Vulture capitalists are investors that acquire distressed firms in the hopes of making them more profitable so as to ultimately sell them for a profit. Due to their aggressive investing nature, and the methods they use to make firms more profitable, vulture capitalists are often criticized.

Distinguishing between venture and vulture capitalists

A venture capitalist is an

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...

who provides funding for start-ups, early stage firms and companies with growth potential. These types of firms seek out venture capitalists, as they are too small or too new to have credit profiles, making them ineligible for bank loans and other forms of raising capital. Although risky, venture capitalists invest in firms as there are very lucrative returns on their

investments Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

when the company they are investing in is successful. Furthermore, venture capitalists will often invest in a range of firms rather than just one or two, in order to mitigate risks if the investments are unsuccessful. On the other hand, vulture capitalists provide a final attempt at gaining funding. Whereas venture capitalists seek firms with growth potential, vulture capitalists usually seek out firms where

costs In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which ...

can be cut in order to increase profits. Mostly, these firms are distressed and on the brink of

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...

. Due to this reason, vulture capitalists are able to buy these firms at a much lower price than if they had been profitable and expanding. Once the firm is acquired, vulture capitalists can attempt to increase efficiency in order to turn the company around. This is often done by cutting costs wherever possible, which in part is likely to be accomplished by firing workers where possible, reducing benefits or both, which increases profits or the likelihood of future profitability, thus raising the

share price A share price is the price of a single share of a number of saleable equity shares of a company. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for. B ...

and the worth of the investors holdings. Lastly, the vulture capitalists sell any

equity Equity may refer to: Finance, accounting and ownership * Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the dif ...

they own, making a profit. But vulture capitalists can also choose to divide and sell off the entire company in pieces, if this should increase the attractiveness of each individual piece to its purchaser and thus allow the vulture capitalist a net profit.

Criticism

Vulture capitalists receive a lot of criticism as they often go for firms that are in very poor shape, meaning these firms are unable to secure capital from banks or even venture capitalists as they are too risky an investment. Due to this, vulture capitalists are able to acquire the firms for prices that are often very low considering what they would have been if the company was not currently under pressure, or if other participants were bidding on it. Once vulture capitalists acquire a firm, they often fire workers to reduce costs, in order to raise profitability for their own gain. Vulture capitalists are criticized for this, especially as the newly

unemployed Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...

people can be said to put pressure on the

political economy Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...

and general society through their need of

unemployment benefits Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployment, unemployed people. In the United States, benefits are fun ...

, which comes from company payroll taxes and other

taxpayers A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...

. For the same reasons, venture capitalists can be accused of being vulture capitalists, or "vulture" for short, depending on how they conduct their business. In this sense, vulture capitalist is used as a derogatory word for venture capitalists, as the vulture capitalists are considered to be preying on firms in distress for their own profit.

References

{{reflist, 30em Investment Private equity Class-related slurs

Distinguishing between venture and vulture capitalists

Criticism

See also

References