This article originated in a shock of recognition. In the second volume of his discourse on "Civilization and Capitalism," Femand Braudel muses on the "eclecticism" of "the most advanced kind of capitalism": "As if the characteristic advantage of standing at the commanding heights of the economy ... consisted precisely of not having to confine oneself to a single choice, of being able, as today's businessmen would put it, to keep one's options open."(1) My colleagues and I work as venture capitalists and as investment bankers of a specialized kind, engaged in raising capital to support the growth of technology-based companies and in realizing liquidity for their founding investors— often ourselves—by managing public offerings of their shares or by merging them into much larger companies. A primary virtue of our practice is the opportunity to choose with broad discretion where to commit our own and our clients' capital across what Braudel calls "the differential geography of profit."(2)

The immediate relevance of Braudel's insight made me seek to recall how other primary explorers of the dynamics of economic society had characterized the role of "the capitalist." This article, accordingly, begins with a discussion of what capitalists do in the worlds of Braudel and Karl Marx and John Maynard Keynes and Joseph Schumpeter. The second section of the paper is a report from the front: what do the venture capitalists I know actually try to do with the capital and other resources they control. My conclusions reflect both the contemporary relevance of the authorities and a desire to find out how much, if at all, the professional practice of venture capital today represents a novel extension of capitalism.

What Capitalists Do: Four Views

In Braudel's synoptic view, the "unlimited flexibility" of capitalists in their search for profit is the "essential feature" that establishes "a certain unity in capitalism from thirteenth-century Italy to the present-day West: One's impression the… is that there were always sectors in economic life where high profits could be made, but that these sectors varied. Every time one of these shifts occurred, under the pressure of economic developments, capital was quick to seek them out, to move into the new sector and prosper."(3) The telling point is Braudel's grasp of the capitalist's unchanging goal: to escape from the "world of transparence and regularity," as he defines the "economy," where the possibility of profit is constrained and even eliminated by the regulations of the traditional market or by the competition of the emerging free market: "The capitalist game only concerned the unusual, the very special, or the very long distance connection."(4)

It was in long distance trade that Braudel's capitalists truly flourished: "Long-distance trade certainly made super profits; it was after all based on the price difference between two markets very far apart, with supply and demand in complete ignorance of each other and brought into contact only by the activity of middlemen... If in the fullness of time competition did appear, if super-profits vanished from one line, it was always possible to find them again on another route with different commodities."(5)

If the domain and context is vastly different, the activity remains recognizable: to put surplus cash to work again and again, wherever the potential return is effectively unlimited either by established economic and other institutional structures or by competition. But to pioneer in establishing "the long distance connection" was, literally, to sail uncharted seas in primitive boats with rudimentary instruments for navgation and for defense. The magnitude of the possible reward was commensurate with the risk-that is, of sailing off the edge of the world.

While Karl Marx's principal theoretical concern is with the generation of surplus value through the process of industrial production, he defines "the capitalist" in terms as general as Braudel might wish. The creation of capital arises from the capitalist's inversion of the circulation of commodities, from C-M-C-"selling in order to buy"—into M-C-M—"Buying in order to sell."(6) The capitalist's role as the embodiment of accumulation again, as for Braudel, crosses the nominal phases of capitalism: "Buying in order to sell, or more accurately, buying in order to sell dearer, M-C-M, appears certainly to be a form peculiar to one kind of capital alone, merchants' capital. But industrial capital too is money that is changed into commodities, and by the sale of these commodities is reconverted into more money. The events that take place outside the sphere of circulation, in the interval between the buying and the selling, do not affect the form of this movement."(7) But those "events" decisively affect the substance; in fact, they create the very reason for the circulation of capital in the first place. The increase in money driving the process arises from the capitalist's purchase and exploitation of the commodity that alone can create value, namely labor. So the capitalist exists as the omnipotent human link in the endless chain of accumulation, converting cash into "means of production and labor-power" in order to produce commodities, which he then sells for more cash "over and over again."(8)

The power that Marx's capitalist enjoys to command labor power to create surplus value distinguishes him from Braudel's capitalist who finances a venture that literally, sails beyond his own control. At least until "the law of the tendency of the rate of profit to fall" asserts itself, Marx does not allow for the uncertainty inherent in the capitalist process of production-by which I mean the certainty that at every moment for some capitalists and at some moment for all capitalists, the never-ending circle will be broken and they will lose money.(9) And yet, Marx's simple and profound spiral remains: from M to C to more M. Substitute "company" for "commodity" and you have in brief the charter of the professional venture capitalist.

Keynes

The capitalist of John Maynard Keynes's General Theory inhabits a world hardly recognizable to Marx, one in which "the outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made."(10) The maturing of capitalism has produced both the separation of ownership and management and the development of organized security markets. The result represents a radical break with capitalist experience:

The daily revaluations of the Stock Exchange ... inevitably exert a decisive influence on the rate of current investment. For there is no sense in building a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased; whilst there is an inducement to spend on a new project what may seem an extravagant sum, if it can be floated off in the Stock Exchange at an immediate profit. Thus certain classes of investment are governed by the average expectation of those who deal in the Stock Exchange as revealed in the price of shares, rather than by the genuine expectation of the professional entrepreneur."(11)

For Keynes, the separation of ownership and management has turned the capitalist into an investor, and the development of organized security markets all but inevitably turns the investor into a speculator.(12) Against speculation, "the activity of forecasting the psychology of the market," stands enterprise, "the activity of forecasting the prospective yield of assets over their whole life."(13) But the capitalist engaged in enterprise is as far from the embodiment of calculating maximization as may be imagined. Though derived in order to explain the failure of capitalist enterprise to spur economic recovery from the bottom of the Great Depression, Keynes's characterization of the capitalist as an instinctual animal operating within the speculative casino of the stock exchange has remarkable resonance for the venture capitalist today.(14) The venture capital boom of the past several years was directly driven by the extraordinary "high-tech" speculation in the new issue market in 1983. And the collapse of "animal spirits" among professional venture capitalists apparent in 1985 has followed upon the inevitable collapse both of the stock market speculation and of many of the ventures that were funded under the influence of that speculation. More broadly, in contrast with the capitalist as prime mover in Braudel and Marx, Keynes's capitalist is utterly passive when it comes to the actual commitment of capital to new profit-promising enterprise. Secondary dealing in shares has arisen as a substitute for forging a long-distance bridge between supply and demand or for direct engagement in the creation of value.

Schumpeter

Joseph Schumpeter sets a similarly reduced secondary role for the modern capitalist owner against the distinctive emphasis he places on the entrepreneur. Innovation—"any 'doing things differently' in the realm of economic life"(15)—drives the course of economic evolution. And innovations in turn are embodied in “new plant,” in “new firms,” and, above all, in "new men"—the entrepreneurs who carry out innovations.(16) "The entrepreneur may, but need not, be the person who furnishes the capital.... In the institutional pattern of capitalism there is machinery, the presence of which forms an essential characteristic of it, which makes it possible for people to function as entrepreneurs without having previously acquired the necessary means. It is leadership rather than ownership that matters."(17) The capitalist, in his prime role as owner of surplus cash available for investment, has been relegated in remarkable fashion: "Risk bearing is no part of the entrepreneurial function. It is the capitalist who bears the risk. The entrepreneur does so only to the extent to which, besides being an entrepreneur, he is also a capitalist, but qua entrepreneur he loses other people's money."(18) Turn-about is fair play, as capitalists are the heirs of the successful entrepreneurs of previous generations, endowed with the opportunity to redistribute their wealth by placing it at the disposal of new entrepreneurs.(19)

Schumpeter is at pains to separate the entrepreneurial function against the variety of individuals who may fill the role.(20) In the old "competitive capitalism," it is easy to find the entrepreneur "among the heads of firms." It is in the modern capitalism of "giant concerns that the entrepreneur's identity-as manager, salaried employee or major stockholder-has become problematic."(21) Schumpeter extends his search further, finally touching on what appears to be the protoventure capitalist: "Although company promoters are not as a rule entrepreneurs, a promoter may fill that function occasionally and then come near to presenting the only instance there is of a type which is entrepreneur by profession and nothing else."(22) The very process that transforms, historically and conceptually, the aggressive owner of surplus wealth into the passive candidate for entrepreneurial exploitation, in turn creates the space into which the professional venture capitalist can move.

What Venture Capitalists Do: One Experience

For analytical purposes, I abstract the practice of venture capitalism into four categories of activity: selection of investment, working with entrepreneurs, providing financial autonomy and declaring victory.

Selection of Investment

As ever in the history of capitalism, from the furthest frontier of Braudel's research on down, the goal is to compete as necessary, not as little as possible. The distinction here reflects the conflict between being first in successfully exploiting a new technology versus being so much the first that no market exists for the product. The history of venture capital is littered with examples of technological "solutions" in search of commercially identifiable problems; the history of venture capital is also littered with sets of "me-too" start-ups seeking to follow where others have already proven a market to exist.(23) The point is that the selection of interesting investment opportunities requires the matching of evolving technological capabilities with evolving market needs.

Keynes wrote fifty years ago that "investment based on genuine long-term expectation is so difficult today as to be scarcely practical," contrasting it with the speculative game of guessing "better than the crowd how the crowd will behave."(24) The venture capitalist elevates the task into another dimension, for he is attempting to form a genuine long-term expectation at the most problematic frontier, where rapidly evolving technologies and barely emergent markets intersect. No wonder that venture capitalists should search for the "unfair advantages" that a particular team brings to attack a particular market/technology window or that most venture capitalists should spend most of their time playing follow the leader (Braudel's merchant venturers only financed the pioneering of new trade routes when excessive competition forced them to). In either case, the venture capitalist is assuming the secondary role assigned by Schumpeter, betting on an entrepreneur.

Working with Entrepreneurs

Venture capitalists do not, by and large, plan to be the pawns of rapacious entrepreneurs. Sooner or later, nonetheless, the venture capitalist learns this law of life: entrepreneurs lie. It comes with the territory, as Arthur Miller put in a not wholly different context. For the innovating entrepreneur would have the world become by his efforts other than, by definition, it now is. And the world is often recalcitrant. When the world resists, the accuracy of reported results is likely to suffer.

A tenacious grasp on the realities of the cash cycle is the venture capitalist's defense. When entrepreneurs are able to lie, it is generally because the venture capitalist is about to be taught the difference between the income statement, as defined within the flexible standards of "generally accepted accounting principles," and cash flow, as inflexibly defined by the bank statement of receipts and disbursements. Countless are the ventures that have run out of money while reporting record profits as they accelerate reported revenues by hook and by crook. It is a tribute to Marx that M-C-M. the flow of cash-out, to purchase labor services and materials; in, from the collection of receivables for the sale of products-should remain the basis for policing the financial integrity of the capitalist venture.

By insisting on the direct expression of all operating decisions in terms of cash in/cash out the venture capitalist participates as active partner in the entrepreneurial process. It is as if he has signed on to one of Braudel's voyages, if not as navigator then as paymaster. And, when a venture stumbles, it is generally the venture capitalist who gets to insist on the final law of cash flow: there are no fixed costs, only a definable period of time-and a corresponding cash requirement to buy the time -during which to translate high-and-fixed into low-and-variable expenses.

Providing Financial Autonomy

With rights go responsibilities. In return for the right to participate in building a venture, the venture capitalist accepts the responsibility for providing finance. Both to fulfill this responsibility and to share risks in pursuit of the best deals, venture capitalists travel in packs. Just as the merchant financiers whose networks Braudel traces across pre-modern Europe, professional venture capitalists work in identifiable cliques and coteries, a small number as leaders-and in some cases allies-and a vastly larger number as followers. Beyond the ranks of the self-proclaimed, risk-seeking venture capitalists, the lead venture capitalist seeks to establish access to consistent support for the ventures he sponsors among the relatively small number of institutional investors gaited for long-term illiquid private equity investments, among potential corporate "partners," among commercial bank "venture lenders," among leasing companies, throughout the established structure of finance and industry. The duty of the venture capitalist, in short, is to be rich-in relationships, even more than cash.

The emergence of professional venture capitalists over the post-war generation has been punctuated by waves of speculative fever that have swept through the securities markets and deluged new ventures of every sort and description with literally limitless funds—1983 was only the most recent. But the bubbles are the exception; their lifetimes are measurable in months. The venture capitalist earns his return in good part by securing the financial resources to support his ventures during the years in between. From the day I joined my firm in 1970 until the explosion that began in the winter of 1982-1983, I should note, there were no more than six to eight quarters out of more than fifty during which the equity market in New York was reasonably accessible to initial public offerings for new companies.

Declaring Victory

A new issue market such as that of 1983 makes it easy, so easy that the problematic question of what constitutes "victory" can be ignored. Going public at extraordinary values—multiples of what Keynes's long-term investor would consider appropriate—becomes a substitute for victory. For an enterprise, victory might be considered to be the achievement of such a position of market franchise and technological security as to allow management effective discretion in trading off profitability versus growth, while also conferring on management the discretionary power to generate positive cash flow from operations. No amount of capital is enough if these operating goals are not attainable, and they are not attained often.

For the venture capitalist, as distinct from the enterprise, the case is even clearer. Victory for today's venture capitalist is identical with what it has always been, as chronicled by Braudel and as proclaimed by Marx: to realize his investment-at a rate of return that fully compensates for the risk accepted-in the form of cash, which is then available for new investments. The new issue market of 1983 allowed liquidity to be nominally created for stockholders in a host of ventures. The regulations under the securities laws and the restrictions imposed by underwriters generally combined to keep the venture investors locked in until the bubble had burst and the world and the marketplace had done a reasonable job of separating the sheep from the goats.

Effective victory is more certainly available if the venture is merged into an established company as it matures. As maturity expresses itself-whether in incipient price-taking, or in incipient technological exhaustion or in incipient organizational inflexibility-it is generally more attractive to realize all of one's investment at one fell swoop than to hope to cash out bit by bit, ever dependent upon the vagaries of the public market and its assessment of value. For very few ventures of any sort, at any time, "go all the way." The quintessential representative of Keynes's professional class of speculators should have the last word on the subject. When asked how he had made his money, Bernard Baruch legendarily replied: "By selling too soon."

Some Conclusions; The Capitalist as Entrepreneur

For my part, the original shock of recognition remains. Schumpeter writes of entrepreneurial innovations creating "New Economic Space."(25) It is across this space, as across the ocean challenged by Braudel's capitalists, that today's venture capitalists are chartered to explore a like "differential geography profit." As innovators breaking free from the structured world of mature capitalism, they are supposed to be throwbacks in spirit to an earlier age, while mastering simultaneously the commercial potential of a range of frontier technologies. In fact, reality is less romantic, and the operating significance of Keynes's sermon on enterprise and speculation remains profound. I would judge that the great majority of venture investments made by the great majority of professional venture capitalists only one and two years ago have already proved not to have been based on "superior long-term forecasts of the probable yield of an investment over its whole life" but rather were attempts, more or less witting, "to guess better than the crowd how the crowd will behave."(26) And some victories will always be a function of dumb luck. The observation that Braudel cites from Jean de La Bruyere is telling: "There... are stupid men, and I dare even say imbeciles, who find themselves good places and are able to die rich without one having any reason to suspect that they have contributed to this by their labor or the slightest industry: someone simply took them to the source of a river, or perhaps mere chance put them in its way; they were asked 'Do you want water? Take it.' And they took it."(27)

Yet the relationship between risk and reward remains as critical as it is problematic. Marx's all powerful capitalist operates free from the risk that Schumpeter's exploited capitalist passively bears. The venture capitalist both bears risk and is supposed to work to reduce it. While this contributed labor, indeed, is intended to generate value and potentially surplus value, much of it is bound to run to waste and loss. But note: by and large, it is not the venture capitalist's loss. For, as Schumpeter remarked in his passing reference to the "company promoter," today's professional venture capitalists are themselves generally entrepreneurs, working to earn a carried interest in the funds they have secured from wealthy families, pension funds, insurance companies, industrial corporations, banks, and even in some instances the retail investing public. In a broad-gauged effort to pursue higher returns than have been available in established industry by emulating the success of a relatively small number of individuals and partnerships whose activities date from the 1950s and 1960s, such institutions have committed billions of dollars under contract to a host of professional venture capitalists in the past few years. In this phenomenon there is something novel.

The venture capitalist, as entrepreneurial fund manager, seeks to reduce his risk actuarially by spreading it across a portfolio of investments, each carefully screened for technological innovation, market relevance and managerial leadership. This, at least is the prospectus he offers his investors. In truth, every investment to some extent represents its own gamble on the wind and the tides and the current incidence of piracy and scurvy and the most feared of all threats, competition. Throughout the history of capitalist enterprise, there have emerged rules to reduce the odds: counting the cash at the end of every day and before and after every decision is still the most important, which in turn means that no spread of commitments is an effective substitute for sailing as an active partner on every vessel that you back.

In the current epoch of dimmed animal spirits and faltering spontaneous optimism for high technology ventures, there is a certain comfort in observing speculative enthusiasm shift—as Braudel might have foreseen—to the opposite end of the spectrum, the leveraged buy-out of the industrial dinosaur. Less visibly, the professional venture capitalists are proceeding in their efforts to prove, if they can, their durability as a hybrid species of capitalist and entrepreneur. But building companies is hard work and much presumption underlies the venture capitalist's promise. He is, after all, himself an entrepreneur, and we know that entrepreneurs lie. The possibility does exist that, in retrospective fact, the emergence of the professional venture capitalist as a generic actor in our economic society will represent an ephemeral, epiphenomenal flourish marking the peak of our generation's great speculation. And yet, and yet—how great was the presumption in traveling East for spices eight hundred years ago!

Notes

1. Fernand Braudel, The Wheels of Commerce (New York: Harper & Row, 1982), p. 381.

2. Ibid., p. 433.

3. Ibid., pp. 433-34.

4. Ibid., p. 456.

5. Ibid., p. 405.

6. Karl Marx, Capital, vol. 1, (Moscow: Foreign Languages Publishing House, 1961), pp. 152-53.

7. Ibid., p. 155.

8. Ibid.,p. 564

9. Marx, Capital, vol. 3, ch. 13 and 14.

10. J.M. Keynes, The General Theory of Employment, Interest and Money, (New York: Macmillan & Co., 1961). p. 149.

11. Ibid.,pp. 151.

12. Ibid., pp. 154-55.

13. Ibid., p. 158.

14. Ibid., pp. 161-62.

15. Joseph A. Schumpeter. Business Cycles, vol. 1, (New York: McGraw-Hill, 1939), p. 84.

16. Ibid., pp. 93-96.

17. Ibid.,p. 103.

18. Ibid., p. 104. Emphasis added.

19. Ibid., p. 106.

20. Ibid., p. 103.

21. Ibid.

22. Ibid. Emphasis added

23. The commercialization of the laser is the classic example of the solution in search of a problem.

24. Keynes, The General Theory, p. 107.

25. Schumpeter, Business Cycles, p. 134.

26. Keynes, The General Theory, pp. 154-55.

27. Braudel, The Wheels, p. 402.