In 1602, the Dutch government granted the British East India Company (BEIC) a 21-year monopoly to trade in Asia. BEIC was a two-year old enterprise at this point and their assets were limited to the four ships in the fleet. In order to expand into Asia, they needed enormous amounts of capital to fund long-distance voyages and maintain ships. Historically BEIC raised capital from merchants on a per-voyage basis but given the scale of the opportunity and enduring road ahead they required permanent funding and lots of it. To raise the necessary funds, they sold shares to the public and paid dividends based on the success of ventures, making it the first-ever initial public offering. VOC, their initial equity offering, gave merchants permanent equity in the entirety of the British East India Company business and provided BEIC with the necessary backing to explore far eastern territories on multi-year voyages. Thus the Plunder for Profit business model was now accessible to the general public.
Over 400 years later, the Pirate Stock Exchange found in Somalia has managed to preserve a good deal of the Dutch East India Company’s original spirit.
After the fall of the Somali government and President Siad Barre in 1991, Somalia descended into civil war. The central government collapsed, and the country fragmented into different regions controlled by warlords, clans, and militias. Harardhere, being a remote and coastal town, became largely isolated during this period of chaos and lawlessness.
In the absence of a central government, Harardhere fell into an anarchic state. Primary education rates amongst school-aged children fell below 15%, infrastructure and healthcare were virtually nonexistent and sustainable, legitimate sources of income were nowhere to be found.
In a place like Harardhere, many would join private gangs to avoid a life of militancy, poverty and petty theft. Further inland, Somali gangs generated revenue from extorting local businesses, kidnapping for ransom and clan-based resource control.
In Harardhere none of the pre-existing methods of value extraction were available due to a lack of high-value kidnapping targets (no government presence and lack of industry), resources were largely perishable or commoditized (fishing was the main export) and stealing from local businesses was not profitable enough to be the sole source of income.
Harardhere did have two things going for it:
Harardhere is located directly on the coast of the Indian Ocean and under 150 miles from the strategic Gulf of Aden, which links Europe to Asia through the Red Sea. The Gulf of Aden services 20,000 ships annually and 55 ships per day on average. It is particularly vital for energy transport, with a significant percentage of the world’s oil and gas supplies passing through the region.
Harardhere also had a surplus of skiffs which were used to fish for tuna, sardines and grouper along the Eastern Somali coast to be sold to markets in the Middle East.
As the town collectively realized the Somalian government was too preoccupied with quelling the burning embers of Islamist extremism to support them, many decided it was high time to capitalize on their #1 export: piracy.
“Move fast and break things.” – Mark Zuckerberg (and also Somali Pirates)
The Somali pirates of Harardhere were fully bootstrapped to start.
The maiden voyages were haphazardly staffed and resourced– typically funded by petty theft and equipped with stolen supplies. Pirates came brandished with any threatening objects they could find and vessels were outfitted with oars rather than engines.
After a number of flat out failures and near-successes, the pirates upgraded to AK47’s and swapped their wooden paddles for small gas powered engines.
In 2005, the pirates found PMF.
The first major conquest was the MV Feisty Gas in 2005, a liquefied petroleum gas tanker off the coast of Somalia. The pirates used small, fast skiffs to approach the larger ship and boarded with AK47’s and machetes. After 75 days, The pirates successfully negotiated a ransom with the parent company of the MV Feisty Gas, Alfred C. Toepfer International– a German agriculture exporter. They were able to successfully navigate the local waterways, board a ship with 17 crew members and extort the owner of the vessel for a seven figure payout. This was their first meaningful success and in a region where the annual per capita GDP was $200, they had officially become kings.
A few months later they struck again and this time it made a global splash. The MV Semlow was carrying 850 tons of food aid from Kenya to the tsunami-affected people in Somalia as part of a humanitarian mission. On June 27, 2005, it was seized by Somali pirates off the coast of Harardhere. The pirates held the ship and its crew hostage for more than 100 days, demanding a ransom from the owners and humanitarian agencies. The standoff ended when a ransom was paid, although the exact amount was not disclosed, and the crew was released in October 2005.
These initial breakthroughs created an influx of capital, competition and attention. Piracy as a conduit for upward class mobility was no longer a pipedream but became the only potentially viable path for economic advancement.
“The only way to scale is to grow quickly, iterate, and learn from failures.” - Reid Hoffman (and also Somali Pirates)
Having achieved success on a global stage, the enterprising pirates of Harardhere decided to scale their operations. Without access to legitimate capital markets, they were forced to be resourceful- and thus the Somali Pirate Stock Exchange was born.
The Somali Pirate Stock Exchange (SPSE) began in August of 2009 with 15 different maritime companies and grew to 72 unique pirate operations within the first 6 months. In the same timespan, 10 of the 72 listed pirate organizations had already experienced successful outcomes in the form of ransom payments– a hit rate of 13.89% with an incredibly attractive liquidity profile. The NYSE had less than 10 companies listed in its inaugural year and the majority of those businesses posted flat returns.
Similar to venture investing, the SPSE provided investors with the opportunity to back specific pirate operations in exchange for a share of the ransom if the mission succeeded. Investors could contribute capital, weapons, equipment, or even supplies and be issued clearly defined shares in return for their contributions. Successful maritime companies with a proven track record could take on less dilution for much needed materials, while upstarts had to prove they had an edge before setting the terms on their Series P.
Prior to raising funds the teams would survey trading routes and plan to attack ships with the highest value cargo and the least sophisticated opsec. Since pirates weren’t willing to divert/transport cargo or hold inventory, the highest value ships were typically classified by the number of crew members and the parent company’s origin. Pirates particularly targeted Western European ships flying Carribean flags as the theoretical first-responder would be the Carribean nation and those islands had limited naval capabilities. Third world countries were almost always avoided, as those nations couldn’t afford ransoms– evidenced by the 200 third world hostages that were held for years in Somalia that no one has bothered to rescue. According to a report from the Somalian Tribune, sailor hostages earned these entrepreneurial criminals an average of $4 million USD from Western shipping insurance per “job.”
The division of Ransom is calculated:
30% goes to original financier or investors via the SPSE 20% goes to corrupt government officials 50% is divided between everyone who is hired to support the mission
In contrast to the exclusivity of today’s private capital markets, where venture capital remains highly lucrative but inaccessible to most people, the SPSE was a free market that was open 24 hours a day. One wealthy former pirate named Mohammed describes the market dynamic here:
“The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”
The capital and resources provided from SPSE investors seemed to have an immediate impact on the efficacy and volume of pirate attacks.
From October 2005 to December 2008 there were a reported 201 Somali Pirate attacks, with 39 successful outcomes– a hit rate of 19.40% over 4 years.
In 2009 alone there were 217 attacks, with 47 successful hijackings– a hit rate of 22% over a single year.
The success of many piracy operations had a trickle down effect on the broader Harardhere region.
In 2009, Harardhere’s deputy security officer was quoted saying, “Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output… The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools.”
In one specific case, Piracy investor Sahra Ibrahim, a 22-year-old divorcee, made $75,000 in 38 days after contributing a rocket-propelled grenade to a gang that freed a Spanish tuna fishing vessel.
According to the International Chamber of Commerce, “Piracy increases the cost of international commerce by $12 billion annually, and in Somalia alone, more than 20 vessels and 400 hostages are currently being held,” notes Avi Jorisch of The Wall Street Journal in 2012.
Pirates are not ideologically motivated, when they capture ships it is purely a commercial transaction– they’ve never killed a hostage. They have professional negotiators on staff, dozens of people running the back-office logistics of executing the plan and relationships across multiple ports to gather intelligence.
The operations of the pirates were largely curbed in 2013 due to a combination of international naval patrols, better coordination among countries, increased use of armed guards on commercial ships, and improved onboard security measures. Additionally, changes in shipping routes and stricter regulations from the International Maritime Organization (IMO) contributed to the decline.
The Somali Pirate Stock Exchange was built from necessity and ended from exuberance. Lesson in that.