Lately, Republican candidates are taking shots at Mitt Romney because in his private equity life he had some failures. Democrats have made no secret that they are going to go after Romney because in his private equity life, he had to shut down some unprofitable plants to save businesses. Heaven forbid, other businesses he invested in went belly up. I am not here to defend or advocate for any particular candidate, but I do think that Americans need a much better perspective on failure.
Why are we so hard on failure?
One of the things the start up community does is embrace failure. When a company goes under, you learn from it. I have invested after tax dollars that were hard to earn into many companies, and not all of them have worked out. One went belly up. One is marginal, one is on fumes, and the rest are operating, but like any company they have challenges. I have had some exits too. But, even those had many twists and turns along the way and the company could have gone under.
Being in business isn’t easy. It’s risky. If it were easy, we’d all leave our cushy government and corporate jobs and go on our own and start entrepreneurial companies. But, statistics show that fewer than 30% of all start up businesses make it ten years. Starting a business isn’t rocket science, but it’s a heckuva lot tougher. But, encouraging people to take that risk leads to gigantic gains for our entire society.
To give you a little perspective, you need to know what Romney engaged in. He was in what is called Private Equity (PE). Most people confuse Private Equity with Venture Capital (VC). Venture invests in newer companies that have a new technology. Private Equity invests in an existing company that has been operating and reinvents that company. Usually, PE firms use a lot of leverage (debt), to generate returns. Extra leverage on the balance sheet magnifies the rate of return if the company can afford the debt load. If the company can’t afford it, it either restructures again or goes bankrupt. The reason it’s called Private Equity is that the money for the fund comes from private sources, not government sources. The companies that the PE firm buy and run are not listed on public markets, but closely held. The big payoff for PE comes when they spin the companies back out into the open market through an IPO or acquisition. Private Equity firms take risk.