3 Business Lessons From Venice History

The Venetian Republic has a rich history of trade and institutional innovations. What can we learn from the Serenissima past?

In the 14th century and 15th century, Venice imposed itself as a dominant city-state, and a commercial empire in the Mediterranean Sea. Ruling over its Domini da Màr (“Domains of the Sea”: Venetian colonies along the Adriatic Sea and up to the Bosporus and Cyprus), the city was the center of trade between Orient and Occident. This wealth, as displayed in Sanudo’s Cronachetta, exposes itself in the sumptuous architecture, the busy port, and the markets stuffed with exotic goods and spices. In every way, the Republic displayed its riches. “Questo è per esser tutti danarosi” (‘because everyone has money’), explained Gino Luzzato in Storia economica di Venezia dall’XI al XVI secolo. What can modern entrepreneurs learn from this model of success?

First lesson: Competition is for losers

The success of Venice comes mainly from the long-haul trade merchants were conducting. The historian Fernand Braudel studied this model thoroughly. He highlighted the fundamental difference between the long-distance trade and the market economy. Indeed, for Braudel, any economy has different levels, which are not exclusive but complementary:

1. The domestic level: this is where we find the gift system or the household management system, not falling under pure economic logic.
2. The market level, where a market economy can occur.
3. The capitalist level, developed initially under the long distance-trade regime.

Indeed, the roots of capitalism can be found in the long-distance trade, because its model relies on merchants investing their money (capital) to fund a risky galley expedition (enterprise), in the hope of returning from Asia or the Middle East with valuable and exotic goods to be sold, and hence making a profit. This is, according to Fernand Braudel, the very spirit of capitalism: a capitalist willing to take a risk and make an investment, to eventually realize an added value. Venice was one of the first cities to rely, in a systematic way, on this long-distance trade, with the Moghols, Byzantium and the Ottoman empire.

Capitalism (through long-haul trade) is not similar to a market economy. It can even, according to Fernand Braudel, sometimes act against the very idea of the market economy. The latter relies on a competitive structure and a transparent mediation between consumers and producers over a product. The market mechanism creates a price, transparent to any participant in the market. The everyday goods, like wheat or wood, coming from the terraferma (mainland domains beyond the Adriatic coast in Northeast Italy), and even goods coming from farther, like wines from the Domini da Màr, as long as they were traded regularly and in a foreseeable way, were mediated by this market economy.

Capitalism, although it often requires market structures for commercial outlets, tend to act against this market mechanism. The long-haul trade enables some opacity over the prices of the exotic goods coming from afar. Merchants are keen to hide information that could help consumers price the goods correctly, as opposed to how a transparent market mechanism would normally do. Moreover, to realize a profit, merchants are eager to monopolize the routes, and are able, by the very structure of this commerce, to source themselves directly from the producers. This is what is called double information asymmetry. Merchants are the only one to know the prices from each side of the supply chain. Geographical distance reinforces the cost of information, which is centralized by the merchants. They can squeeze through the usual market price-making mechanism. This capitalist dynamic can thus go against the market, by disrupting the price fixing.

What does it tell us on current business principles? If a business is trying to compete on the market, where prices are fixed by an encounter of consumers and producers, it is failing in its very strategy. No business can maintain the possibility of remaining a top contender on a market, if it is competing directly with other firms, and when consumers will not be loyal if a competitor offers a lower price. Instead, one should follow a blue ocean strategy: avoid the frontal competition, and seek to differentiate itself via the quality, brand or experience it proposes. Failing to do so will resume in a red ocean… Or, as Peter Thiel said, “competition is for losers”. Like Venice, the idea is to start small to go big (Dogado, terraferma, Domini da Màr, then long-haul trade with the Orient), in order to monopolize. If the product or service a company is offering falls in the market level, it will be under the pressure of market mechanisms. If a firm creates a monopoly through a unique product, it will be able to profit from this asymmetry of information.

Second lesson: Delegation is power

As we saw, the major factor in the success of Venice was its ability to monopolize the trade with the East, and in doing so, develop a capitalist system. But this success would not have been possible without a major legal innovation. Indeed, long-distance trade was around long before Venice, with the Sogdian merchants or Genoa in the 13th century. But Venice was able to generalize a system of delegation named the commenda.

The commenda is a contract defining the relations between merchants. Usually, a sedentary merchant (commendator) gave the necessary capital to a travelling trader (tractator) with some guidelines on how to conduct the operation. The trader returned after what was usually a one- or two-year journey, with the goods that were sold once in Venice. Profits were then shared between the commendator (receiving 75% of the profit) and the tractator (who receives 25%). The tractator sometimes brings capital to the operation (bilateral commenda), up to 20% of the total fund. The profit is then shared following a 60–40 split. Most of the time, the tractator would return to Venice, but sometimes — and this gives a deep insight on the trust at stake between the parties — money could be remit to the commendator without the tractator coming back to Venice.

This gives us an interesting view on how to conduct business. Any enterprise is a risk, almost by definition. And the sharing of responsibilities and decision-making ability between the manager/investor and the tractator is critical to the success of the operation. One important aspect is that the initial investment does not systematically involve the tractator. Hence, the skin in the game is not necessary to conduct business, as long as the prospect of a fair share of profit is foreseeable. Prospect was important with these travels. The tractator could generate wealth out of a few travels, and thus make a name for himself in Venetian society. This dynamic worked well for Venetian prosperity. At least for a time.

Third lesson: Innovative cultures are insanely hard to maintain in the long run

This commenda system benefited new entrepreneurs. Young businessmen eager to gain a social status could become a tractator and make their fortunes with a few journeys. This enabled inclusive economic and political institutions: Venice, with its Doge, was a model of medieval representative democracy. The commenda system allowed new wealth to be created for the entrepreneurs. This new aristocracy, however, became less and less tolerant to the pressure from new entrants. Inclusive institutions propelled innovation and prosperity in the Republic, but as a new elite was forming, it became wary of any threats this social mobility could pose to their status.

The commenda, which enabled these new riches, was banned. Capitalism, through its innovation, created a new class of aristocrats which, in return, triggered an anti-competitive mechanism at the political level. In 1314, the Venetian state began to take over and nationalize trade. In 1315, the establishment published the Libro D’Oro, or Book of Gold, which officially registered Venice nobility. Social mobility stopped. New entrepreneurs, despite their efforts, could not get in. From then, the Venice elite renounced political and economic inclusiveness, and relied on extractive institutions. Entrepreneurship was not encouraged, and the return on investment for a tractator was dismal. Investment in land became prominent in the Terraferma, with the appearance of a new class of gentleman farmers. Far from the idea of a merchant travelling to the East.

This is the beginning of a long term but decisive trend called La Serrata (‘closure’): the end of the Venetian supremacy. When the New World was discovered, Venice did not have the power nor the institutions to support exploration. It became less and less relevant, in contrast to other European powers.

This is the third lesson. Even if there is a will for innovative culture, innovations, by definition, reshuffle powers and capabilities. Creative destruction creates, also by definition, winners and losers. This is true at the national level, but also at the corporate level. The winners of the early innovations will be rewarded, and will not welcome newcomers pushing an even newer wave of innovations. This might unfold in some individual strategies, such as barriers to entry in recruitment, nepotism, incertitude zones around process, or even in policies backed by management. If innovations happen at some point, it does not mean a company will remain innovative — on the contrary, it is where the danger arises.