The Bain of Newt’s Existence

Truth is, not all companies, not all business ideas, can make it on their own. 

It’s easy to say that a good idea will automatically lead to a successful business. But it’s a lie.

Apple did not become Apple without investors.  Sure, there are some examples of businesses that flourished without financial help.  But not many. We’ll never know the wonderful ideas that died in their owner’s garage for lack of financing. 

Markkula offered to guarantee a line of credit of up to $250,000 in return for being made a one-third equity participant. Apple would incorporate, and he along with Jobs and Wozniak would each own 26% of the stock. The rest would be reserved to attract future investors. The three met in the cabana by Markkula’s swimming pool and sealed the deal. “I thought it was unlikely that Mike would ever see that $250,000 again, and I was impressed that he was willing to risk it,” Jobs recalled.

Isaacson, Walter (2011-10-24). Steve Jobs (p. 77). Simon & Schuster, Inc.. Kindle Edition.

A lot of people with ideas turn to government for investments. Why a business person with an idea would go to government for funding is obvious: poor scrutiny, below market interest rates, and (seemingly) unlimited funds. Ideas requiring big investments and heavy risks tend to seek out government help.  (See Aerotropolis.)

But the private sector has its own method of bringing great, but risky, ideas to market: venture capitalists and private equity. 

Venture capital and private equity firms pool their money together and invest in start-ups or small businesses seeking to grow, or salvage existing companies that suffer from bad management.  These firms employ experts and risk-takers who help push ideas over the top. 

Most importantly, private equity firms are like Bailey’s Building & Loan—they give us an alternative to the Mr. Potter of government.

bain-mitt

It’s absurd to criticize Bain Capital for its practice of salvaging failing businesses.  It’s absurd and silly to criticize Mitt Romney for laying off people from dying companies. Even some Democrats get this:

Should bad, poorly-managed companies be allowed to destroy value?  Should fast-growing, innovative businesses receive capital and support to accelerate their growth?  And should hard-working pensioners and retirees be allowed to invest their savings in an asset class that outperforms nearly every other one available?  Private equity has an important role and should be lauded, not lambasted.  The WSJ does a nice job of making this case here

I am a strong proponent of business considering all stakeholders, not just shareholders, as vital corporate interests.  I’ve written about Creating Shared Value in the past. I believe that mass layoffs shouldn’t happen simply to boost quarterly or annual numbers. 

When Bain Capital bought a business, the damage had already been done.  Bain didn’t buy thriving companies and gut them; it bought failing businesses and saved them.

Sometimes layoffs are necessary to avoid outright closure.  That’s why business leaders get paid big dollars—because we rely on them to save as many jobs as possible by making brilliant strategic decisions. 

While I have a lot of difference with Mitt Romney and with business executives who treat employees like pawns in their personal empowerment games, I believe that Romney’s actions at Bain were necessary and compassionate, not callous and self-serving.

Were it not for private equity firms like Bain and venture capitalists in general, ideas like the Apple II would die in Steve Jobs’s garage.  Entrepreneurs, inventors, and troubled companies would have nowhere to turn except government.

Newt Gingrich made a big mistake attacking Romney’s role in saving failing companies. In fact, his error was so big it might have sealed the nomination for Romney.