Welcome to The Business Academy.

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In the spirit of the upcoming new year, I've been thinking about how we got here. And how this all started.

Capitalism is a beautiful force today. But how did we get here?

There is much infrastructure that we take for granted that allows us to do the work that we do.

Our legal structures are designed to drive specific outcomes for our economy.

Studying history I've found many changes that have created meaningful impact. But the one that may be the greatest invention is the creation of the Limited Liability Company.

And here's its story...

In the year 1555, the Muscovy Company was founded in Great Britain.

The Muscovy Company gained a royal charter to handle the trade, and discovery of Russia. It then had a monopoly on trade between Britain and Russia.

This was not a new idea.

But they did something innovative when they started the business...

The Muscovy Company started as the first joint-stock company.

What does joint-stock mean, and why is it important for us?

The Muscovy Company established the concept of limited liability.

Previous to this date, if you were an investor in a project, and the project fell apart, you could get sued as an owner. Even if all you had done was invest a bit of money.

That's quite a deterrent from investing.

What if you accidentally invest in someone who's a bad actor, and the business they build goes on to hurt many people? You, as a co-investor would get dragged into litigation.

That's a big incentive to play it safe and avoid investing in any project because you never know the outcome. Yet, a lack of investment is bad for innovation and entrepreneurship.

So these English traders design the first limited liability company.

Now when you invest in a company as a passive investor, you are not liable for the outcomes of the company. This new structure gave birth to the Venture Capital industry.

Venture capital speculates on company futures. It invests in low-probability, extremely high-value outcomes, called a power law. That means they are putting money into very speculative projects.

At the time of investing the Venture Capitalist does not know if this company may go on to harm its customers. And it's hard to argue that if a company harms customers, it's the passive investor's fault.

We can use Elizabeth Holmes as a real-life example. She was sued for fraud and mistreating patients at Theranos. Because of the concept of limited liability, her early angel and VC investors were not charged in the lawsuit.

Now imagine if the investors did get sued. They would never speculate on other biotech projects. And neither would their friends.

Biotech companies need a lot of funding to bring their innovative drugs to market. So we should all be thankful that the concept of limited liability exists. It's a net good for the world.

The concept of limited liability inspired this famous company...

The Muscovy Company later inspired the Dutch East India Trading Company (the VOC in Deutch). This one is a better-known name in the history books. The Dutch East India Trading Company (VOC) became the largest company in the world while colonizing Asia for hundreds of years.

Here is the story...

The VOC was issued a royal charter in 1602. It was a merger of a few smaller trading companies. It received a monopoly on Dutch colonial activities in Asia.

In 1611, the first stock exchange was created for the VOC, the Amsterdam Stock Exchange. The VOC was the only company traded on this exchange for many years.

Its shareholders were first wealthy people and elite Dutch. But as it grew and became more successful it granted shares to members of the Dutch government.

The VOC needed the support of the Dutch army. If their ships were confiscated in the Asia seas, they needed government military backing to continue their activities.

As shareholders, the politicians were personally and economically motivated to ensure the ongoing success of the VOC. Eventually, the VOC created their own army and navy to protect their activities in Asia.

Corruption and competition from other trading companies eventually led to its demise. However, it lived and thrived for almost 200 years until 1799.

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🔑 The creation of the rubber band

Rubber is not a new product. It's been in use for thousands of years. We have records of how the Mesopotamians used it to make sandals and waterproof containers.

In the late 1800s, rubber was used for car tires, but it broke down very quickly.

One day a gentleman named Charles Goodyear was working on a solution to make the rubber stronger.

While pouring the rubber he dropped it on a burning coal. It made a mess, but once the rubber cooled he found it to be incredibly durable, and elastic. He had accidentally invented a process called "vulcanization", and with it the new-age car tires.

We still use vulcanization today to process rubbers.

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🔑🔑 Two interesting posts from this week

​How to increase your surface area of luck

​To move your career ahead, learn to disagree

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Have a great week,

Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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