[This post is the third in a series on American Exceptionalism. I’ve written on this subject elsewhere, so some of you may want to skip this one.]

Throughout its history, America has produced an astonishing parade of entrepreneurs, individuals who started their own businesses and grew them to prodigious size. At the same time, most new businesses failed, and many successful businesses were rendered obsolete by more efficient upstarts. This is the process of so-called “creative destruction.”(1)

During the first few decades following the Industrial Revolution America was simply one of several societies (Britain and France, most prominently) where individuals built great businesses. But as I suggested in my first post on this subject (“American Exceptionalism: Separated at Birth?,” post of 4/18/13), legacy cultural attitudes in other societies quickly undermined them.

In the US, however, a positive attitude toward private wealth led eventually to the extraordinary acceleration in business creation that we now understand as the “entrepreneurial society.” Let’s look at how American entrepreneurialism happened and the crucial role played by private capital.

In the Nineteenth Century most of the Captains of Industry made their fortunes building one great company: Ford in autos, Rockefeller in oil, Morgan in banking, etc. But there was a very interesting exception, and it happened in my home city of Pittsburgh. Andrew W. Mellon made his fortune not by building one successful company himself, but by investing in the promising business ideas of others. Mellon would sit in the office of his family bank, T. Mellon & Sons (now Bank of New York Mellon(2)) and listen to entrepreneurs pitch business ideas. If he liked the idea, which he rarely did, T. Mellon would lend money and, more important, A. Mellon would buy an equity stake.

During the heyday of the Industrial Revolution, Pittsburgh was the Silicon Valley of the era. Its extraordinary wealth of natural resources allowed the city to become the fourth largest metropolis in the US and the most heavily and diversely industrialized city in the world.(3) Pittsburgh became known as a Steel Capital(4), but that was only the tip of the iceberg. It was also a leading center for coal mining (Consol Energy), oil and gas production (Gulf Oil Corp, now part of Standard Oil), food (H. J. Heinz), electrical equipment (Westinghouse), silicon carbide (Carborundum), chemicals and materials (Koppers, Pittsburgh Coke & Chemical – now Calgon Corp.), glass (PPG), and many others. In effect, Andrew Mellon was the original model for firms like Kleiner Perkins Caufield and Byers (KPCB), who invest in promising ideas in places like the modern-day Silicon Valley.

Mellon died in the 1930s, and for awhile it looked like venture investing had died with him. But Pittsburgh is a small town, and it turned out that Mellon’s successor had simply skipped a generation. There was a competitor of the Mellon family companies named J.H. Hillman, Jr. Hillman was in the coal, coke and barge businesses, among others, and although he was a vastly smaller operator than the Mellons he fought them to a standstill. J.H. was one tough SOB. J.H.’s son, Henry, admired his dad, but considered that Andrew Mellon’s approach to getting rich sounded more promising.

Henry Hillman began investing in startup businesses. He was such an early entrant that he was invested with KPCB while Kleiner and Perkins still had their day jobs at Hewlett Packard. He took half of the very first KKR fund. Throughout the 1970s and 1980s, the Hillman family was the largest venture capital investor in the world. The Hillmans ended up owning parts of such firms as Amazon, Genentech, Google, Intuit, Juniper, Sun, Symantec, and many others.

Other families noticed, and soon there was so much venture capital available that pretty much anyone who had a good idea could expect to get funding. Even the institutional world took notice, and institutional investors now dominate parts of the venture world, especially growth and late-stage venture. But families have always dominated the “friends and family” rounds, angel rounds, super angel rounds, and early stage venture. (This is how my company, Greycourt, got started.)

The widespread availability of venture capital is a phenomenon limited almost exclusively to the US. There are pockets of VC in Britain and Israel, but overwhelmingly it’s an American phenomenon. And this is a crucial point. In societies where it’s nearly impossible to raise venture funding, new business ideas simply don’t happen. Thinking up a good business idea, putting together a kickass business plan, raising the capital, and then working 90-hour weeks to make the business a success aren’t for the faint of heart. In societies that lack venture funding, you would have to be a great fool to even think about launching a startup venture.

And so startups don’t much happen outside the US. I happen to live within a few blocks of Carnegie Mellon University. CMU is small as universities go, with roughly 12,000 students. But every year more entrepreneurial businesses are launched at CMU than in Italy, which last I looked had about 60 million people. In other words, we aren’t talking about a marginal advantage, but a gigantic, overwhelming, decisive advantage.

Granted that many startups fail. But if you don’t grow a lot of startups, you also don’t grow many global multinationals. Roughly half of the Global Fortune 500 got their start in the last 30 years. Of those, fully half were launched in the US, a country with 5% of the world’s population. And the dominance of the US is actually much greater than that, since many of the other new multinationals are really State Owned Enterprises – huge, bloated corporations that have nothing in common with dynamic startups.

Oh – you’re wondering how many global multinational businesses got their start over the past three decades in Europe, a place that boasts 700 million people? The answer is one: no private capital, no venture capital; no venture capital, no startups; no startups, no global multinationals.


(1) Originally, creative destruction referred to the Marxist (via Schumpeter) notion that capitalism was doomed to a cycle of creation and destruction that would ultimately lead to its collapse. But here I simply mean that apparently successful businesses can be and frequently are obsoleted by innovative new entrants. The new entrants might not directly create as many jobs as they destroy, but the improved efficiency they bring to the business world will typically create more direct and indirect jobs.

(2) BNY Mellon is the oldest bank in the US, tracing its lineage back to the founding of the Bank of New York by Alexander Hamilton in 1794. It’s also the largest depository bank in the world.

(3) And also the most polluted. After World War II, when the city fathers decided to try to clean the place up, they brought Frank Lloyd Wright to town to seek his advice. Wright stared down at Hell with the Lid Off for a long time, so long that R.K. Mellon had to ask, “So, Dr. Wright, what do you recommend?” Wright shrugged his shoulders. “Abandon it,” he said.

(4) In case you’re wondering why America won World War II despite fighting a two-front war against powerful enemies, consider this factoid: between 1939 and 1945, more steel was produced in Pittsburgh than in all of Germany and Japan combined.

Next up: American Exceptionalism: Giving Back: The Remarkable Power of Private Philanthropy

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 Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.


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