A decade ago, in the immediate aftermath of the Nasdaq bubble, the term "dot-com" became a slur. Having seen immense fortunes made and lost overnight in companies like CMGI or Webvan, investors burned by Nasdaq 5000 swore off the sector entirely. That's it for making big money on investing in the Internet, I remember thinking. Guys like Yahoo's (YHOO)
It was a full four years later that Harvard student Mark Zuckerberg launched Facebook from his college dorm room, just as Michael Dell had earlier founded Dell Computer (DELL)
Facebook's success can be attributed not only to Zuckerberg and his team, but to the venture and private equity investors who funded the company in its early stages. Yet despite the site's immense popularity worldwide, it's those very investors who are now routinely demonized in the Presidential primary, just as hedge funds were in the last one.
Facebook's forthcoming initial public offering is expected to be among the largest in U.S. history, raising $10 billion with a valuation between $75 and $100 billion, which would make the 8-year-old company as valuable as McDonalds (MCD),
These kinds of paydays, however, are rare. The vast majority of private equity and venture investments yield losses and even promising companies aren't easy to spot. In 1999, the founders of Google (GOOG)
Venture capital and private equity investors, either directly or via companies like Blackstone (BX)
The now ubiquitous, collectivist argument calls for such investors to "give back" more of their earnings in taxes is more than quizzical. Give back to whom? In reality, we've already benefited handily from their efforts. Facebook, Pandora (P),
The real injustice wasn't caused by Facebook or its investors but by the government who, as I wrote last year, prohibits most people from participating in such early stage companies via a myriad of regulations which limit such opportunities only to "accredited" (read: extremely rich) investors.
Without such "protection" from the government, more companies would be funded, generating more wealth throughout the entire economy.
Private-equity or venture capital investors don't owe society a thing.
Without a penny of taxpayer money or coercion from the government, they've created immense wealth for themselves, their portfolios and everybody who uses the groundbreaking services that have become part of our everyday lives. Don't chastise their efforts, celebrate and thank them instead.—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC