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 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 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 are a type of venture capitalist, which provide a final attempt at gaining funding. Whereas venture capitalists seek firms with growth potential, vulture capitalists usually seek out firms where costs can be cut in order to increase profits. Mostly, these firms are distressed and on the brink of bankruptcy 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 cut-downs costs wherever possible, which in part is likely to be accomplished by firing workers where possible, reducing benefits or both. With reduced profitable or at least raises the probability of this eventually happening, thus raising the share price and the worth of the investors holdings. Lastly, the vulture capitalists sell any equity 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.
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 people can be said to put pressure on the political economy and general society through their need of unemployment benefits, which comes from company payroll taxes and other taxpayers. Meanwhile, vulture capitalists pay only 15% tax on their profits. In other words, while vulture capitalists reap the rewards, they can be said to put more pressure on the current social and economic systems.
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.
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