In defense of the "vulture"

In a spirited web forum discussion, one of the participants threw out the term “vulture capitalists,” accusing them of costing the country jobs, ruining the economy, etc. I never cease to be amazed how willing people are to parrot almost anything they get from a bumper sticker, web blather or skewed media, and pass it along, without understanding it, as the gospel.

Vulture capitalist is not a new term. It’s been applied to venture capitalists for decades by the knowledgeable, half in rancor and half in grudging respect for the role. Only recently have the politicians grasped onto it and recognized its value as an inflammatory and confusing tool to rile and mislead the susceptible segment of the population.

The first thing you have to understand is that most economic growth depends upon innovation and entrepreneurship, not moribund corporate giants. Steve Jobs, Phil Knight, Jeff Bezos and their kin have created far more employment in our era than Sears, Howard Johnson and Kodak. What drives the creation of the essential entrepreneurial ventures?

You have an idea for a more efficient alternative to the internal combustion engine. You also enjoy getting laughs. You have a much better chance of getting them by requesting a loan from your bank than you do at open mike night at the comedy club. The bank is barely willing to give you a home loan with them holding the deed and you providing solid proof of income. They are not in the high risk business and vociferously shun start-up lending.

What drives the growth is venture capital. The suppliers are willing to sustain the higher risk and losses (relatively few start-ups succeed to any substantial degree) in return to requiring a piece of the action and a short horizon to cover their shortfalls. If you don’t think they’re sticking their necks way out, I know a half dozen different people looking for start-up capital. They would be delighted to hear that you’re willing to put your money at risk, requesting less in return than the “vultures.” Anyone? Anyone?

So you really can’t put the spurs to your economy without the innovators and someone to finance the risk. And, outside of the venture capitalists, few are willing to do that. They are driving our entrepreneurial innovation, not hurting the economy.

Let’s address employment. The criticism is that, when the capitalist cashes in at the pre-disclosed desired horizon, jobs are lost. Huh?

Going back to our example, you got your money from a venture capitalist and started up with 50 employees. That’s 50 jobs that didn’t exist before. Since you and the venture capitalist share the goal of high growth, within a few years, you’re employing 300. Again, jobs that didn’t exist before.

This is where the capitalist cashes out, which was the disclosed intent from go. In one scenario, Fred buys it. He didn’t spend millions to shut it down, so no jobs are lost.

In another scenario, ABC Corporation buys it and eliminates duplicate jobs because it makes no sense to pay people to do the same thing. Let’s assume that’s 5% of the positions. You still have 285 jobs that you didn’t have previously and that’s just at this juncture. ABC didn’t buy it to stand pat. They have to grow it to recover their investment. So, the intent is to grow the business beyond the employment of 300.

I’ve oversimplified here to create understanding. But, if you still believe the venture capitalists are a pox on society, contact me and I’ll put you in touch with those start-ups who are looking for funding. You can put up your money and show us a better way.