Equity crowdfunding has been growing popularity in the last years. The recent period has seen a further growth thanks to the opportunities blockchain technology brings to the sector. However the concept has not been invented in the 21st century and the history is full of projects were the financing part had the crowd has main protagonist.
The most important antecedent of equity crowdfunding brings us back in the Scotland of the end of the 17th century where William Paterson (also famous for having co-founded the bank of England) had a project but lacked resources. His vision was to create a trading hub in the Caribbean island of Darien. The moment was right as the increase of activities of the West Indian Company, defined the need of safe harbors and trading marketplace.
Not succeeding to secure capital from traditional investors, Paterson pitched the “crowd” to raise the funds he needed.
The crowdfunding campaign was a success. An incredible success. It is estimated that something between one sixth and half of the whole monetary wealth in Scotland where invested into Paterson’s company.
The company itself turned out, instead, to be a disaster. A complete disaster, with over half of the settler leaving Scotland for Darien, died in the attempt to establish the company.
Assessing what went wrong is a valuable source of insights to understand what is crucial when starting a venture and what to look at when investing in startups.
- Know the landscape you operate in. William Paterson had never been to Darien! While the island was reported by the settler as a natural paradise, it had two main characteristics which made here the wrong spot for a trading hub. Firstly, the winds blew in a way that made very easy for the vessels approaching the harbor but almost impossible to leave it without smashing against the rocks. Secondly: proliferation of diseases unknown to the colonizers.
- Lean and be ready to change course. Darien was the place. No other spot had been considered. No other island, on the same route, was assessed as possible alternative. Also when the island showed its dark side (as per previous point), the idea of moving elsewhere was never thought. The company of Paterson fail to adapt and to implement the needed flexibility to learn from mistake and to address arose challenges. After the first issues they could have identified other suitable lands. They stayed in Darien; they failed.
- Keep the costs down. Inebriated by the capital raised the team behind the venture spent dilapidated resources without searching for efficiency nor securing safety funds for unknown expenses. The Darien company discarded the option of renting ships (like common practice already at the time) and opted for entirely new state of art ships. This is a reference that we could often see in startups with fancy offices, expensive merchandising, unjustifiable high travel cost while still generating no revenues.
- Know your customer’s needs. For a trading company a measure of success is given by the products you have in your portfolio. The ships that left Scotland were stuffed only in a minor part with tradable goods and amongst these a big portion was consisting of fashionable shoes and clothes…definitely not the most tradable items amongst sailors. One possible reading of this is that Paterson and his team, secured the products they would have liked to buy, nor what their customers might have needed.
- Don’t underestimate competitors. The whole project was built around a valid trend, the increased traffic of mercantile ships in the ocean, a consumer demand, the need of a commercial hub, but it completely ignored the main players owning the colonial market at that time: the Spanish. The outcome is the typical one you have when underestimating a much larger player and, given the epoque and time, it is no surprise that resulted very bloody.
Nowadays investing in ventures is way safer than it used to be back in the time of the story of Paterson and the Darian company. More information are available and the many cases of failures happened in history are a valuable learning to make informed decisions.
