Mobilizing Venture Capital during the Second Industrial Revolution:

Cleveland, Ohio,1870-1920

Lamoreaux, Levenstein, and SokoloffCapitalism and Society, 2006

Main story

• How Cleveland’s inventors and innovative firms obtained financing?

• successful local enterprises= wealth-creation possibilities + hubs of overlapping networks

The Rise of Cleveland

• manufacturing output: 22th in 1870, 4th in 1920

• Significant patents: 5th in 1900

• average size of firms: 66th in 1870, 52th in 1920

Informal Finance not Automatic

• personal connections + the worth of ventures

• Jacob Cox’s Cleveland Twist Drill Company 1, initial capital investment of $2000 (at 7

percent interest)

2, lent him $9,000

The Brush Electric Company

• Brush’s technical triumph + Telegraph Supply Company’s backing= success +prosperity

• 1 magnet for ambitious young men

• 2 network with creative people

• 3 investors eager to finance

Hub of Network of Inventors

1, Bentley and Knight +electrically powered• Streetcars

2, Work in Cleveland

3, very visible position+ financial backers= Bentley-Knight Electric Railway Company

Limited Formal Financial Institutions

• secondary role of formal finance

Crucial: validation of technology by experts in the hub + businessmen hoping to replicate

The White Sewing Machine Hub

Almost all the same!

Summary

• conventional story: employment positions in the R&D facilities of large-scale enterprises

• the dominant pattern in the Midwest: inventors became principals in companies

• detail the channels through which local pools of capital flowed into high-tech enterprises

The exact channel

• good reason to believe that the investments would pay off

• signal that their ideas were promising

• the networks that formed around innovative firms

Beyond Cleveland: Detroit

1, Initial Olds Motor Works

2, demand for parts: Cadillac, Ford, and Buick

3, spun off large numbers of new enterprises

Beyond Cleveland: Silicon Valley

1, the Fairchild Semiconductor Company

2, founding engineers started other businesses : Advanced Micro Devices, Intel, and LSI Logic

conclusions: heart of overlapping networks of innovators and financiers