What is Vulture Capital Investing?

Vulture Capital

Vulture Capital

There are many different types of venture capital firms and a plethora of funding sources for businesses which are in trouble, or for one which is just getting started. Effi Enterprises helps emerging companies and those who are involved in trying to establish entrepreneurship find funding sources. These funds are provided for a business along with some expertise and counsel to help the company become better established. Usually, venture capital is a type of private investing where money is given to the company in return for stock. These “seed” funds are planted in the business in the hope that the business will be profitable down the road at which time the initial investor will reap the benefit of the profits. One way of looking at it is that it is a long term commitment with financial backing to ensure the success and profitability of a new company.

Vulture Investing and Leveraged Buyouts

In the 80’s there was a term used a lot in the financial realm, “leveraged buyout.” The new term for this is “vulture capital.” Rather than seeding money into a business that has high growth potential, a company purchases the controlling shares from a company so that they have the leverage. Generally the intent is not to help the company be profitable, but rather to profit from the liquidation of the company’s assets.

There are not always negative connotations. Vulture capitalism is the practice of purchasing distressed assets from a company. This means the company is likely to die, is in trouble or in danger of bankruptcy. Many times the “vulture” will believe that there is at least some redeemable value in the company and therefore will invest in the company and either try to liquidate it before it hits the bankruptcy stage. Many see this as a great benefit to the economy while others see the vulture as the “bad guy.”

Bad guy or good deal?

Public and private investing occurs on many different levels in the business world. Every business understands that some will be profitable and some will not. With any investment there is always a huge risk involved, even for the vulture capitalist. Usually, they purchase an offer because it is very low and many times there simply are not any other takers. But this does not always mean that they are predatory in nature. It is very common for people to purchase foreclosed homes, when the current owner was not able to manage the asset and no other buyers are obtainable. Who knows if the vulture is even getting a good deal or not? They may get stuck with a purchase that they are unable to unload onto someone else down the road.

Vulture vs. Venture

Vulture and Venture capital are both funds that are poured into a business. The intended outcome is the main difference. Most VC firms will put action and counsel behind their invested finances to ensure the company’s success and profitability. Usually this type of investor receives a large piece of equity or control in the business so that they can help change things around if the business starts to suffer. Typically, the vulture investor is already planning on selling the company and liquidating as many of the assets as possible. They may invest some time in trying to establish more value in the assets before selling it off, but typically this is the goal when the investment is made. There is no doubt that no matter what type of investment is contributed, the intended goal is profits for everyone involved. The biggest difference here is how the final goals are achieved.

Advertisements

About Efraim Landa

My name is Efraim Landa I am an entrepreneur and an expert in venture capital. I am the co founder of Effi Enterprises, a venture capital firm as well as the co founder and CEO of Gluco Vista, a company that is in the process of developing a non invasive glucose meter for those with diabetes.

Posted on June 30, 2012, in investing, LBO, Private Equity Financing and tagged , , . Bookmark the permalink. 1 Comment.

  1. Very interesting post! I had no idea about the term “Vulture Capital” and found it interesting to learn its negative connotation in relation to Venture Capital. I also liked the explanation of the difference between venture and vulture capital

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: