Mitt Romney is having a hard time defending his record at Bain Capital and, simultaneously, the way private equity and venture capital work to create new jobs and lead the economy forward. His case is better than he is making it and the issues are more important for the economy than we are hearing.
Tom Alberg, co-founder of Madrona Venture Capital in Seattle (and a founding chairman of Discovery Institute's Board) explains the difference between private equity and venture capital.
"Most voters and the press, unfortunately, will never understand the positive role that private equity plays in our capitalist system. Private equity usually invests in old line companies that have become stagnant for various reasons, such as poor management (often family heirs) or failure to adopt new technologies."These companies usually face declining revenues, earnings and employment and often end up in bankruptcy if left to their existing management and investors. Private equity searches for this type of companies and invests for a controlling interest with the intent of providing better management, investing in technology, etc. Sometimes there are layoffs, but their goal is to build big successful companies which will incidentally employ many more people. Some of the companies do not succeed and go bankrupt but corporate bankruptcy is an essential consequence of risk taking. There are some abuses by some private equity firms but generally PE is important for our economic growth.
"Venture capital plays a much different role in that it mostly invests in new companies with high growth potential, usually involving technology in a deep way. Some of these companies also go bankrupt, but overall venture capital creates a lot of jobs. Both private equity and venture capital are important.
"Interestingly, Bain makes both private equity and venture investments. From an investor standpoint they have done quite well. It's hard to tell whether Romney was any better than their other partners and leaders, but it appears that he was at a minimum a very competent leader for Bain.
"It is too bad for Republicans that the combat for the Presidential nomination results in candidates distorting the facts and fundamental economic principles."
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