Venture Capitalism

There have been a lot of attacks on Mitt Romney based on his work at Bain Capital. Here's how Bain worked. They looked for small businesses that were in trouble but had the potential to be turned around. They would buy them, lay off non-productive section and build up new ones. Some of these companies went out of business anyway but many prospered - enough to more than double Bain's investment.

The current complaints about Bain (and Romney) are because some jobs are eliminated along the way. The expectation seems to be that somehow a company can be saved without laying anyone off and that the layoffs must have been motivated by the desire for higher earnings by Bain.

So, how does a compassionate leader handle a turn-around? We have a great example - President Obama's handling of GM and Chrysler. GM is particularly instructive since it is the bigger of the two and Chrysler was sold to a foreign company.

Obama poured money into GM but he also cut out the non-productive sections. Some were put up for sale. If they could not be sold then they were closed. People were laid off - a lot of people. The resulting company was stronger and stands a good chance of surviving.

How is this different from what Bain did? Money was invested but some people still lost their jobs.

Here is an example closer to home for me. The company that my wife works for had a simple business model. They would take out a loan and use the money to buy merchandise and print catalogs. Then they would sell the merchandise, pay off the loan, and bank the profits. They did this quarterly. Then the recession came and credit dried up. So they brought in some outside investors who decided that their business model would no longer work. Instead they came up with a new model. While much of their merchandise was produced outside the company, they did have a line of cookbooks and calendars that they made in-house. The catalog sales arms was closed and a good chuck of the staff laid off. The cookbook and calendar operation was expanded and the remaining part of the company was saved.

So, which is the greater evil - laying off some workers so that a company can survive or keeping everyone employed rught up until the company goes out of business? Most people would agree that some jobs are better than none, even President Obama.

Remember this when you hear about the evils of Bain Capital.