Vulture vs Venture Capitalists

I’ve seen a number of people trying to lessen the impact of what private equity firms, like Bain Capital, do to the economy by classing them in with venture capitalist, and calling the results of their raids with the job losses as ‘creative destruction’. The two are just about polar opposites.

If you work in the tech industry you probably don’t like venture capitalists, but realistically they are essential to getting new ideas to market. If they are evil, they are a necessary evil.

By the time you have worked on a project and got it in shape for a real launch, you are normally out of money, and so is everyone you know who might lend you some. The last step is expensive, and the banks won’t go near you. This is when you turn to a venture capitalist to get the final money to finish your ‘dream’.

The important thing to remember is that venture capitalists, are real capitalists, i.e. they are going to risk ‘their money’ in hopes of turning a profit, and they need you to succeed to get their money back. It is a high risk/high reward environment, but it is based on a voluntary agreement between the company and venture capitalist. If the project is successful everyone makes money, and if it is a failure everyone loses.

If the new product is a significant improvement over existing products, the companies that make those products may be devastated, and that is the process called ‘creative destruction’. A recent example would be what has happened to the market for cathode ray tubes after flat LED screens dropped in price.

This is not what corporate raiders, like Bain Capital do. They don’t risk their capital, and they don’t share in any losses as a result of their take-overs. They use leveraged hostile take-overs to seize stable older companies who have low or no debt loads and have been making consistent profits for extended periods. The targets are not growing, they are simply maintaining a nice comfortable pace without any major swings in stock price or other indicators beloved by Wall Street analysts. These are companies that are designed to provide stability and a future, not instant returns. They look out for decades, not quarters.

The vulture capitalists seize control with borrowed money, and once in control loot the victim, and then mortgage it to the hilt. Their small investment is recovered almost instantly, with obscene interest, and they squeeze every possible dime out, before leaving the dessicated hulk to face bankruptcy on its own.

The destruction that occurs isn’t ‘creative’, it is simply destruction.