Stuff Matters: Genius, Risk and the Secret of Capitalism

Let’s be realistic. At a very minimum, you’d have noticed that you had the scope to charge your services at premium rate. There weren’t so many lawyers in Rockhampton and these three clients were in no position to haggle. If the ore in the rock was gold, then these clients would pay you, and pay you royally, for your legal expertise. That kind of reasoning, however, is amply consistent with being slave to the Toad. No one will pass up a little extra cash, if they don’t have to put anything at risk. So you charge your time at a premium rate, but what else? Do you commit significant time and energy to the project, unsure of whether you’ll receive a penny in exchange? Do you put some of your own money into it and if so, how much?

To answer the question accurately, you need to be careful about details. You are not wealthy. You have a young wife to support. Your start in life accustomed you to a high standard of living and in Rockhampton, Queensland, cash is hard to acquire and easy to lose. I suggest you would do roughly what I would do. Be interested, but evasive. Seek out as many facts as I could, knowing that time is always ticking by and that my main advantage lies in having been just the fifth person in the world to see and handle that little black stone. I’d talk with my wife. Discuss our own capital position, how much we need for the baby, how much we need for our security. Identify a sum that we can afford to gamble. Find a balance between maintaining a regular weekly income and investing time in a scheme that might be hare-brained or might be the best thing we ever did.

I’d speculate, but sensibly.

That’s not how D’Arcy did it. He went in big. Huge. Together with two Queensland entrepreneurs, Thomas Hall and William Pattison, and the miners themselves, he formed a syndicate. The Morgan brothers contributed their mineral rights; the other three would provide a crushing mill for the extraction of the gold. D’Arcy didn’t have huge funds at this point, but he threw his all at the project. He gambled. His future. His wife’s future. Their baby’s future. Everything.

We know this story for one reason and one reason only. The bet paid off. The hill from which that black boulder had tumbled – Morgan Mountain, as it became – was truly a mountain of gold. The entire six man syndicate made a fortune, but D’Arcy made himself richest of all. He returned to England one of the richest men in the world. At its peak, and in present day terms, his wealth ran to several billion pounds. He bought a grand home in town and a magnificent country estate. After his first wife separated from him and then died, he married again and entertained on a prodigious scale.

Character and a moment of risk. Three rough men and a wild story. The spin of a geological wheel. A dazzling outcome.

But perhaps you’re not convinced. You’re there in that Rockhampton office, gazing out at that dusty street. Perhaps you would have gone in big. Perhaps anyone would. Perhaps it’s got nothing to do with character, just a question of being in the right place at the right time. A matter of luck, not temperament.

You might think so, but I haven’t played quite straight with you. There’s more to tell. D’Arcy was a gambler. A provincial solicitor in back of beyond Queensland doesn’t generally have much cash at his disposal. That D’Arcy had enough to make the investment possible at all was because he had already speculated, heavily and successfully, in land. He only possessed the means to bet on Mount Morgan because his appetite for such bets was already strongly evident.

Move the clock forward to the young man’s triumphant return to London. He had no financial need to stake anything on anything. He could have bought art, wined and dined, moved in society, held balls, indulged whims – done whatever he wanted. Yet horses and the racetrack still fascinated him. There were only two private boxes at Epsom race course. He owned one and the Queen owned the other. The thunder of horses’ hooves did what the clatter of a miner’s pick had once done. He needed risk to feel alive.

And one last thing. The main thing. The reason why D’Arcy is an important name and not merely a colonial chancer who came good. In 1900, an emissary from Persia came searching for ‘a capitalist of the highest order’ to invest money in the hunt for Persian oil. The geology was favourable. The oil business had already made fortunes for Rockefeller in the United States and for Marcus Samuel of Shell in Britain. The idea wasn’t crazy and D’Arcy was interested.

Twice already, he had spun the wheel. In land first, then in gold. The horse racing in Britain fed a compulsion but hardly offered stakes large enough to satisfy a gambler’s spirit and Persia offered the largest stakes of them all. A businessman, a real one, the kind used to managing complex corporations and large capital investments, might have looked harder before leaping. D’Arcy certainly made a show of thinking hard. He enquired after the geology, he ordered maps and took advice; but the badness of the advice he was given suggests that there was only one answer he’d ever have accepted.

From the Shah of Persia, he purchased a sixty-year concession to search for oil. The cost was £20,000 up front and a further £20,000 worth of shares in the venture. The cost of the bribes spent to gain the Shah’s agreement was more again. Even the eunuch who brought the Shah his morning coffee got his baksheesh. The cost of drilling two exploratory wells was estimated at £10,000. Real money, even for a prodigiously wealthy man.

His advisers, however, did not spend much time discussing the cultural complexities of the region: the Shiite hatred for political authority, for Christian interlopers, for foreigners. They did not pause to take account of certain technical challenges: the entire country boasted only a few hundred miles of road; the territories which looked most promising for oil lay across wild and mountainous countryside; and the local labour possessed so few technical skills that few of them had even seen a hammer. They did not allow much of a contingency reserve for the mounted tribesmen who would sweep down from the mountains demanding gold to protect the incomers from bandits – that is to say, from themselves. They did not make full allowance for the fact that Persia was so far away from anywhere with anything that the nearest dentist was to be found in Karachi.

When D’Arcy’s men came to drill, the cost of those first two wells was more like £200,000 than the £10,000 predicted. The venture bled money. Drilling started in 1902. In extremely challenging conditions, the equipment continually broke down. As early as 1903, D’Arcy’s overdraft stood at £177,000, or a few tens of millions of pounds in today’s money.* His bankers had demanded shares in the Mount Morgan mine by way of collateral and, to make matters worse, those shares had fallen to about one eighth of their peak value. Tough times on Easy Street.

Then, in 1904, relief. The drilling team struck oil. The would-be oilman used the news to scour Europe and the United States for new investors, but the well, that had started so promisingly, ran dry. He was advised to shift the exploration effort miles to the southwest. His overdraft grew still further. His bank started to demand the concession itself as collateral. Everything seemed lost.

As things turned out, D’Arcy did succeed in finding an investor, Burmah Oil, whose support enabled the troubled little venture to go on burning cash. By early 1908, however, even Burmah had had enough. It asked D’Arcy to put up more funds or close the whole operation down. He complained, ‘Of course I cannot find £20,000 or anything’, but stubbornly ignored the deadline. He just allowed it to pass without action or comment. The gambler refused to leave the casino.

Burmah, in turn, ignored their partner’s refusal to cooperate and on 14 May 1908 sent a letter to the drilling team in Persia informing them that they should close up shop, sell everything saleable, and come home. The letter took weeks to travel from Glasgow to Persia. And after it was sent but before it arrived, the drilling team struck oil. They hit a gusher so big that the spout of oil jetted fifty feet higher than the steepling drilling rig itself. Shortly afterwards, the second exploration well struck oil too, and also on a prodigious scale. When George Reynolds, the tough, single-minded genius of the drilling team, received Burmah’s communication, he wrote back sarcastically, ‘[Your] instructions…may be modified by the fact that oil has been struck’, and refused to act on them. The age of Middle Eastern oil had begun. D’Arcy recovered the funds he’d sunk into the sands of Persia and received shares worth some £895,000 to boot. The company that emerged went through several name changes since those early days, but is still alive and well today. The company is now known as BP and is worth approximately $175 billion.

I’ve told this story at length because it’s dramatic and because it makes a point. A moment of risk, of opportunity is not enough. Given the right opportunity, any of us may succeed to a certain extent, but the world has not been shaped by those whose ambitions run ‘to a certain extent’. D’Arcy’s ambitions were large when he speculated on land, larger when he speculated on gold, and almost boundless when he speculated on oil. You or I would have needed to conquer our aversion to risk to have done even one-tenth of what he managed. He, however, conquered nothing. He wasn’t averse to risk, he needed it. When he had all the wealth anyone could ever want, he put himself through almost a decade of financial loss and heartache simply to feel the thrill of that spinning roulette wheel one more time.

The need for risk isn’t unique to entrepreneurs, but it’s the mark of the breed, all the same. When speaking to entrepreneurs in the course of writing this book, I’ve asked how much of their capital they put at risk in that first crucial investment, the one that launched them. They all answered the same way: they invested everything they had and in many cases borrowed heavily too. If their business had gone bad, they’d have been wiped out, walked away owning nothing more than fresh air and sunshine. That’s the answer I’m given, but in almost every case I’ve noticed a tiny pause before it comes, one of those micro-habits which supposedly reveal a truth beyond mere words.

What is that hesitation, that nanosecond of delay? I think it comes down to translation. To you and me, who’d much rather not be wiped out, the question about that first investment has many possible answers. For entrepreneurs, that’s not the case. There’s only one first investment you can make, which is as much as you have. That answer is so instinctive, it takes a moment for them to remember that not everyone thinks the same way. They have to translate their answer from Risk-Think into regular Human-Think, and the pause for translation accounts for that micro-delay.

Allied to risk, and inseparable from it, is restlessness. For most humans, comfort is defined in static terms. The log fire. The hot drink. It’s a pastoral ideal, the ideal of a people who will sleep tonight where they slept last night, do tomorrow what they did today. No doubt entrepreneurs like log fires too, but their instincts aren’t remotely pastoral. Modern science has discovered a type of neuro-receptor (called the 7R variant of the DRD4) which seems highly linked to Attention Deficit Disorder, as well as novelty-seeking and food- and drug-cravings. In the modern Western world, this receptor isn’t one you’d want your kids to have. It’s not the sort that promises wonderful educational outcomes or stable career prospects.

People who have this kind of brain receptor, though, aren’t ill. The genes responsible for it are doing their job just as nature intended. Since nature has a tidy habit of ensuring that poorly adapted genes are competed into oblivion, then those genes must once have been doing something useful. The question is what.

Enter the Ariaal – not a misspelled font style, but a tribe of semi-pastoral nomads in Africa. Some Ariaal continue to be true nomads, wandering the arid plains of northern Kenya, herding camels, cows, sheep and goats. Some of their brethren, however, have settled down and become farmers. The two groups are genetically identical; it’s just the lifestyles that have diverged. Scientists have studied the two groups and found that nomads who had the ‘novelty-seeking’ receptor were stronger, healthier, better nourished than nomads who lacked it. Among farmers, however, it was the other way around. The novelty-seekers were worse nourished and less well adapted. In short, if you have a wanderer’s genes, you’ll do well as a wanderer but struggle if asked to settle down.

As far as I know, no one has ever taken cheek swabs from billionaires to conduct the same study, but they’ve come close. Twin study analysis conducted jointly by St Thomas’s Hospital and Imperial College in London and by Case Western Reserve University in Cleveland, suggests that around half somebody’s propensity to become self-employed is attributable to their genes – perhaps a rather lower score than you might expect. (Intelligence, for example, is about 75 per cent genetic.) On the other hand, it’s not clear that twin study tests such as these are methodologically accurate. Nearly all identical twins share an upbringing, so it’s hard to tease out genetic from environmental factors. In a world well set up for such experiments, there would be a plethora of identical twins forcibly separated at birth to make the data analysis easier, but alas such twins are far too rare to generate statistically meaningful results.

What’s more, self-employment is not entrepreneurship. Indeed, much entrepreneurship isn’t really entrepreneurship. A plumber, for example, or a lawyer, or an accountant may be self-employed, and may choose to house their occupation in a wholly owned, legally incorporated company. But neither self-employment nor corporate status is the test. The test is ambition. It’s all very well to start a business in your garage, but unless you start it dreaming of the corporate skyscraper you’ll move into one day, you are not an entrepreneur. (And this, by the way, is the real secret of American enterprise. The United States does create a lot of entrepreneurs, but so do some other countries. Almost nowhere, though, do entrepreneurs dream on a bigger scale, as measured by the employment growth expected by an entrepreneur over the first few years of the business’s life. Those outsize dreams have a lot to do with what makes the United States what it is.)

Other scientific studies have perhaps got closer to the mark. A very intriguing study conducted by Cambridge University studied the brains of 17 ordinary corporate managers and sixteen entrepreneurs, each of whom had started at least two high-tech companies and who therefore passed any reasonable test of entrepreneurship. Asked to make a series of routine decisions, the managers and entrepreneurs scored about the same. These were sensible people, analysing problems in a sensible way. As soon as they were asked to make decisions involving considerable risk, however, the entrepreneurs were consistently bolder. Knox D’Arcy would, no doubt, have been off the scale.

Bold, please note, is not the same as intelligent. Indeed, it’s a commonplace in the venture capital industry that founder-CEOs should be gently eased out of the hot-seat as soon as possible. Noam Wasserman of Harvard Business School quotes one venture capital type as saying:

Upfront, I ask founders to level with me. If they are interested in working with me on the basis of [their] being a big shareholder, then I am interested. If they are interested in working with me because they have to run the company, then it’s probably not going to make sense for us to work together.

This attitude, a common one in the industry, would make no sense if that entrepreneurial boldness was the same thing as profit-maximizing genius. It isn’t. It’s gambling, linked (as Wasserman also points out on the basis of careful study) to the tendency among entrepreneurs to be markedly more optimistic about outcomes than their peers.

The trouble is that any attempt to measure optimism in laboratory conditions founders on a basic difference between entrepreneurs and the rest of us. It may, indeed, look to us as though entrepreneurs are ‘too’ optimistic, yet that’s to make the mistake of looking at their world through our eyes. To us, failure matters. To them, failure doesn’t really matter an iota. The failure of a particular venture is not the desired outcome, obviously, but it’s not a bad one. The only bad outcome would have been if they hadn’t had the nerve to go for it in the first place. Our ‘do nothing’ default option is their worst case scenario. That’s the one they truly can’t envisage. Equally, our worst case scenario (‘invest up to your neck, then see the whole thing go pear-shaped’) is no big deal for them. It’s an ‘Aw shucks!’ outcome, one that just makes them want to go back and try again with something else.

Even the way we respond to success is different. For us, success probably means a new home, a nice car and perhaps (depending on the level of our success) a yacht, a private jet, a football club, or a private island. For them, success means all those things for sure, but it means something else even better: that their ‘baby’ has flourished, that their act of creation has been rewarded by something that has matured into a confident, independent adulthood. These feelings mean that the risks and rewards we face are quite different from the ones that entrepreneurs face, even if we were both to compute the odds in the exact same way. Little wonder that we end up behaving in sharply different ways.

How we feel How entrepreneurs feel Do nothing Fine. This is our default choice. Bored. Frustrated. No way. Try and fail Oh my God! What do I live on? At least I gave it a go. Try and succeed Jackpot – got the house, got the yacht. Immense satisfaction – I created something.

Knox D’Arcy is the perfect exemplar of all these things: the optimism, the gambling – and the irresponsibility which (to our pastoral, anti-nomadic minds) is the inevitable result. D’Arcy’s judgement about the Mount Morgan mine proved reasonable, but he refused to sell down his investment in it, even after the stock hit absurdly unsustainable heights. His judgement about Persian oil was simply awful. True enough, even that bet came good in the end, but any competent business manager would have made a much better fist of assessing risks and benefits before making any financial commitment – and would, at the very least, have come up with a much more sober estimate of the probable costs and the scale of financing needed.

Yet there’s nothing unique about his mindset. I’ve spoken to upwards of two dozen self-made multimillionaires. (And my threshold level for ‘multimillionaire’ was high. The median net worth of those I spoke to was well into the tens of millions of pounds.) Almost all of these entrepreneurs used the same kind of language to describe themselves. They’re ‘restless’, have a ‘very low boredom threshold’, need ‘decisions to happen quickly’, need ‘high energy’ and ‘passion’ from those they work with, couldn’t stand the ‘slowness’ of large corporations.

Some of them did have high educational achievement, but plenty didn’t. Typical was one entrepreneur who crammed his three-year law course into an eighteen-month workathon. After getting his degree, he started in corporate finance. He became bored working for others, so set up on his own instead. When he wearied of funding other people’s companies, he bought his own. Work was never the challenge, dullness was. With people like that, I almost got the feeling that if they were forced to sit in a classroom or given a pedestrian middle-management job in a dull but worthy company somewhere, they’d end up chewing carpet tiles or jabbing forks into electrical sockets. These were folk who needed stuff to happen and happen fast.

Although entrepreneurs are often described as rule-breakers, it would perhaps be more accurate to say that they’re typically not rule-minded. It’s not particularly that they seek to break rules, more that they don’t really see the rules that are so clear to the rest of us. That’s why those 7R-DRD4 variant nomads find it so easy to travel beyond the far horizon. They haven’t felt the tug of any prohibition against doing so. It’s perhaps also why immigrants are so over-represented in entrepreneurship – around a quarter of all US start-ups are founded by immigrants, for example. Those who are born and brought up in a place feel its rules and mores in their bones. Those who have already left kin and country behind are much less tuned in to those rules in the first place.

These issues may even lie at the heart of one of the oddest results to come out of the torrent of research into entrepreneurship: namely that while only 1 per cent of corporate managers are dyslexic an astonishing 20–35 per cent of entrepreneurs are (the two figures are for UK and US entrepreneurs respectively; the researcher was Julie Logan of the Cass Business School in London). There’s no settled interpretation of this research finding, but here’s mine. Dyslexics have gone through their school life noticing that the rules which work for others don’t seem to hold for them. A is for Apple, B is for Bird, C is for Cat, D is for Dog. That worked for me. If you’re non-dyslexic, then it presumably worked for you. For dyslexics, however, even those most basic of all rules seem to make no sense. So what do you – as a bemused child, anxiously seeking the approval of your teachers and parents – do in such a situation? You surely get creative. You develop your own techniques and trust those in preference to the seemingly unreliable ones offered by your teacher. You’ve learned to invent your own way around problems. You’ve learned that the rules of Planet Normal just aren’t going to work for you – indeed, they don’t even make sense. And as soon as you start to think like this, though you may not know it yet, you’re an entrepreneur.

If wealth creation is alchemy, then its orginating spark is here. The restlessness of people who can’t bear to be still; the risk-taking of those who can’t bear to be safe; the decisiveness of those who know that if they want a thing done, they’ll need to do it themselves. And from the spark – fire. From the Mount Morgan mine to Middle Eastern oil and the birth of one of the world’s largest oil companies.* The ultimate reason why the world today is different from the world 250 years ago is because of the extraordinary creative energy of that entrepreneurial spark. It’s that spark which has wrested gold, iron, coal and oil from the earth; which has hewn lumber, bashed metal, invented gadgets, launched ships – and done all those other things which make our world what it is today.

When as non-physicists we read about the Big Bang, it’s almost impossible for us to get our heads round the idea that something can come from nothing. In historical terms, though, that’s precisely what has happened over the last 250 years. In 1750, the Earth had plenty of gold in her belly, iron in her veins, lumber in her forests. Indeed, she had more of all those things then than now and yet it was a largely useless sort of fertility because it was one that sat alongside almost universal poverty, illiteracy and high mortality. Out of that void was created the extraordinary affluence of our modern Western world; something from nothing on a colossal scale and achieved in the space of three or four human lifetimes.

As entrepreneurs go, William Knox D’Arcy isn’t the best possible exemplar. He didn’t bring the world any extraordinary new vision. He invented no new technology. He was neither manager nor organizer. He wasn’t even a particularly astute investor, holding onto his Mount Morgan shares when they touched £17 and watching them fall back all the way to £2. But more than almost anyone else D’Arcy exemplifies the willingness – the compulsion – to gamble his all on a vision of the future. Character and a moment of risk. The start of everything.