The Commenda

The Colleganza Contract or How Venice De Facto Invented Venture Capital.

It is 12th century, the Venice Lagoon, and the city-state is sizzling. More people live on the island republic than there would be 1000 years later. What brought such prosperity, enabling risk-taking seen a few times throughout history?

Historians, economists, and scientists in general argue on what was so special about Venice in medieval times that gave it a magic touch, to a city that turned into a city museum in the 21st century, with 1/4th the population that what it was at its height. It’s impossible to attribute an order of importance to the factors listed below, but it’s clear that the combination of them played the most important role in pushing Venice to become the world’s metropolis.

The first thing that was an important ground for success is that Venice in the 12th century was politically stable, creating a fertile ground for investing and encouraging entrepreneurs to take risks with a rule of law that gave ordinary citizens, and the wealthy confidence in the system. The second factor was that starting in 1032, the ruler could come from even outside of the elite families. Something not normal in the heyday of medieval wild Europe. The Grand Council (equivalent of Parliament/Congress) severely restricted the power of the Doge (equivalent of Prime Minister/President), who was elected for life, like supreme court judges in many Western democracies. Furthermore, Venice had a geography that allowed it to have a safe harbour to develop a naval fleet while having great access to the water. It was the easternmost major port trading with the Byzantine Empire and had established monopolies on many trade routes along the Adriatic Sea, Cyprus, Crete, and some rights in Constantinople itself (Today’s Istanbul). Venice got an initial injection of the population when Atilla the Hun rampaged the Roman Republic in the 5th century, as it was a nice safe-haven from already the 5th century, but it did not become a major power for another 500 years, until the maritime trade routes really developed.

In addition to the political and geographic situations, the legal and financial reforms enabled Venice merchants to become entrepreneurs, while limiting the downside to the venture. What was known as Commenda in medieval Europe, had its roots and was more used in Venice and was called Colleganza – a limited liability partnership, the predecessor to the Joint Stock Company that dominated Dutch and British expeditions 4-500 years later. This LLPs looked awfully similar to today’s VC funds because Commendators (LP equivalents) provided money, and were limited to the risk of the investment while Tractators (GP equivalents)were entrepreneurs that had no personal liability but maintained 25% of the profits from the trade. It looks like Venetian lower and middle class really took advantage of this setup and composed around 40% of the Colleganza entities until the political situation changed and a series of oligopolistic laws were introduced which effectively gave exclusivity to certain families for the most lucrative trade routes. Some say that this preference for the elites was a major contributor to the decline of Venice, as it removed the incentive to reap benefits from the best routes, making exploration not worth the risk. Venice was also the place where modern accounting was invented by Luca Priori, a Franciscan Friar who determined that double-entry bookkeeping was the best way to account for assets and liabilities – something IFRS adheres to this day.

What seems to have made Venice special is not the financial and legal reforms or the fact that its bankruptcy laws were so advanced that it distinguished between insolvency and illiquidity even 1,000 years ago. It is likely the fact that these laws were usable in practice. In fact, history shows that similar limited liability partnerships existed in 7th-century Arabian countries, with legal entities called Qirad and at the same time in Byzantine entities like Chreokoninonia. Each of these jurisdictions had a legal system in place but none were as versatile, protective, and used in practice, as Venice’s Colleganza during the 11th to 13th centuries, when lots of Venetian Merchants moved from poor into the middle class, to a level where books were written about it later, in Warwickshire.

Written by George Chanturia, Founding Partner at Argo Advisory

Argo Advisory | Published: November 2023