• January 28, 2017

Market Entrepreneurs versus Political Entrepreneurs: The story of Cornelius Vanderbilt

 

I had an amazing journey to simple discoveries. While I was in a business discussion with one of the associates of our company, we decided to travel times and see what history would teach us on how Nations really emerge; we also reviewed the importance of ‘Free Enterprise Market Structure’. Well, my sentiment is this: no one cares how you kill a bird, just be able to eat it.

Come to think of it: There are two types of entrepreneurs in every community; those who build their businesses with private funds, using either their own money or funds from investors. I call them ‘Market Entrepreneurs’. And those that, on the other hand, lobby government officials to award federal funds to their business enterprises.I call them ‘Political Entrepreneurs’ Market entrepreneurs succeed by giving the public useful goods or services at a good price.

While looking at these two broad categories, I also stumbled on the beautiful and inspiring story of Cornelius Vanderbilt. A good case of a market entrepreneur. And also looked at Samuel Cunard and Edward Collins, a good example of a political entrepreneur. I took a journey back to 1840’s.

Mr. Vanderbelt who was born in New York in 1794 to a generation of immigrants and ferry operators in New York Harbor. The young man quitted school at 11 to help build his father’s business and started owning his ferry service at the age of 16. Although an entrepreneur, he was also hired to run the ferry of Thomas Gibbons.

First Lesson: As an entrepreneur, you can take a few years off to unlearn your old business practices and learn how big businesses operate. It’s called Apprenticeship.

At 36, Vanderbilt started his company and established steamboat routes all over the northeast. His business model was structured to charge cheap fares and use other revenue models to make money for the company. While charging cheap fares, he sold foods to customers onboard.

His business adopted an excellent hiring model for captains and used well-built boats with good engines. He became very successful.

Vanderbilt’s success forced his competitors to run their companies well and either cut prices or go out of business.

He invested massively in technology and by 1840, his steamships could cross the Atlantic in less than two weeks, not the three months common with sailing vessels.

British Reaction: So what happened?
The English government soon began subsidizing a British steamship line when Samuel Cunard, a political entrepreneur, received funds from Parliament to establish routes between England and New York. The argument was predicated on the fact that the money was well-spent because Cunard carried the mail, and his ships gave England an advantage in world trade.

American Government Reaction: So what happened?
An American, Edward Collins, lobbied Congress for funds to set up a transatlantic steamship company. He received $3,000,000 down and $385,000 per year. He pledged to build 5 steamships and “drive the Cunarders off the seas.”

His company became wasteful! Spending money on decoration rather than quality improvement. The ships were structurally faulty and used more fuel. He had no incentive o reduce cost since he received free funds from the government. Just like every entrepreneur who wants to maintain the sanity of his/her industry, Vanderbilt went to the congress and promised to operate a transatlantic ferry for 15000USD per trip, which was far cheaper than either Cunard or Collins could do. But the myopic congress turned him down and continued to subsidize Collins. At that time, Collins was receiving $858,000 per year.

While Vanderbilt was innovating and cutting cost to attract more customers, Collins was battling with technical issues and losing customers. Collins ship sank in the middle of Atlantic, killing almost 500 passengers.

In 1858, Collins was bankrupt, and Vanderbilt was on his way to become the leading American steamship operator. Vanderbilt was innovative, energetic, and loved competition in a free market. Vanderbilt’s innovations gave travelers across the world faster, safer, and cheaper transportation with no government subsidy. As a market entrepreneur, Cornelius Vanderbilt provided a useful, safe service to the public at a good price. The Collins vs. Vanderbilt story should be a good lesson to Americans of every generation.

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