The Worlds Greatest investment: Electricity

The global economy so far has not been able to inspire much confidence since 2008. Despite the best efforts by our Governments and businesses alike, the fundamentals in most developed economies continue to drag global economic growth rates to a stagnant level when inflationary pressures are taken into account. 

This worldwide economic slowdown has managed to deflate the valuations for start-ups as well as established businesses even if they can demonstrate a strong potential for projected growth. This de-valuation period has opened up opportunities for angel investors that are willing to get in early, take a risk, and take on a stance that the entrepreneur they choose to invest in will be positioned to take advantage of the economic growth that will follow the recessionary period that we are in now. This investment sentiment; ‘swimming against the tide to get to calmer waters later’ is also shared by World famous investors including Warren Buffet who once infamously stated: “…invest when there is blood on the streets” 

When market and investor confidence is at an all time low, and many high net worth individuals and angel investors are vary on investing into innovative start-ups, a cash liquid astute investor can quickly realize that this is the time to search out lucrative opportunities and take advantage of very low business valuations. It does require sharp foresight and a considerable appetite for risk on the part of the Angel Investor – but the rewards can justify the risk.

It is a powerful thought, but a single angel investment in the right industry, at the right time, and in the right entrepreneur can change the way the World works, and the way that humans operate within it. 

Think; AC Electricity was once a disruptive technology that had to be proven and commercialized to gain investor interest in its early stages. Opportunities were lost but the few investors that saw the long term potential of electricity led on to create two of the world’s largest corporations - General Electric and Westinghouse. 

The Second Industrial Revolution
1820 to 1914 saw a remarkable progress in industrial development in the Western World. There are many similarities from this period to the dotcom and technology era that we have witnessed since 99. Prior to 95 there was no Google for example and you would have most probably been reading this article on a piece of paper – or loading it from a floppy disc. Technology entrepreneurs like Ram Shriram (early stage investor in Google) benefited from this foresight. 

Much in the same way, electricity in the Second Industrial Revolution was a relatively unproven concept and to commercialize it required substantial investment and foresight from investors. One of those investors happened to be J. Pierpont Morgan who in1878 at a Paris exhibition, along with several angel investors, including the members of the Vanderbilt family decided to invest in the vision of Thomas Edison. He was convinced that “DC Electricity” would change the world and would be the only real viable solution for providing electricity to Business Districts. 

Though the investment in hindsight is a no-brainer, at the time, electricity generation was highly experimental and would require a huge commitment of investment with no guarantees of success. Edison in 1878 held a patented system of electricity distribution and was successful in raising angel investment.

Using the angel investment he raised Edison launched his first DC electricity generation station four years later in 1882. It was capable of providing DC electricity to 60 customers in Manhattan. 

Following the success of this operation and from a mixture of organic growth, raising second and third rounds of funding, Edison swiftly expanded his foothold in the industry and opened a total of 121 DC electricity power generation stations in the US by 1887. 

The barriers to entry were becoming larger and larger and it seemed that Edison and his investors were well on their way to creating a virtual monopoly in electricity generation. However, the major caveat of DC electricity that Edison could not find a solution to was that his DC electricity generation stations could only supply electricity over a distance of 1.5 miles. This meant that no matter how much Edison perfected the generation process DC could only supply local business districts. In spite of the flaws that were inherent on DC electricity, they were not a major concern to Edison as he could still supply electricity to individual businesses more economically than it would have cost them to produce it locally. It is fair to state that Edison believed that his patented technology may actually be able to control the entire electricity industry. However as time has thought us time and time again, free markets do not support this notion and they never have. Think the music yesterday. Think Apple today.  Apple has relentlessly tried to control every aspect of its product and service, from retail to software, mobiles and desktops. It will be interesting, if this is the first company in the history of time that will be able to control every aspect of its operation without any type of licensing, as Edison wished to do in 1887.

Enter industrialist and Angel Investor George Westinghouse and Tesla that introduced AC electricity as a viable alternative to Edison’s DC electricity. It was a disruptive technology as AC electricity could travel much greater distances on much cheaper cable than DC, which meant fewer power stations were needed, and as the electricity could serve more end users – it could supply electricity for far less than DC electricity.

As an Angel Investor of AC Electricity Westinghouse’s vision was to supply the entire country with electricity in a cost efficient method and he knew that DC electricity would not be able to fulfill this vision. As the creator of AC electricity, Tesla was very much in alignment with this vision, and Westinghouse swiftly bought out Tesla’s patents on AC electricity, and hired him as a consultant. Together they then created AC systems that turned a new chapter in the history of electricity – and some of these innovations are still in use today!

It became increasingly clear that AC electricity was the future, and endorsing AC electricity as a cheaper more efficient generation process over DC electricity would mean effectively passing control of electricity into the hands of Westinghouse and Tesla. 

This might have been a good time for Edison to be visionary – and perhaps search out ways to incorporate AC electricity into DC electricity distribution. However J Piermont Morgan and Edison were not keen to allow this to happen because they already held patents in DC electricity and they had recognized how disruptive AC electricity could be to their business model, and so Edison literally waged a war against anyone even trying to endorse AC electricity. Edison convinced the public that his technology was better than the competitions (sounds similar to a large technology conglomerate of today?) and even used tactics like employing AC electricity in the Electric chair for public executions which would also demonstrate how unsafe AC electricity was.

A parallel to this is the response of record producers and CD producers of today when Napster (the illegal worldwide music sharing site peer-to- peer) launched in 1999. Instead of being insightful and allowing their business model to evolve naturally, they acted like typical complacent fat cats and invested a large amount of their reserves into trying to shut down these websites and to also prosecute its end users. 

These archaic methods of trying to prevent technology from flourishing naturally have never worked. History has demonstrated this time and time again and it did not work now, and it would not work then!

An ugly competition for market share ensued between J Pierpont Morgan and Westinghouse and since the smear campaign against Westinghouse and Tesla was not really helping, Edison and J Pierpont Morgan decided to attack them in a different way. Using their significant clout within the industry they spread rumors to the Angel Investors and Wall street investors that Westinghouse’s finances was in a precarious situation and that it was only a matter of time till the whole venture failed.

The tactic worked, and angel investors pulled out the working capital required to continue the research. 

At this point, busted, Westinghouse proposed to Tesla that if this technology was to be developed further the contracts that Tesla held would have to be altered drastically – so as to conserve the capital reserves that they held. Tesla, for his belief in his own technology agreed with Westinghouse and relinquished all of his royalty rights to AC electricity. 

This selfless act from Tesla was his lasting legacy and a real testament to the belief his vision that his creation, AC electricity could change the World. And it did. The advantages of AC electricity soon became evident, and due its combination of a low cost business model in tandem with its exciting range opportunities, AC generation installations quickly superseded Edison’s DC electricity operation. Much of the technology that Tesla created is still employed today. 

This leads us neatly onto how much money was actually made by the Investors that financed AC Electricity?

The person who could have gained the most was Tesla. Though he sold his patents to Westinghouse earlier on he had a generous royalty contract on AC electricity which he surrendered during Edison’s smear campaign.

The Angel Investment agreements between Westinghouse and Tesla stipulated that Tesla, as the inventor of AC electricity, would receive a royalty of $2.50 for every horsepower outputted.  The royalties from the AC generators and equipment alone would have been worth approximately £5bn today factoring inflation without even taking into consideration the royalty for $2.50 per horsepower of electricity outputted. 

It is fair to say that factoring in inflation; Tesla would be one of the wealthiest men in the World thrice over. It is absolutely staggering that a single person could have been entitled to all of this – and that to from a single royalty contract.

Tesla passed away in a New York hotel room in 1943 – Poor. Though he may have surrendered all of his rights to the technology - these designs are still the standard that is employed worldwide.

Electricity, today, remains a constantly evolving technology. Its newest variations still continue to attract angel investors. Wind energy, nuclear energy, solar energy, and other newly emerging green clean technologies for energy generation have captured the imagination of several large angel investment firms. So whether you believe the best investment in the world is Google because of the profit that was earned, or electricity because of the change it has made for the whole world remains a subjective opinion, and also, what type of entrepreneur you are. I am sure sociopreneurs would jump at Electricity as the worlds greatest investment, and I am sure that alphapreneurs and empire builders would say: google is the best investment in the world!

There is a lesson to be learned here for angel investors. Even when the right investments in technology have been made, not remaining alert to disruptive technologies, or at the very least, failing to recognize that any technology can be superseded in only a matter of months (regardless of the barriers to entry) is at an Investor’s peril. 

J Piermont Morgan invested in DC electricity, but failed to comprehend the superiority of AC electricity even when the opportunity knocked at his doorstep. 

Sometimes, Angel investors should diversify their investments – perhaps EVEN in competing technologies when it is unclear which one of them may eventually prosper. Remaining unemotional helps.  The right approach therefore is to spread your investments out across competing fields and spread risk. 

Further reading: What is the best investment in the World: Google or Electricity?

  
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