Thinking About Thinking

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.