Phil Knight started Nike in the 1970s. From day one, runners couldn’t get their hands on them fast enough.
But Nike had two problems.
One was keeping up with demand. Shipments could sell out within hours of hitting the shelves.
The other was convincing investors that it was a viable business.
Knight writes in his memoir, Shoe Dog:
There was no such thing as venture capital [in the 1970s]. An aspiring young entrepreneur had very few places to turn, and those places were all guarded by risk-averse gatekeepers with zero imagination. In other words, bankers.
Nike nearly went out of business as banks backed away, terrified of its growth. A company moving as quickly as Nike needed a thick layer of equity and stable monthly cash flow, the bankers said. Which was the one thing Nike didn’t have, since it used every penny it had to fuel growth.
These kinds of stories rarely exist today. There are now more than 1,000 venture capital funds, most of whom understand the tenuous economics of a startup.
But Nike’s background highlights how young venture capital is.
The entire concept of venture capital didn’t exist 40 years ago, expect in small niches. The industry wasn’t formal until the 1980s, and wasn’t big until the 1990s.
The backbone of entrepreneurial support is, realistically, not much older than a new college grad.
The venture capital industry is good at what it does, and getting better. But it is young. It doesn’t have much of two things that are critical for deep understanding:
Unbiased generational knowledge transfer. Engineers can study Henry Ford’s discoveries and failures without him trying to influence the story to protect his legacy – which every well-meaning person inevitably does. It’s harder to do that in a field where many of the pioneers are still practicing. This is what Max Planck meant when he said science doesn’t advance by changing people’s minds, but when the old generation that’s attached to its beliefs passes on.
Experience in a wide variety of environments. There have been two recessions in the last 26 years. That’s not many. Ask a statistician what you can learn with a sample size of two. Systems improve when you break them, and the survivors learn from whatever caused the damage. The more breaks, the more learning. But feedback cycles in finance and so long that learning is a maddeningly slow process. Meteorologists are good at what they do because they have tens of thousands of historic storms to study. Investors have a tiny handful of economic storms to look at, and comparing those few storms isn’t even apples-to-apples, since economies are always changing.
Companies are good at quickly learning small lessons. But the huge, industry-changing lessons can take many decades to discover and learn from. Which is tough for industries that aren’t many decades old.
This isn’t a bad thing. It’s actually wonderful if you grasp reality with both hands.
When you accept that investors can be skilled at what they do within the context of an industry that is still relatively new, you realize that everyone is still learning. When you realize everyone is still learning, you’re more open to change, willing to adapt, and eager to look beyond what looks like established norms. It’s a much safer place to be in than clinging to the idea that you – or even experts who came before you – have already figured out the best path forward.
This is more common than people think. Some of the most important parts of the world didn’t exist a generation ago.
Take retirement. Fifty years ago, the entire concept of retirement was reserved for the wealthy. The majority of men over age 65 were still in the labor force as recently as the 1950s. Most people worked until they died. Part of the reason individuals are notoriously bad investors is because the idea that everyone should invest their own money to fund 20+ years of retirement is a brand new concept. There’s been little generational knowledge transfer, and just a few bear markets since the mass expectation of retirement became a thing. Everyone is still learning how this works – which means we should be open to new concepts, learning techniques, and savings systems.
Same with globalization. China and Russia were effectively closed to the rest of the world 30 years ago, and still just poking through 17 years ago. That’s one generation dealing with one generation, sharing between themselves a single global recession. No one should pretend we’ve got this figured out. The whole idea is the equivalent of a junior in high school. Everyone is still learning.
Social networks. Index funds. Hedge funds. Private equity. Telecommuting. Zero barriers to most international communication. We don’t know that much about these things, because they’re so new. It might take decades to figure out what they mean. So we’ll be surprised, forced to adapt, and learning for decades to come.