Don't Mistake that Venture Capitalist for a Vulture! | The Business ...

Venture capitalists and vulture capitalists have become synonymous in the minds of some people. The terms mean completely different things, but few people realize exactly what that difference is. In fact, vulture capitalist is a derogatory term for venture capitalists with a bad reputation. What they do have in common is that they both earn money working with other companies, but just not in the same way.

Earlier this year, Republican presidential candidate Mitt Romney came under fire for ?looting? start-up companies as an executive for Bain Capital ? a venture capital and private equity firm. According to the Washington Post, former House speaker Newt Gingrich and Texas Governor Rick Perry accused Bain Capital of putting $30 million into a company, and taking $180 million out as it went bankrupt. Both Gingrich and Perry urged voters to differentiate between legitimate venture capitalists and vulture capitalists such as Bain Capital. In this article, we shed some light on the differences.

What is a Venture Capitalist?

A venture capitalist firm is a company that funds and nurtures start-ups. They can potentially provide start-ups with millions of dollars and leadership support in exchange for an equity stake in the company. Sometimes the venture capital firm will continue to hold the equity shares until the company goes public and sell them for a profit while others may continue with the company in leadership positions. All of this can depend on the agreement that they make with the entrepreneurs in the beginning of the partnership, so there is no standard mode of operation. Companies that do receive funding from them are usually science or technology.

The majority of venture capitalist firms are legitimate and they help thousands of businesses every year. Because of the large investment they put into companies, venture capitalists are certainly entitled to a degree of control. In turn, when a company becomes a little too overwhelmed with debt and other financial hardships, venture capitalists have a say in what happens to the company thereafter.

The direction in which venture capitalists takes the struggling company thereafter, is how some people may start to consider them to be a vulture capitalist. It is very easy to simply throw the derogatory term around, as it is certainly a matter of perception.

Vultures, Oh My!

A Vulture capitalist firm is a horse of different color because they do things differently than venture capital firms. Vulture capitalists are often private equity firms that use leveraged buyouts to purchase established, yet financially troubled companies. The term vulture stems from the fact that many of them will target companies that are literally dying just a like real vulture prey on a dying animal.

As you can probably guess, the target firm that they take over will end up getting sold off in pieces to recoup the costs of the buyout. In some cases, they may cut costs or impose changes to make the company profitable and then sell it off again to another company for a profit. The sad truth is that some of these companies will not survive the transaction. Again, there are exceptions to the rule, but that is why people are so leery of vulture capitalists.

In a nut shell, venture capitalist firms assist fledgling companies, while vulture capitalists focus on making struggling companies profitable. As you can tell, they are clearly entirely different creatures with different objectives, so they are not to be confused with one another.

Source: https://www.businessfinancestore.com/2012/08/16/dont-mistake-that-venture-capitalist-for-a-vulture/

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