VENTURE CAPITALISM

I know that a few of you reading the title of this piece will audibly groan and feel that if read any further, you will fall into a coma-like stupor of eternal boredom, so deep and prolonged,  that you could never be awakened until the day you die. But before you reach for a sledgehammer to smash down on your big toe in hopes that the excruciating pain will prevent this from happening read on about what a fun topic venture capitalism can be. For example if your brother-in-law asks to borrow a couple of grand from you to open up a hot-dog stand, and you agree to the loan for perhaps a 5-10% cut of the profits, you’re a venture capitalist.

The topic recently has gotten national attention with the publicity surrounding Mitt Romney’s time as a venture capitalist during which he accumulated somewhere  in the neighborhood of a quarter of a billion dollars in wealth. Yes that’s b  for billion. Seems that Romney was a partner in Bain Capital with a lot of other rich white guys, and their mission was ostensibly to go in and rescue businesses that were in trouble, financially, and return them to profitability for a share of the profits or sometimes out-right ownership of the company. This often involved paring back the wasteful practices of the company in question which in turn often involved firing a lot of people (some who had been working there for decades) in order to increase profit margins. So  Fred Waternobby who had been working on the assembly line for over 20 years, and who essentially lived paycheck- to- paycheck, would be told he had to be fired for the good of the company, but hey, the homeless shelter 2 blocks away wasn’t as bad as everyone said. Meanwhile Bain Capital would reap millions or tens of millions in profits from the deal.

Recently Romney’s opponents for the GOP nomination, such as good ole lovable Newt, and the bible-thumper from Texas, Rick Perry, have jumped on Romney’s time as a venture capitalist. Perry even called Romney a “vulture” capitalist. I think however that’s so un-Republican of them. I mean isn’t tickle-down economics, tax-cuts for the rich, and special-privilege based on wealth part of the Republican philosophy? How dare they even imply they were concerned about the little guy.

Now to be fair venture capitalism is not without its risks. If venture capitalists invest in start-up companies that don’t materialize as thought, or invest in failing companies that can’t be turned around they will lose money. The trick is to be smart enough to know which companies to invest in and which ones to avoid. Early investment in companies like Microsoft or Intel would, of course, have brought in spectacular profits for its investors. Apparently Bain’s partners were  smart, shrewd guys and thus became hugely rich.

There is no doubt, however, that there are many unscrupulous venture capitalists that will go in and virtually plunder companies under stress, and drive them out of business to sell off their assets and thus make a profit. Which brings into question the very nature of capitalism itself. Unfettered capitalism as existed in the 19th and early part of the 20th century is no longer with us. Instead, because of all the shysters, fast-buck artists and others trying to game the system, capitalism is now heavily regulated. But it doesn’t seem to stop the gamers from trying.

In 1837 there was a huge real estate bubble that burst and caused a severe depression. Yes, you read it right, 1837, when all you had to do was go a little west of New Jersey and you could have all the free land you would ever want. Nevertheless, fast-buck artists managed to create inflated realty prices leading to a depression. Of course, the government had no clue then as to what to do so people suffered. It was not unlike the real estate bubble created in the early 2000s by get-rich-quick scammers. It used to be that people bought houses to live in. Even if you bought a second house it was usually to live in it part of the year and perhaps rent it out the rest of the time. But after the turn of the century, “investors” were buying houses on speculation because everyone knew that housing prices could only go up, right. (The house we bought in the year 2000 in Las Vegas skyrocketed in price to such an extent that I figured out that if I sold it at its peak and moved to an igloo in Alaska all my money problems would have been solved. Might have a tough time, though, convincing the wife who absolutely abhors the cold.) The only good thing to come out of the real-estate crash was the drubbing experienced by many of these speculators.

Capitalism, heavily regulated as we know it today, is intricately woven into our system of democracy. But democracy as we all know, is not without some serious flaws. Winston Churchill once said that democracy is the “worst” form of government, except     for every other that’s ever been tried. As for myself I think I’m leaning toward a benevolent monarchy but that’s a topic for another posting. But why should Britain have all the fun of a royal family always getting itself in trouble as they inevitably would.