Chapter 1: The Wild Origins of Private Equity - From Columbus to Modern Finance
Chapter 1 of Cyril Demaria’s book opens with a story you probably did not expect in a finance textbook. Christopher Columbus. Yep, the guy with the ships.
Turns out, Columbus was basically running a venture capital deal back in 1492. He just did not know it yet.
Columbus: The Original Startup Founder
Here is the setup. Columbus spent 7 years pitching the Spanish monarchs, Ferdinand and Isabella, to fund his trip west. His pitch was simple: “I will find a shorter route to the Indies, make you rich, and embarrass the Portuguese.” Classic elevator pitch.
Demaria points out that this had all the ingredients of a private equity deal. An entrepreneur (Columbus) gets external investors (the monarchs plus private Genoese investors who put up 50% of the money). The project has a high risk of total failure. But if it works, the returns are massive. And there are barriers to entry protecting the advantage, since the Spanish Crown would grant legal rights over the new route.
Columbus even negotiated what we would now call “carried interest.” He asked for 10% of all profits from the route, plus option rights to buy one-eighth of any commercial venture using it. Sound familiar? That is basically how modern fund managers get paid.
Of course, his math was hilariously wrong. He estimated the Earth’s diameter at 3,700 km instead of 40,000 km. Off by a factor of 10. But he stumbled onto an entire continent nobody in Europe knew about. Demaria compares this to startups that pivot: you set out to build one thing and accidentally discover something bigger. Hopefully, not every startup CEO underestimates the effort by 10x.
Pooling Money and Power
The bigger point Demaria makes in section 1.1 is that private equity has always been about pooling resources from different parties to fund risky ventures.
In the early days, this meant mixing public and private money. Kings funded expeditions because they wanted power and territory. Private investors joined because they wanted profits. Nobody worried about conflicts of interest back then.
The Dutch West Indies Company swapped what is now New York State for Surinam in 1667. That turned out to be a terrible deal. Early PE had its share of bad bets too.
Over time, these public-private partnerships separated. The king’s personal wallet got distinguished from the state treasury. Fair trade rules appeared. Governments shifted from directly funding ventures to creating legal and tax frameworks that made private investment possible.
Demaria traces this all the way back to the Code of Hammurabi in ancient Babylon (around 1750 BC). Those 285 laws, displayed publicly for everyone to see, allowed the creation of business partnerships. Before that, most ventures were family-only affairs. The Code let unrelated families pool capital and share risk. It also introduced the distinction between equity and debt, and the concept of collateral. Though the collateral back then could include your wife and children being sold into slavery if you defaulted. Brutal times.
Even Hammurabi understood something modern governments still struggle with: you need infrastructure, education, and favorable conditions to make private enterprise work. He invested in irrigation, stored grain against famine, and lent money at zero interest to stimulate trade.
No Entrepreneurs, No Private Equity
Section 1.2 shifts focus to the entrepreneur. Demaria is clear about this: without entrepreneurs, private equity simply does not exist. The whole system revolves around people who take risks, build things, and create value.
He walks through several historical examples. James Watt improved the steam engine in 1774, cutting fuel consumption by 75%. But Watt alone could not turn his invention into a business. He needed Matthew Boulton, who provided capital and management skills. Watt invented. Boulton ran the business side. It took 10 years before the venture became profitable, but eventually both retired wealthy.
This Watt-Boulton partnership is a key moment in Demaria’s telling. It shows the separation of the entrepreneur from the investor/manager. That separation is what makes modern private equity possible.
Thomas Edison is another example. In 1878, he convinced J.P. Morgan, Lord Rothschild, and William Vanderbilt to invest $300,000 in Edison Electric Light. Morgan kept backing the company through mergers, eventually creating General Electric. In 1896, GE became one of the original 12 companies listed on the Dow Jones.
Even Leonardo da Vinci gets a mention as history’s most famous “entrepreneur in residence.” He spent 17 years with Ludovico Sforza, the Duke of Milan, designing weapons, buildings, and machines. The modern Silicon Valley model of an entrepreneur-in-residence at a VC firm has roots in Renaissance Italy.
Incubators and Accelerators: Not New, Often Overhyped
Demaria is skeptical of incubators and accelerators. He notes that incubators grew from 15 in 1999 to 350 in 2000, right before the dot-com crash. Business accelerators went from 4 in 2007 to 579 in 2016. He sees them as early warning signs of venture capital bubbles.
His main criticism: they chase trendy startups instead of backing real breakthroughs. Internet consumer startups in 2000, mobile apps in 2012, fintech in 2016. They spend too much time helping founders polish their pitch decks and not enough time challenging their actual plans.
Exit Strategies Matter
One thing I found interesting is how much emphasis Demaria puts on exit strategies. Investors need a way out. They cannot sit in a company forever. The main exits are: selling to another company (50-70% of deals), selling to another financial investor (15-25%), going public on a stock exchange (10-20%), or the company just fails (30-70% for venture capital).
The stock exchange matters a lot here. It gives PE investors a way to cash out. But it also infects PE with stock market behavior: overconfidence, bubbles, booms and busts.
Demaria’s Definition of Private Equity
The chapter ends with an attempt at a clean definition. Private equity is: (1) a negotiated investment in equity or debt, (2) held for a long time (3-7 years typically), (3) bearing significant risks, (4) generating hopefully high returns, (5) on behalf of qualified investors like pension funds and insurance companies, (6) to create value by supporting entrepreneurs and implementing a plan.
That is a lot of words to say: rich institutions give money to smart fund managers who invest in private companies, help them grow, and sell them later for a profit.
The chapter sets up the rest of the book nicely. Private equity is not some Wall Street invention from the 1980s. It has been around since humans first pooled money to fund risky ventures. The structures got more sophisticated. The collateral got less horrifying. But the core idea is the same: find someone with a good plan, fund them, share the risk, share the reward.
This is a retelling of Chapter 1 from “Introduction to Private Equity, Debt, and Real Assets” by Cyril Demaria. The book is a solid academic overview of the PE world. I am summarizing it in plain language so more people can access these ideas.