Silicon Valley--with its distinctive ecology of university research, venture capitalists, and entrepreneurs--is the very embodiment of America's innovation system and the wellspring of the "new new thing."
Except that it is not new. Long before there was "Silicon Valley" there was "Oil Creek Valley," with the same financing model that exactly 150 years ago took a crazy idea and launched an industry that changed the world even more thoroughly than the Internet has done, at least so far. It's called the oil industry. And, as so forcibly struck me as I worked on the new edition of The Prize, the start-up that got the oil industry going had all the features now associated with the modern venture capital system.
First there was the need. In mid-19th century, the best source of illumination (electricity had not yet been harnessed) was from burning whale oil. But whale oil was in increasingly short supply and the price was going through the roof (as high as $2.50 a gallon!) So-called "coal oil" was not as good.
In the early 1850s, a sometime high school principal named George Bissell hatched an idea. Bissell had a flair for languages (French, Spanish, Portuguese, Hebrew, Sanskrit, Greek, Latin and German). He had no less of a flair for entrepreneurship, as well as an intense desire to make money. Visiting his alma mater, Dartmouth College, he spied a sample of "rock oil" in a professor's office. Rock oil was used mainly for patent medicines--to cure such things as toothaches and stomach upsets, as well as sores on the back of mules. It was obtained in very small amounts from seeps in the backwoods of northwest Pennsylvania, in an area known as Oil Creek Valley, either by digging for it or by dipping rags into creeks and wringing the oil out of it.
With a flash of intuition, Bissell had the idea that it could be used as an illuminant. But, to make it happen, he needed to raise money, and for that he needed validation. This was provided by a Yale University professor, a chemist named Benjamin Silliman Jr., who analyzed the properties of rock oil, as well as the prospects for refining it into an illuminating oil. After a spat over the size of his bill, Silliman provided a report that would have lit up any offering document. "Your company have in their possession a raw material from which … they may manufacture very valuable products."
With that, Bissell succeeded in raising, from moneyed people in New Haven, Conn., the funds he needed. Like all good venture capitalists, the investors knew that this would be a risky undertaking--in fact so risky that one of them, a New Haven banker, kept an incredibly low profile so his depositors would not think he had lost any sense of probity and prudence.
Bissell and the other investors confronted an issue that today's venture capitalists regularly face. They realized that there would be no exit from their investment if they could not scale it. And wringing rock oil out of rags would not exactly get to scale. Like many modern start-ups, this would have to be a technology play. And there, too, Bissell had a flash of inspiration: Adapt the new technique used for drilling for water to the recovery of oil. The skeptics were many. "Oil coming out of the ground, pumping oil out of the earth as you pump water?" the skeptics said. "Nonsense! You're crazy."
But this was Bissell's vision of the "new new thing"--get sufficient volumes of rock oil by drilling for it refine it into a high quality illuminating oil, and then take market share away from existing illuminants and, at the same time, build wholly new markets.
To accomplish this vision, they needed a CEO, although no one would have used that term. They found him in a hotel in New Haven. Edwin Drake had no obvious qualifications to run the Seneca Oil Company except for two: as a retired railroad conductor, he could travel by train with a free pass, and--in what is required for the head of any start-up--he was very persistent by nature, indeed downright stubborn.
And so, at the end of 1857, Drake set off for the small lumber town of Titusville near Oil Creek Valley. The investors made sure he was preceded by letters addressed to "Colonel Drake," the title added in order to enhance his reputation among the backwoodsman.
Of course, Drake could not do it all by himself. He had to recruit a management team, which in this case was comprised of a water driller named "Uncle Billy" plus his two sons.
Like almost all start-ups, everything took longer and was harder, and there were many, many disappointments. Other drillers that Drake tried to recruit slipped away because they were convinced, as were the locals, that Drake was actually insane.
And, as in many venture capital deals, the increasingly worried investors had to pony up money for several more rounds that they had not anticipated. Their discouragement mounted as their funds depleted. (There's almost nothing that v.c.'s hate more than having to put money into a "down round" of investment, as is so evident today.) Finally, as Drake and his team labored on, the investors gave up hope altogether. They decided to pull the plug and write it all off, and sent a letter to Drake telling him to close down the start-up.
Fortunately for innovation, postal service to the backwoods of Pennsylvania was so slow that the letter arrived a day or two after Drake and Uncle Billy had, at a depth of 69 and a half feet, struck oil. The letter was forgotten as, on Aug. 29, 1859, Drake and Uncle Billy and his sons got feverishly busy pumping oil and filling wash tubs and whiskey barrels (why we speak of "barrels" of oil today) with the black liquid. Meanwhile, people were running through the woods shouting, "The Yankee has struck oil." Thus was launched an industry that today, with infinitely more complex technology, produces 84 million barrels per day--40% of the world's total energy.
The whole enterprise had taken a total of six years. And, as in so many start-ups, many obstacles had to be overcome, many more than the investors had ever imagined. But now, with this proof of concept, Oil Creek Valley and the surrounding region erupted in the first oil boom. And a tremendous boom it was.
"I never saw such excitement," George Bissell wrote to his wife. But, he added, "We have had a hard time of it, very. Our prospects are most brilliant, that's certain. … We ought to make an immense fortune." Yet it had been so difficult and so often had the start-up tottered on the edge of failure that another of the venture capitalists lamented, "The suffering and anxiety I experienced I would not repeat for a fortune."
But this innovative enterprise was transformative--producing, said one writer shortly after, a light that "the brightest and yet the cheapest in the world; a light fit for Kings and Royalists and not unsuitable for Republicans and Democrats." And the business certainly got to scale. John D. Rockefeller helped make that happen.
"Oil Creek Valley" demonstrated the American model for venture capital and innovation long, long before the first pioneer venture capitalists showed up in the almond groves around Stanford University that would in due course become Silicon Valley.
And the success of this 19th century venture capital deal did what venture capital tries to do today, 150 years later--it "disintermediated" the incumbent industry. That is a fancy way of saying that Oil Creek Valley put the whale oil industry out of business. Oil Creek Valley did something else too. It also disintermediated the capital city and very heart of the whale oil industry--the island of Nantucket, off the coast of Massachusetts, which thereupon went into a long decline until, eventually, it found a wholly new vocation as a haven for summer vacations.
Daniel Yergin received the Pulitzer Prize for The Prize: the Epic Quest for Oil, Money, and Power, published in an updated edition in 2009. He is chairman of IHS Cambridge Energy Research Associates.