Thinking About Thinking

Why I Did Not Join Bain Capital

Posted in Pop Culture, Venture Capital by larrycheng on January 13, 2012

Coming out of college, without even really knowing what they do, my dream job was to one day work at Bain Capital.  Their reputation was that they took the very best of the young investment bankers and management consultants a couple of years after college.  Since I was headed into the management consulting world after school, I always kept in the back of my mind that maybe I’d have the chance to work at Bain Capital one day.  Having grown up in the 80’s, I viewed Bain Capital as the “Top Gun” of investment world.  It’s where the best of the best went.

Nearly a couple of years into my management consulting experience, I called up a friend at Bain Capital.  I said what much more informed candidates today would never say, “I am very interested in venture capital and wonder if there are any opportunities at Bain Capital.”  That statement is the equivalent of looking for a job at an ice cream store because you like frozen yogurt.  My friend politely informed me that Bain Capital was not a venture capital firm (at that time), rather they were a leveraged buyout (LBO) firm.  Not knowing the difference, and considering they still wanted to interview me, I went along for the ride.  For the next few months, I went to several interviews at Bain Capital’s pristine offices in a downtown Boston skyscraper.  I started to learn about what LBO firms do.  I was impressed.

At around the same time, I randomly saw a job posting on a website called CapitalVenture.com about a role at Bessemer Venture Partners.  I had never heard of Bessemer, but they said they were the oldest venture capital (VC) firm in the country.  That sounded good to me.  I decided to apply and for the subsequent few months, I went to several interviews at Bessemer’s “office” in Wellesley, MA.  Their office was a converted two story home.  I am pretty sure I interviewed in what would have been the guest bedroom, the master bedroom, the library, the kitchen, and the kids’ rooms.  Nearly every step I took in that office, the floors creaked because the house was old.  It was no Bain Capital in appearance.  But, I started to learn about what VC firms do.  I was also impressed.

I came to appreciate that Bain Capital and Bessemer Venture Partners had commonalities and differences.  These traits would be true more generically of any LBO firm relative to any VC firm.  Their commonalities were clear: they both invest in businesses, help shepherd businesses, and ultimately aim to generate good financial returns for their investors and the other shareholders of these businesses.  Their differences came in how they generated financial returns.

Bessemer, as a proxy for the VC industry, did well on investments if those companies grew, and grew aggressively.  They bet on being right on trends, technology leadership, and new markets emerging.  Bessemer pushed me hard on my risk tolerance during the interview process.  Bain Capital, as a proxy for the LBO industry, principally relied on sound financial engineering to generate returns.  They emphasized things like terms on debt, balance sheet structuring, and predictability of cash flow.  They pushed me hard on my quantitative and modeling skills throughout the interview process.  I came to appreciate that the VC and LBO worlds were two very different worlds.

The question the political world is grappling with this week is whether Bain Capital created jobs during Mitt Romney’s tenure.  I hope that through that discourse, the difference between VC and LBO firms comes out.  I am convinced that successful venture capital firms create jobs as a byproduct of their investment practice.  The companies VC firms invest in have to grow to be successful, and a byproduct of growth is jobs.  I also believe that while LBO firms don’t have to create jobs to have a successful investment, the great ones like Bain Capital probably have done so in meaningful ways over the long run.  I don’t have any numbers, but that’s my belief.

What I am sure of for both firms is that they have been successful over long periods of time because they have generated good returns for their investors.  In Bain Capital’s case, their investors probably include many state pension funds, corporate pension funds, university endowments, sovereign wealth funds, and insurance companies.  It would not shock me at all if a surprising number of the readers of this blog have at least someone in their extended family who has benefited in some way from indirectly (and probably unknowingly) investing in a Bain Capital fund or working at a Bain Capital company.  That value can not be under emphasized when it comes to understanding the contributions of any investment firm.

Back to my personal story.  I remember the day that I turned down the offer from Bain Capital.  I called the same friend and said with surprise in my own voice, “I feel like I’m turning down my dream job, but I’ve decided to go to Bessemer.”  When people asked me how I could possibly turn down Bain Capital, I told them the truth.  Working at Bessemer and doing venture capital investments just sounded like more fun to me.  What could be more fun than coming to work every day and investing in companies that are trying to change the world in some way?  And, with that call 14 years ago, I started my venture capital career.  I certainly respect the work of LBO firms like Bain Capital, but have had such a great time in the venture capital world.  The last 14 years have absolutely flown by.  I guess time flies when you’re having fun.

6 Responses

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  1. zackmansfield (@zackmansfield) said, on January 13, 2012 at 12:25 pm

    awesome story larry, thanks for sharing. I always love hearing personal experiences like this.

  2. Richard Holm said, on January 13, 2012 at 1:21 pm

    I agree, we need more stories like this to share with the bright individuals that graduate out of top tier schools. While I am not disputing the value of LBOs, the entrepreneurial world of startups has far more opportunity for value creation and ecosystem disruption (which is needed to keep the US competitive.)

  3. markdchou said, on January 13, 2012 at 2:53 pm

    Larry, I just started as an associate at a New York-based VC and made a similar decision in terms of venture vs. megacap buyout. Hopefully I might have the opportunity to make a career out of it as you have!

  4. Mike Braatz said, on January 13, 2012 at 10:18 pm

    Interesting post, thanks. A more appropriate title might have been something like “Why I Chose VC over LBO”. Use of the Bain Capital name is a bit opportunistic given recent events. I get that it was Bain Capital (specifically) that made you an offer. But it seems you were more drawn to VC vs. away from them.

    And another quibble… Something that has differentiated Bain Capital from other LBO firms is their heavy reliance on fundamental research and understanding of the markets, companies and management teams in which they invest (similar to the VC model in many ways), versus relying solely on financial engineering. They were also among the first to use internal management consultants to partner with and advise their portfolio companies. The result has been better than industry returns, even compared to their private equity peers.

    I’m no expert by any means, but it seems to me the biggest difference between Bain Capital’s LBO arm and VCs is the stage of the companies in which they invest. LBO firms mostly invest in more mature markets and larger, troubled companies. VCs mostly invest in new markets and earlier stage companies.

  5. Lyla Cavanaugh said, on January 14, 2012 at 3:51 pm

    Kay Bee Toys (Bain) sounds like a classic mafia bustout). Buy Kay Bee cheap, load it up with debt, watch it go bankrupt. In Kansas the other business went out and taxpayers like myself had to bail out the pension funds to the tune of 44 million. Companies like Bain are clearly parasites.

  6. Thiago Castro said, on February 7, 2012 at 10:26 am

    Larry,

    I found your site on google once I’m looking for information about investors, startup etc and you have great topics and news.
    How do I contact you to discuss 2 new projects that I’m about to launch this year?
    Do you still work with investment or give some help or advice as you’ve given to Mark and Eduardo?
    Once again, congrats!
    Thiago Castro


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