From the publicani to AI VC - 5,000 years of venture capital

Technology has a way of disintermediating markets, but it also tends to consolidate them. That's because the function of leverage through technology, just like capital, isn't linear, but exponential. When we talk about "economies of scale", we simply state that pooling resources is more advantageous than operating independently.

This isn't new. Humanity realized very early on that cooperation is greater than the sum of its parts, and created concepts to organize people around common goals systematically. The Babylonians called them tamkārum: the traders, the merchants, the moneylenders. Clay tablets suggest joint venture partnerships existed primarily for funding expeditions and seeking precious resources, with shareholders having different shares of the profits. Just like the merchant princes Asimov would write about five thousand years later, these merchants would pool resources and expertise to trade, craft, and sail around the world. And just like Asimov's — and today's merchants – they had the blessing of their governments to expand their reach, bring back wealth, and in the process, spread the hegemony of their cultures around the world.

The Phoenicians, and eventually Greeks, just perfected the codes around the behavior and function of these joint ventures. However, they still lacked legal identity or personhood (we'll talk about persons later). The Romans were perhaps the first to give clear distinctions, classes, and a modern legal code to the different types of partnerships. There were a few, some with more religious, collegiate, or social purpose, but we'll focus strictly on the commercial today: the publicani.

Venture of the past: Societas publicanorum

The publicans were born out of necessity: the Republic was expanding rapidly and the government couldn't manage its complexity. Turns out that collecting taxes across three different continents is no easy feat, especially when you have to ride by horse from town to town to collect in person. Something similar happened with public works projects: roads became longer and more intricate, thus it wasn't effective anymore to hire a single person to build them – and for that person to informally hire sub-contractors – or for the government to manage them. Most importantly, the problem with hiring individuals is that it is too risky for a single person to bear all the responsibility and liability of undertaking complex projects.

Limited liability enters the chat. It was, and still is, a partnership with the government. You undertake projects of public importance and, in return, we slightly alter the social contract so any collateral damage doesn't come back for your wealth. As you can imagine, this was very popular and the Roman Republic experienced a commercial explosion, blurring the lines between public and private for hundreds of years. Private organizations would bid for government contracts that ranged from building roads to extracting natural resources. Those bidding the lowest would win. Perhaps the most lucrative project was to collect taxes, especially from farming operations. It doesn't get more capitalist than privatizing the collection of taxes and the Romans were doing it thousands of years before Adam Smith set the foundations of free market theory.

Senators couldn't be publicani directly, but they could be shareholders (sounds familiar?). Hundreds of years would have to pass, but eventually the reign of publicani came to an end. The struggle for power between senators, their interests, and government contracts slowly degraded the concept and the rise of the Roman Empire was the final nail in the coffin. Emperors just found it much more profitable to run the projects themselves and replace the publicani with a network of pseudo-public servants, with of course a reasonable kickback. Any politics theorist will tell you that authoritarian governments can't sustain themselves just with fear: you need to grease a lot of palms. Augustus and his successors had large budgets to appease and enrich their appointees — not doing so would mean their downfall.

Venture of the present: organized risk management

I'm getting sidetracked, as usual. In essence, venture isn't new, and neither is the existence of risky investments with volatile outcomes. The lack of organization management meant that the spread of outcomes looked more like today's early-stage startup venture than the public markets. The chance of success of an expedition to the Anatolian peninsula in search of minerals was lower than, let's say, Colgate meeting earning expectations next quarter – but probably higher than a YC startup. (40% chance of the whole crew being eaten by lions vs 50% chance of a YC company raising their next round).

What is new, however, is venture capital as a function of capital aggregation and risk management. It's unacceptable nowadays for most holders of hard currency to deposit their assets directly in risky endeavors – either because they don't wish to, or because of politics, in the case of government-run funds. Venture capital firms exist as a proxy to aggregate capital and, to a limited extent, reduce the risk profile of the investments through domain expertise and mild diversification. That means the spread and access of capital to these markets has increased.

That's not to say that rich people in antiquity didn't have access to lucrative, closed investments. It was common for Roman senators and, later in imperial times, for members of the court, to have access to investments like real estate and lending opportunities. Seneca, as much as he was a stoic, was also an avid lender and famously caused the Bread and Circuses Riots of 58 AD when calling in a loan to Britannia. Historians disagree on whether he did it out of his own volition or was enforcing policy, but the fact of the matter is that average high-class (and not that royal) Romans had access to private markets before angel investors did in current times.

I won't delve into the validity of VC's current shape and form in modern times. If they exist today it's because there's a need for them. It's impractical for most startups to go directly to the Ontario Teacher's Pension Plan and ask for a $1M check. The function of capital aggregation on one side and talent aggregation on the other works most of the time. VC successful outcomes are less driven by optimizing that function and more just on focusing on the right investments, fully milking the VC's ability to go deeper into an industry and acquire domain expertise, and not spreading yourself into areas you aren't familiar with.

Venture of the future: back to basics and AI

To be frank, the "venture of the future" has been brewing over the last 10 years, with moderate success. I started seeing algorithmic VCs in 2013 that, on the surface, would use AI or pseudo-AI for different stages of their process. Some have been content using it for deal flow and CRM filling, and some have been bold enough to anthropomorphize them and give them names.

Regardless of the final shape and form, what I'm seeing is the Rise of Thin Orgs. This means the revolution happening in VC is also the revolution happening to general business and company building. In the next few years, we're going to see thinner and thinner organizations producing outcomes once only imagined by hundreds (or thousands) of employees.

Many organizations, as the years go by, get too wrapped up in their lore and vocabulary. They forget their original purpose and start becoming inward. They make overhead their purpose rather than an unfortunate consequence of scaling.

I think in the next few years we'll start seeing billion-dollar funds managed by smaller and smaller teams, and single GPs with hundreds of millions under management. Imagine a fund the size of the SoftBank Vision Fund being managed entirely by 1 or 2 people.

This also means VCs are going to have more time and energy to expand their horizons and become fully vertically integrated. Traditionally, VCs that have tried to play the hedge fund game have been burnt, soon discovering not all capital deployment is created equally. The opportunity here is a hybrid approach that improves substantially the private equity roll-up model, takes the best of VC, and turns it into a consolidation machine.

One of my bets in this direction is that vertical consolidation is going to be paramount for the rest of the decade, and seamless plug-and-play integration between systems will make this astronomically more cost-efficient, which is why I'm building bem.