Between 1870 and 1920, a vast wave of invention transformed the American commercial landscape. Telephones, electric lights, automobiles. Mass production and mass distribution. Not coincidentally, those 50 years were the first great era of company building, a period when most of the corporations on today's Forturn 500 were born.
A fine time for entrepreneurship, right? Well, maybe. To judge from a new book by Thomas M. Doerflinger and Jack L. Rivkin, the obstacles that faced company builders 75 or 100 years ago were even more numerous than they are now. The book is called Risk and Reward: Venture Capital and the Making of America's Great Industries (Random House Inc., 1987). If ever you start feeling sorry for yourself, read what Doerflinger and Rivkin have to say about the bad old days.
Most of a growing company's difficulties back then turned on money, just as they do today. But a century ago there was no new-issues market; the idea of financing a small business's growth by selling equity to the public was virtually unheard of. A company really had only two choices. It could rely on financiers, who were considerably less venturesome than they are now. Or it could bootstrap itself, paying for growth out of profits.
Both methods were chancy. American Bell, for example -- AT&T's corporate ancestor -- had to rely on outside financing, simply because the telephone business was so capital-intensive. But investors willing to bet on new technologies of any sort were scarce. Thomas Sanders and Gardiner Hubbard, Alexander Graham Bell's original backers, soon found themselves strapped for cash, and they lost control of the business to an investor group headed by William Murray Forbes.
Forbes and his cohorts, reflecting the era's investment priorities, sought high dividends, not growth. So they kept phone rates high, expanded slowly, and neglected such niceties as good service. When the Bell patents expired, in 1893, independent telephone companies grew so fast that by 1900 they controlled 43% of the market. Bell finally responded with aggressive rate cutting. But the capital needed to finance the cuts swelled the company's debt, and Forbes too lost control.
Detroit's fledgling automobile companies, scorned or ignored by Wall Street, had little choice but to rely on the bootstrap method of financing. The typical auto shop gathered together a small amount of money, bought its parts on credit, and sold its vehicles for cash. This pay-as-you-go plan worked fine for the likes of Henry Ford, who turned $28,000 in start-up capital into $37,000 in earnings in just three months. But those who didn't succeed quickly had little to fall back on. In the first years of the century, one survey found, 485 companies entered the industry. More than half had already failed by 1908, and most of the rest went out of business not long thereafter.
When Risk and Reward sticks to its history lessons, it's engaging: it gives a good feel for what company building was like in that earlier era. A few chapters, readers should note, offer the authors' less-than-original opinions on matters such as the U.S. budget deficit (bad) and personal investment strategies (buy low, sell high). Doerflinger and Rivkin could safely have skipped those chapters. Since they didn't, the reader will have to.