It has been fascinating to watch the 2012 Presidential campaign kick into high gear. I liken it to rubbernecking on the highway. While I am not making a political statement on this blog post, I think we need to have a discussion on the differences between Private Equity and Venture Capital, considering the frenzy around Mitt Romney and Bain Capital. It’s amazing to me how a lack of fundamental understanding of this concept has permeated its way into the campaign. I know I shouldn’t be surprised when the media doesn’t do basic research or homework to truly understand an issue. However, I am more agitated with the candidates themselves who regularly use phrases like vulture capital to describe Bain Capital and their strategy. This is not only completely incorrect, but misleading and hurtful to a company, person and industry that has done some truly great things. Let’s be clear, there is a major difference.
Venture Capital describes a class of investment that focuses on smaller, earlier stage companies. Our investment is virtually always for equity only and is never leveraged. We initially take Minority ownership positions to make sure the early team is properly motivated to build a high growth company and share in the financial success. We are backing entrepreneurs, their ideas and their ability to scale the business. Think of it in terms of rocket fuel. Many crash and burn, but the successful ones can be spectacular. The risk is higher, but offset by potential return. In the process, these investments can create many jobs, as early growth stage companies typically need to scale rapidly.
Private Equity is an asset class that Venture is technically part of, but is usually meant to describe the investment strategy. Private equity firms are typically acquiring majority or controlling positions in larger, more established companies. The larger deals use leverage to complete the transaction as many of these can be in the hundreds of millions or even billions of dollars. The firms then help to manage the newly acquired asset, often replacing top management, selling or divesting of underperforming assets and acquiring other strategic companies to build a more efficient and profitable entity. The goal is to then sell the company at a premium. When it is successful, the emerging company will be more successful, can provide a great opportunity for job growth and build shareholder wealth.
Both investment strategies are appropriate for certain investors and both can offer tremendous value and return as well as create jobs for the future.
Good investing. Comments always welcome.