BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

January 19 2012
by Thanasis Delistathis

Venture capital should not be a political punching bag

Venture capital has been in the news lately, thanks to the critics of Mitt Romney’s previous career as a CEO of Bain Capital.  For those of you that have been in a cave over the last couple of weeks, the criticism from Romney opponents is that some of the companies that Bain Capital invested in went out of business, leading to a loss of jobs, even though Bain made money in the process by exiting those investment or getting dividends.

I have been incensed at some of the ridiculous comments made by some of the financially illiterate talking heads on TV.  One of the pundits asked if ” would like to have a president who managed a investment group where 20% of the companies failed.”  I don’t know the facts around how many of Bain’s investments are successful, but that would actually be a good loss ratio.

But first, let’s clarify something.  Most of the comments about Romney and Bain have been centered around investments the company made in mature businesses that are not growing as fast.  Usually, the goal in those investments is to reduce expenses and streamline the businesses to make them more profitable.  In the financial community, that is referred to as private equity, not venture capital.  Venture capital, which is the business model of our firm, has to do with taking minority non-controlling equity positions in high risk growth business that are primarily focused on the products and services of the future. In contrast, private equity is about buying controlling ownership interests in companies addressing mature markets.  To an outsider that might not seem like an important distinction, but it is.  The skillsets, risks, operating practices and investor-management relationships are very different in those two models.  As a result most investment firms are pursuing either one or the other.  Bain is a rare specimen of a company that pursues both private equity and venture capital investments.  I have never worked in such an investment group, but I think private equity has an important role to play in a dynamic economy like in the US. Our fund has been in the venture business since 1999 and I have something to say about comments targeted at our business.

Venture capital is an important reason why the US is still on top of the global innovation game.  Our venture capital industry has been the most successful in the world.  And it is a large exporting business.  Half of the investors in our fund come of outside the United States.  In essence, we are exporting investment services to foreign investors by attracting capital and fees to the US.  That capital is in turn used to enable young startups and young entrepreneurs to realize their dreams and build big businesses.  Instead of using venture capital as a talking point and political pun, we should be embracing it and designing policy to encourage more of it.  Rick Perry, the now-former ill-advised presidential candidate from Texas used the term “vulture capital” as a soundbite in accusing Romney of doing something inappropriate.  Perhaps Perry can be excused since smart policy was never his strong suit.  Gingrich, however, doesn’t have an excuse.

Our business is risky.  In our business plan, we assume that close to 40% of the businesses we invest in will fail and we will lose all our funds.  Of course, if we do our job well, those losses, in capital and jobs, are more than made up by the big successes in the business and make it and strive.  We should all be disappointed in the reporting of politically-driven journalists and pundits that criticize business failure out of context.  There is nothing wrong with failing.  It is OK.  In fact, the acceptance of failure and risk-taking is what has made our country’s venture industry so successful.  And it is also what has lead to millions of new jobs at cutting edge technology industries.  Even though venture capital accounts for a very small portion of total annual investment dollars, the National Venture Capital Association estimates that venture backed companies account for 14% of all private sector employment and 21% of all US GDP.  So it’s a business we should all be cheering for and not trying to bring it down.

 

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