Bain Capital, Romney, Vulture Investing and 15% Tax Rates

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Rich Tehrani
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Bain Capital, Romney, Vulture Investing and 15% Tax Rates

A shout out to investors everywhere

I haven’t seen this level of funding in the tech space in years – I would go so far as to say the amount of funding is the greatest I’ve seen since 2000. I don’t believe we are exceeding 2000 levels but it is encouraging to see that investors believe that tech makes a solid investment.

Before I begin with which markets have gotten money, let me make a shout out to the investors in the world. You see, me, everyone at TMC and in fact most of the tech world owes its existence to investors who risk their capital against all odds to make a profit. It isn’t unusual for these investors to hit it big in one out of ten deals – meaning 90% of their investment is washed down the drain.

And because of their decision to be investors we get companies like Amazon, Facebook, Twitter, Pandora and Google which have made the world a better place.

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We are in an unusual time in American history – one in which a potential presidential candidate is under attack for being a successful investor. Mitt Romney was the head of Bain Capital and not only is his firm being accused of being involved in vulture capitalism – he is under fire for laying off workers and also for paying a tax rate of 15%.

There aren’t too many people coming to the defense of Governor Romney regarding the above so this is what people need to know.

Investors are good – regardless of whether they invest in distressed companies and have the moniker “vulture” attached to them. If a company is distressed it is usually because it needs money and is potentially facing bankruptcy. When an investor comes in it is because they believe they can either turn the company around and/or they believe the sum of the parts is worth more than the current market value of the company.

So when the “vulture capitalist” comes in and a company subsequently shuts down – it is no worse a fate than would have faced the company had the investor not put up money to help out in the first place. In the best case scenario the company gets the funds it needs and can do an acquisition, invest in a new factory or whatever it must do to become profitable again.

It is worth pointing out the big payoff for an investor – whether it is a vulture, strategic or any other type is when the company they invest in becomes more profitable than when they first invested in it.

This gets us to Bain Capital laying people off. The primary reason for a company to be in business is to generate increased profit over time. If the business goes south (and remember we are dealing with distressed companies to begin with) or there is an opportunity to close a plant and reduce expense, the business has to do what it needs to do to ensure shareholders make money on their investments. Moreover, closing a plant could be in-part the reason the rest of the company can keep their jobs.

Remember, investment funds only get to stay open if they make a profit and most of their investments will fail. Only a single digit percentage will make it.

This gets us to the capital gains and dividend rate of 15%. I have heard countless people tell me this is unfair but my argument is if these investors are responsible for so much hiring and innovation and most of their investments are lost then why would we want to take this money out of the private sector where it generally gets reinvested into more new companies?

After all – the companies which are invested in rent office space – use contractors, hire people by the hundreds of thousands who in-turn pay all sorts of taxes – they buy massive amounts of equipment which not only helps companies like HP and Dell but they also pay sales tax on these purchases.

And if they happen to sell products or services overseas they bring foreign money into the US which protects our currency from going into a free fall due to our excessive dollar printing and overspending as a nation.

The issue many people have is the low tax rate of 15% compared to what they make. A salesperson or executive for example may end up making less income but paying a higher tax rate of 25-35%. To that I respond –why should anyone pay a higher tax rate than 15% – not why should the investor pay a higher percentage.

In other words while I agree the system may not seem “fair” on the face of it – the solution is to bring the tax rate down on all people not punish the people who fuel this economy.

Just today for example three tech companies put out news of funding and it isn’t even noon yet. Polar Mobile received $6M for its HTML5-based publishing platform, Joyent received $85M in the cloud computing space and  TRUSTe received $15M in the online privacy space.

That is over $100M in funding and I would wager virtually all of it comes from money which was taxed at 15%. Moreover, on dividend income which is also taxed at 15% - it is money which is already taxed at the corporate tax rate which is as high as 25%. Meaning the money which comes to investors such as those at Bain Capital has been taxed 40% in total!

I understand the divisive politics of jealousy is effective but if you make your living in any way off the tech ecosystem – you should stop and think for a moment about how lucky you are that this industry is thriving while much of the economy is struggling. Moreover, if you use social networking, tablets, Internet or satellite radio or virtually any cloud service, you can thank private equity and investors.

And this doesn’t take into account the investment in pharma or other markets which produces life-saving drugs and the myriad other industries which receive funding, allowing them to hire and produce great products and services we all enjoy.

Some additional thoughts:

Self-promotional message: Next week TMC the company where I am CEO will be hosting ITEXPO in Miami and there will be great emphasis on cloud computing and communications as well as HTML5. You want to be there.

If I had to choose a Republican candidate I am not 100% sold on Romney – I lean towards Gingrich. Neither is conservative enough for me – but I believe Newt more effectively explains the benefits of conservatism for society as a whole.

Whoever wins – this will be a brutal class-warfare oriented campaign by the left and I truly hope the rhetoric doesn’t distract the nation from coming together and competing with China, India and other countries. After all when you lose jobs in this country it isn’t the fault of the rich guy in the corner office it is because the business environment in other parts of the world is better than the US.

The solutions to the problems the US faces are not going after the people who make the smart investment decisions for their employees and investors but instead to ensure we have a competitive workforce which is flexible and educated with minimal regulations allowing us to make the case to corporations about why jobs need to come back to the US.



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