Venture Capital in the Whaling Industry

The whaling industry in the United States used to be considerable, particularly in coastal parts of New York and New England. Yet, it is rather forgotten about, certainly outside of those regions. Whaling was a very risky venture but one in which potential profits were large enough to entice businessmen and investors anyway. After years of effort, a whaling voyage could either wind up with nothing or a profit exceeding the cost of the investment many times over. The form of investment structure and the system of compensation for labor and capital devised in this industry were unique but have since been re-used in modern venture capital.

New Bedford

Until petroleum products replaced them, whale oil was used as a fuel and lubricant. Other whale products included ambergris, generated by the digestive system of whales, which was used in perfume, and baleen, misleadingly known as ‘whalebone’ and used by whales to filter feed, which had its own variety of uses. Demand for these products supported the economy of the Northeastern United States, most notably the port city of New Bedford, Massachusetts in which whaling was the key industry. New London, Connecticut and Sag Harbor, New York were other important whaling centers in the 19th century. Nantucket had been an important whaling port in an earlier era, until ships became too large to navigate its sandbars.

Print recreated from an 1855 painting by William Bradford

Before the 19th century, the whaling industry in the Atlantic had been dominated by whalers from Britain and prior to that from the Netherlands and earlier still by whalers from Iceland and the Bay of Biscay. By this point though, the United States possessed by far the largest whaling fleet in the world. In 1850, of the approximately nine hundred whaling ships active globally, seven hundred were American and of these, New Bedford vessels made up 70%.

Whaling Ventures

Whaling ventures were very risky to both lives and fortunes. Back in the 18th century, some 787 whaling boats were launched from New Bedford and 272 of them were lost, either sunk or destroyed beyond repair. Risks to a ship included storms, fires, ice, mutinies, and attacks by whales and enemies. In the 19th century, the whaling firm of George Howland operated fifteen ships and of these twelve were eventually lost to a combination of factors ranging from an attack by a Confederate gunboat during the American Civil War to being stuck in Arctic ice. Perhaps around one-in-one-hundred ships would be lost in a typical year but there were exceptional years with far worse outcomes.

Some of this risk could be insured against. Insurance became more common in the whaling industry of New Bedford after 1820. Insurance underwriters might charge up to 2.5% per year to insure a ship. Multiple underwriters would insure a ship together to spread out the risk. Still, not all risks were insurable. Other uninsurable perils afflicting whaling ventures included the risk of illness or desertion among the crew and price risk with respect to the commodities derived from caught whales.

Compounding the risk was the length of whaling voyages. These became longer as whales became scarcer in waters near New Bedford. Whaling ventures became long term gambles as ships had to travel further to find their catch. Whaling ships travelled all the way up to the Arctic; it was very common for ships to be abandoned when they became stuck in ice there. Whalers also sailed into other oceans. By 1820, most American whaling vessels, even if built and crewed in the east, were active in the Pacific and not in the Atlantic.

From New Bedford, it would take at least six months to arrive in good whaling grounds in the Pacific. Overall, the voyages usually had no set time limit but between forty and forty-eight months was common. So, per annum estimates of risk like the cost of insurance per year or annual rates of lost ships must be seen in light of the multi-year length of whaling voyages. Ships travelling farther were more productive but they were also more likely to be lost at sea, making the industry even riskier with time.

It would cost between $20,000 and $30,000 to fund a whaling venture in the mid-19th century. In the long period from 1783 to 1906, it was tabulated that just over one-third of these expensive whaling voyages resulted in a financial loss. There was about a 6% chance of a ship being lost entirely on any given voyage. Some years were worse than others. Among ships returning to the area of New Bedford in 1858, nearly two-thirds did so at a financial loss to their owners. Later, an unusually large number of ships were lost in the Arctic in 1871, an extraordinary thirty-three out of thirty-eight vessels active there at the time. Occasionally, ships returned from long voyages with essentially no product to show for it.

The profits could be great though. For a few good years in the mid-1850s, the total catch of the whaling industry was approximately 50% of the value of capital employed in the whaling fleet. This was a remarkably high return on assets. In an exceptional case but hardly one unheard of in other times, entrepreneurs put in $8,000 to retrofit an old vessel with a successful history around 1847 and after four years at sea, it returned with product worth more than $138,000. Profits this high, over $100,000 from a single voyage, were rare. Indeed, only about one-in-sixty voyages, or 1.7%, generated returns in excess of 100%.

Financing

Whaling ventures were hardly ever backed by a single person. They were set up as partnerships between whaling agents, their investors, the captains, and their crews. Agents were individuals and firms arranging whaling voyages. They would purchase and outfit ships, hired the captain and crew, and sold the catch. They also put up most of the money to finance a voyage, securing some of this from co-investors whose investment they managed.

The co-investors brought into the fold by the agents were often wealthy individuals or professionals like doctors and lawyers. They were usually few in number for any venture and played no role in preparing for or managing the voyage. Still, multiple investors were needed to raise the $20,000 to $30,000 required to launch a new whaling voyage. This capital requirement made whaling much more capital intensive than a typical farm or even a small manufacturing firm in America at the time.

The agents and their investors would typically receive between 50% to 70% of the profits. By themselves, agents typically owned about a quarter to a third of a venture. Agents would also receive a fee for outfitting a ship, often 2.5% of expenses incurred, and would earn a commission of 0.5% to 1.0% on the sales of the catch.

The agents bet on multiple ships simultaneously and ships would be owned by multiple investors. The Lagoda of New Bedford, a ship active between 1841 and 1886, was owned at various times by between four and eight investors. Eight was the average number of investors in New Bedford-based ships. However imperfect since risks were correlated to some degree, diversification was still key in reducing risk in these long term and risky gambles.

Whatever the risk, the returns were enticing. Hetty Howland Green, one of the richest women in America in the 19th century came from a family of whaling agents in New Bedford. Gideon Allen & Sons, a whaling agency, made a return of 60% per year during much of the 19th century. Admittedly, this was a rather extraordinary firm; an average return was more like 14% per year but still worthwhile. Whaling newspapers tracked the successes and failures of these ventures. If a particular voyage looked promising, whether because the captain or ship had a good record or otherwise, investors might actually invest at a premium, putting in more capital than their share of the expenses would imply.

Most of any whaling voyage would be owned by the agents, the captain, and the crew. There were few passive shareholders and even these tended to be local. Investors did not come from far; a New Bedford investor would tend to invest only in local ventures even though other whaling ports were not far away. Local investors were more likely to be knowledgeable of local agents, ships, and captains. By contrast, a few whaling corporations with large shareholder groups, most of whom were passive investors, were formed in the 1830s. However, all failed before 1850.

Lay System

While the proportion of profits going to agents and their investors generally rose in the 19th century, partly reflecting the greater capital-intensiveness of whaling over time, captains and crew were given the remaining 30% to 50% of the profits of a whaling venture. This portion of the profits from a venture were split into a ‘lay’ for each crew member.

Besides the agents, captains usually had the largest stakes in the venture, often around a 1/8th, 1/10th, or 1/12th lay. This was a form of compensation for their services but captains often invested money into the venture as well. The crew had smaller stakes but were also paid from the profits of the voyage. Ordinary seamen, stewards, cooks, and blacksmiths might receive a lay of between 1/100th to 1/160th. A cabin boy might earn a lay as small as 1/250th.

When the Benjamin Tucker returned home from its fourth whaling voyage in 1851, it realized a net profit of $45,320. A seaman with a 1/160th lay of this trip would earn $283.25; this was not a lot of money even in 1850. From this would still need to be deduced any advances and interest thereon that a captain might have extended to the seaman, as well as certain other expenses incurred by him. This was not a large sum of money for up to four years’ work but recall that most of the seaman’s needs were received in-kind, like meals and a bunk, while on the ship so any income received here could potentially have been saved.

Some crew worked on multiple voyages and rose in rank, earning a larger lay each time. Still, a majority of crew worked for just one voyage; it was not a long-term career for many. Some did not even finish their first voyage. Deaths were common but far more desertions or discharges of crew took place. Among the 489 crewmen on a sample of fifteen whaling voyages made by eight vessels between 1843 and 1862, sixteen were killed, 143 deserted, and 166 were discharged. While the business may have been profitable for agents, investors, and captains, not many members of the crew stuck around in the whaling business.

Lesson

The very specialized nature of the whaling industry meant agents had to secure their own investors, and investors in any given venture were few. The industry’s uncertain nature meant that large losses were common but so too were large gains, and captains and crew were likely to earn a variable rather than a fixed wage. The way in which whaling ventures were financed and members of these ventures compensated may have been specialized for this industry, but the model has been recycled in other activities financed with high-risk venture capital since in the 19th century.

More from the Tontine Coffee-House

Read about the ways in which sailors participated financially in merchant voyages in the 17th century and how a naval war in early-American history affected insurance rates. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.