The East India Company became one of the largest companies that ever existed and controlled half of all world trade at one point. Its beginnings (and its eventual success) are based on the innovation of risk taking:
The company existed for over 400 years and its original intention was to import spices from Indonesia. In 1599, the founders, Smythe and his associates had decided that, because of the huge expenses and high risks involved, that ‘a trade so far remote can’t be managed but by a joint and united stock.’
Expenses included buying the expensive spice commodities, the ships, crews, artillery and a potentially delayed return on investment. The risks were equally high: shipwrecking, piracy, storms, mutiny (losing either the gold en route or the commodities upon their return).
The East India Company reduced the risk by sharing the financial burden amongst many individuals. This made the venture possible in the first place.
“The idea of a joint stock company was one of Tudor England’s most brilliant and revolutionary innovations. The spark of the idea sprang from the flint of the medieval craft guilds, where merchants and manufacturers could pool their resources to undertake ventures none could afford to make individually. But the crucial difference in a joint stock company was that the latter could bring in passive investors who had the cash to subscribe to a project but were not themselves involved in the running of it. Such shares could be bought and sold by anyone, and their price could rise or fall depending on demand and the success of the venture.”
This innovation was the beginning of shareholding in businesses which survives and continues to this today.
The first voyage made 300% profit on the original equivalent of £3m investment. The EIC imported 900 tonnes of Indonesian spices – albeit mostly stolen from Portuguese ships (also known as ‘privateering’ and perhaps also a reflection of what is known in strategy circles as ‘directed opportunism’)
This was a completely innovative approach to taking a huge bet with huge risks but with the potential for huge reward.
Recommended reading: ‘The Anarchy’ by William Dalrymple