venture market.
In Africa, we’re not there yet, but we are slowly taking that path.
What does venture market mean?
A venture market is the pool of potentially investable startups or ventures that private adventure capital place bets on hoping for long tailed rewards.
Ventures by their nature do not rely on cut-in-stone processes. This is one reason why a venture is far from being a business. A whaler follows all the rules of navigation, but each whale is different, and the rules cannot follow the men into the fragile whaling boats after a convincing “there she blows” indicated the discovery of a whale.
Similarly each new startup or venture - which are almost always technology startups by default - is a bet that a mix of outlier ideas, a compelling folktale and hardy talent can navigate pivot progresses to develop an obsessive devotion to finding product-market-fit, the elusive modern whales.
We have a nicer name than folktale today. Every new startup dreams of becoming the next unicorn - on its way to a multi-billion dollar IPO
What is an enterprise market?
I once worked in an energy company that wanted to launch its payments app. It would basically do the same thing you could do from your bank app, USSD, Kuda, or your neighbor’s POS. That meant you could buy airtime, renew your TV subscription, and pay your power bill online. The exact same thing every fintech app is now offering, essentially showing the first signs of a crude enterprise market.
The venture market becomes an enterprise market, or a collection of business enterprises at the precise point when they are indistinguishable from Iya Ayo’s makeshift agbo shop. That is, the point where there is a formula, an easy copycat business model and a market that is basically asking for alternatives.
Granted the economics makes sense to the product teams, besides it’s not a difficult feature to slap on top of your app’s core offering. But when “seed” and even “growth” stage companies begin to compete on external features that do not compliment the core product, or is even complimented by the core product, maybe we have a small problem.
Think about it. Why did the whaling ship set sail? Certainly not to fish for salmon upstream.
Designing ventures for an African reality
Personally, it sounds like the current venture market in Africa, especially fintech as we know it, is prematurely moving closer to becoming an enterprise market. Premature because the problem sets and opportunities are still here, but the will to innovate through the pitch and roll of the sea is slowing down to only following predefined paths, and hunting closer to the shore.
The African reality is that ventures need to spring up faster than enterprises coalesce around them. The rate-of-innovation as a function of our progress and adaptability to technology advances needs to increase - if for nothing to keep up with the pace of adventure capital globally and the economic shifts that are redefining how technology and the energy that powers technology is created and consumed.
Entrepreneurs, accelerators, and operators over to you.