Sunday, October 10, 2010

Entrepreneur's Holiday

This Monday, October 11th, we celebrate the only U.S. holiday that honors an entrepreneur: Columbus Day.

Christopher Columbus is best known as the explorer who discovered the Americas*, but he was first and foremost an entrepreneur.  His journey was not one of pure exploration, but driven by commercial advantage.  And his story shows that the entrepreneur's journey remains the same 500 years later.

The Problem
During the reign of the Mongol Empire, trade between Europe and the Orient, via the Silk Road, was a fairly safe and lucrative one.  That all changed in 1453 with the fall of Constantinople to the Ottoman Turks.  Trade routes collapsed leading to a scramble for alternatives.  There were two main options:  an eastern route around Africa or a hypothesized western route across the Atlantic.

The Solution
Contrary to popular belief, educated Europeans did not believe the world was flat.  In fact, recent advances in celestial navigation rested on the fact that the Earth was spherical.  But for a variety of reasons, there were different estimates for the circumference of the Earth.  To make a long story short, Columbus estimated the westward distance from the Canary Islands to Japan to be ~3700 km (the correct figure is 19,600 km).  Even so, a sea voyage of even that length was pushing the limits of the maritime technology of the day.  While the easterly trade winds might enable a voyage of that distance westward, the question was how to return.  Fighting those same winds eastward would likely exhaust the provisions that ships of that day could carry.  Therefore the western route was considered unfeasible.

But Columbus had a plan.  Based on his 25 years as an ocean trader and his knowledge of the trade winds, he proposed to use the westerlies further north in the mid-Atlantic, to make the return trip feasible.

The Opportunity
In 1488, Bartholomeu Dias of Portugal rounded the Cape of Good Hope which eventually resulted in Portugal's establishment and control of an eastern sea route along the coast of Africa, India, and ultimately to China and Japan.

Enter Spain.  Desparate for funds after a long and expensive war pushing the Moors off the Iberian peninsula, King Ferdinand of Aragon and Queen Isabella of Castile needed a way to boost trade revenues.  With Portugal in firm control of the eastern route, they were willing to entertain the more speculative western option.

The Venture Capitalists
Initially, Columbus took his proposal to King John of Portugal, Genoa, and Venice the "market leaders" in the Orient trade routes.  But King John's experts correctly rejected the proposal on the basis that Columbus's distance estimates were too short.  His negotiations with Genoa and Venice were unsuccessful.  Finally, he sought audience with the Catholic Monarchs of Spain and in 1486 presented his proposal to Queen Isabella.

The Term Sheet
Columbus proposed to discover a western route to the Orient for Spain in one year in exchange for funding for three ships.  If successful, he wanted 10% of the revenues from the new lands in perpetuity, an option to buy one-eighth interest in any commercial venture with the new lands and one-eighth of the profits, the rank of Admiral of the Ocean Sea, and appointment as Viceroy and Governor of all new lands discovered.

As in the case with King John and for the same reasons, the Queen's experts advised her to reject the proposal.

However, to keep Columbus from taking the proposal elsewhere and to maintain an option, Spain paid Columbus a small stipend to support him as he sought to raise funding from private investors.  Columbus lined up commitments for half of the funds from private Italian investors provided he could find a lead investor.  After two years of negotiations and some tempering of the deal, Spain agreed to fund the venture.

The New Venture
Columbus departed Spain on August 3, 1492 with the flagship Santa Maria plus the Nina, and Pinta and as new ventures go, the plan quickly ran into reality.  First, Columbus expected the journey to last four weeks.  Instead it took five weeks with Columbus narrowly avoiding a mutiny.  He made landfall on October 12, 1492 in the Bahamas but convinced he had reached India.  Two months later, the Santa Maria ran aground and had to be abandoned.  On the return voyage, a storm forced them to make landfall in Portugal instead of Spain where they were detained for a week.  They were then allowed to proceed and returned to Spain on March 15, 1493, faster than the one year allotted.

Success!  Columbus was ennobled and granted the title of Admiral of the Ocean Seas.  The Church granted Spain exclusive rights to all lands beyond a line 100 miles west of the Azores, a monopoly that enriched Spain for the next 300 years.

Scale Up
On September 24, 1493 Admiral Columbus led the first of three voyages to colonize and explore the "Indies" as he believed the new lands to be. But Columbus was a lousy governor (i.e. CEO) and over the next six years, his methods became harsher and the complaints from the colonists louder until finally "Chairman of the Board" King Ferdinand appointed Francisco Bobadillo as governor to investigate the allegations of mismanagement.  As a result, on October 1, 1500, Columbus was arrested and sent back to Spain in irons.  He was eventually released and allowed to lead another expedition but he was permanently removed as governor.

Columbus died on May 20, 1506 a wealthy man and firmly convinced that he had reached the east coast of India.

The Pivot and the Fast Follower
So when did Spain and the rest of Europe figure out that what Columbus had discovered was a new continent?  From 1499-1502, Amerigo Vespucci conducted his own voyages to the New World.  A German cartographer, Martin Waldseemuller working from Vespucci's journal became convinced that the land that Columbus had reached was not India but an entirely new land.  In a map he published in 1507, a year after Columbus's death, he labeled the new land America after Vespucci.

Perhaps if Columbus had been able to recognize this, the two new continents would today be called North and South Columbia and America would be that Latin Columbian republic next to Venezuela in South Columbia.

The Legacy
In the end, Columbus's legacy was recognized.  Strangely, even though he thought big (there's nothing small about asking for 10% of the profits from the New World in perpetuity...), in the end his vision wasn't big enough.  He never found a commercially lucrative western sea route to the Orient but something much bigger:  the New World.

Happy Columbus Day!

*  I'm not going to debate here whether Columbus was actually first or not.  I'll leave that to professional historians.


  1. Re. who was first, I wouldn't think that there's much to debate. Were there people on the American continent when Columbus arrived? If so he can hardly be the person who discovered it, can he?

  2. Good point! Thanks for catching my frame of reference error. I should have made discovery "discovery".

    Actually, from a frame of reference perspective, the part I like best about this story is how Columbus, Spain, and the Church assumed that they could lay claim to the known inhabited land they were trying to reach. I wonder what the Chinese Emperor and the Indian princes would have had to say about that!