Can you Compound?
All Things Venture #089
Let’s imagine for a second, that a hundred years ago, you sold a company for $300 million dollars. What would you do?
To set the stage a little bit, a hundred years ago, at the turn toward the 20th century, the double edged safety razor was considered a modern marvel, it would be close to another decade before the first Model T car would be produced, and the modern computer wouldn’t become a reality for another 70 years. So armed with $300 million dollars, in a time period where the primary mode of communicating with someone was to write a letter.
What would you do?
I ask the hypothetical because there’s a real world example behind it. In 1901, Andrew Carnegie sold the Carnegie Steel Company to JP Morgan for $303 million dollars which is equivalent to about $10.7 billion dollars today (sheesh). Carnegie, alongside his partners, made a tidy sum. To his credit, Carnegie put his share of the sale to work in a variety of ways. He spent $2 million right off the back to found what is now Carnegie Mellon University, he established pension funds for thousands of his former employees, and over the course of his lifetime he funded 3,000 libraries across the US, Canada, and even countries as far removed as Australia.
Andrew Carnegie is a household American name. He’s one of those men of history that you’ve heard about, but if you’re like me, you’ve never actually studied. Nonetheless, what I find so interesting about the story of Andrew Carnegie is not necessarily that he became one of the richest people in American history; it’s that hidden within Carnegie’s story is a fascinating example of compounding interest and the development of the VC industry.
Here’s how it starts.
Andrew Carnegie didn’t grow Carnegie Steel to a $300 million exit on his own. He built it with his partners Henry Clay Frick, George Lauder, and Henry Phipps. The hidden story of compounding interest, and the story that is relevant for anyone operating at the intersection of technology and venture capital, is with Henry Phipps. Phipps was the finance guy of Carnegie Steel. To use Carnegie’s own words, “he’s my money-getter.” In such capacity as Carnegie’s right hand man, he was duly rewarded in the sale of the business. Phipps was the second largest shareholder in Carnegie Steel, and he used his portion of the proceeds (around $50 million dollars at the time) to establish a family office. The name of that family office, is Bessemer Trust. And within Bessemer Trust was the initial foundation of the venture capital firm Bessemer Venture Partners. Today Bessemer Venture Partners is one of the preeminent US based venture capital funds, and has more than $20 billion assets under management.
Now the story of compounding here is that Henry Phipps developed a specialty (finance) in an emerging asset class (the US steel industry) to generate wealth. He used that wealth to found Bessemer Trust, which over time has become Bessemer Venture Partners1. In a very similar fashion to Phipps, the early team at Bessemer Venture Partners applied their specialty (finance) to another emerging asset class (the US venture capital industry). And from here, the cycle repeats, again, and again, and again for over 50+ years.
The very nature of investing venture capital is a continous process of seeking out a wide range of specialists (i.e entrepreneurs) building category leading companies in the emerging domains of their choosing, and enabling them to build an asset that compounds over time. Whether it is investing in Pinterest in the early aughts of social media, or investing in Shopify to enable e-commerce entrepreneurs across the world; the practice of venture capital is the practice of compounding. And when you take the long arc of history into consideration, you can see a direct through line from the efforts of Andrew Carnegie and Henry Phipps at the dawn of the 20th century to the success of businesses like Shopify, Pinterest2, and countless others today.
This is a topic that I wanted to write about because compounding is an undercurrent of my daily life. Every day, every time I meet a new founder, every time I am pitched a new business idea, I have to think in the back of my mind, how can this business compound over twenty years? I have to think, what are the conditions that would allow compounding to occur? Do they already exist? Or do I need to believe they will exist at somepoint in the future? If the conditions have yet to occur, what is the likelihood that they will or will not? This constant undercurrent has led me to think about career in an entirely different way, and in a way that has helped me navigate this period of my life. As I get further and further removed from college and more and more established in the “real world,” the more I realize how in a lot of ways the experience of college doesn’t set you up to navigate the ambiguity of careers. The experience of college undoubtedly was formative, life changing, and it equipped me with valuable skills, but it didn’t teach me how to consider the opportunities that compounding a specialization might bring.
Prior to working here at FirstMark, I hadn’t truly thought about the power of compounding and it’s relation to having successful professional outcomes. I primarily thought of a professional career as a step function. Work really hard, make an incremental gain. Work really hard, make another incremental gain. Do that for 30+ years and you’ll live a pretty nice life. You’ll have a life that I’m sure many of us had growing up, or want to have today. But I think what generally goes unsaid is that if you think about your career as a successive set of explorations to identify a compounding opportunity, you can work just as hard, as you would in the traditional step function path of building a career, but you can get to a place where you life isn’t merely nice.
You can get to a place where your life is incredible.
You can get to a place where your life is, “holy shit, I can’t believe this all worked out.”
You can get to a place in life where you decide what to do, on your own terms, on your own time.
You can get to place in life where, you can endow 3,000 libraries across the US, Canada, and even in countries as far removed as Australia.
I increasingly believe that in order to get to that end state, in order to achieve all of the above and more, all you have to ask yourself is,
Can you compound?
That’s it for this week everyone. Hope you enjoyed the article. I appreciate each and every one of you all for reading. Whether you’re new to All Things Venture, or you’ve seen the entirety of the journey, thank you for allowing me to share parts of my story/journey with you. I’m trying to get back into the weekly cadence and the recent encouragement has meant a lot. Till next week! (Hopefully, lmao)
One quick note. Bessemer Trust still exists. The full story is that entity that is now known as Bessemer Venture Partners was originally spun out and known as Bessemer Securities. Bessemer Securities was originally focused on investments in public securities and real estate, and over time developed the specialization in venture capital. Bessemer Trust on the other hand is now a multi-family office that invest across asset classes.
Fun fact, Pinterest and Shopify are both investment FirstMark had made alongside Bessemer