Policy & Politics Obama-Solyndra-Republicans-picking-winners-and-losers

Published on October 21st, 2011 | by Susan Kraemer


Obama DOE Picked More Energy Winners Than Silicon Valley VCs

October 21st, 2011 by  


With just 1.4% of its Recovery Act clean tech investments in “losers”, it looks like the Obama administration is batting a much better average in “picking winners and losers” than the private Venture Capital (VC) market itself.

The US government guarantee of a private loan to Solyndra, at $535 million, represented a minuscule 1.4% of the Department of Energy investment in all renewable technologies. By contrast – VCs (who were out $1 billion to Solyndra, for example) expect much higher failure rates. Richard Stuebi, who advises VCs on expected green energy failure rates, says that just 3 in 10 successes represents a successful VC investment strategy. That is 70% losers – not 1.4%.

The argument against “picking winners and losers” that Republicans in congress have long cited to avoid clean energy investment got a poster boy in Solyndra, and they are flogging it to death. They have pounced on one startup bankruptcy as yet another excuse to shut down all clean energy investment by the Democrats.

Republicans argue that “government should not pick winners and losers” because “the invisible hand of the marketplace” should be allowed to (continue to) decide the winners and losers in energy supplies. It is no coincidence that the invisible hand favors the dirty energy lobby that funds their seats in congress.

The market will pick dirty energy because it is cheaper (for now) since it is already in place, and the capital costs have been absorbed, and it did not pay a dime for the pollution it caused. All the market knew was that it was cheap. But the market did not know that in fact there will be a much larger payment due for that cheap dirty energy.

The market thus conspires with their dirty energy benefactors. Dirty energy has been successful in avoiding paying for the pollution it has already caused, because it made us pay for it instead, at the emergency room, every year: For example, the “230,000 premature deaths, 200,000 cases of heart attacks, 2.4 million cases of asthma attacks, 120,000 emergency room visits, and 5.4 million lost school days” is just the portion prevented annually by the Clean Air Act. And dirty energy will similarly not pay for the future costs that we will bear, with the effects of climate change.

The Department of Energy had hired a clean tech VC to help with picking winners, while the Recovery Act had Department of Energy investment dollars for investing in getting clean energy costs down. He has just left, as there will be no more need for expertise in picking winners. The program ended on September 30th.

The renewable energy loan guarantee program that invested in Solyndra, as part of a historic investment resulting in 16,000 megawatts of clean energy coming online under the Democrats’ brief Recovery Act, could have been renewed when it expired at the end of September. But this Republican congress needs all the energy it can put together just to keep its lights on for each ensuing month.

Now Republicans have shut down the Democrats’ pick – a historic investment in clean energy – rivaling the Manhattan Project, and we will stick with their pick: dirty energy.

Susan Kraemer

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About the Author

writes at CleanTechnica, CSP-Today and Renewable Energy World.  She has also been published at Wind Energy Update, Solar Plaza, Earthtechling PV-Insider , and GreenProphet, Ecoseed, NRDC OnEarth, MatterNetwork, Celsius, EnergyNow, and Scientific American. As a former serial entrepreneur in product design, Susan brings an innovator's perspective on inventing a carbon-constrained civilization: If necessity is the mother of invention, solving climate change is the mother of all necessities! As a lover of history and sci-fi, she enjoys chronicling the strange future we are creating in these interesting times.    Follow Susan on Twitter @dotcommodity.

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  • Richard Stuebi

    One of my old (2004) presentations was cited in this posting, and several things have changed since then — not least of which is that I now work in venture capital, so I have considerably more experience in understanding the VC arena. More importantly, the venture capital business model has evolved — or perhaps I should say fragmented — wherein more venture capital firms have moved to later-stage deals with higher prospects for success. The “3 in 10” statistic is mainly applicable for those VC firms that both (1) work in very early-stage deals, and (2) are seeking high risk/high return deals. It’s analogous to baseball: a slugger has a lower batting average than a singles-hitter. And, there are a lot more VCs willng to be singles-hitters these days, wherein maybe 5 or 6 deals “succeed” (i.e., return invested capital plus hopefully more), although this strategy minimizes the potential for a truly huge return potential afforded by the next Google or Facebook. I agree with the commenter who noted that VCs typically pull the plug on losers relatively quickly, and hopefully before lots of capital are invested, so that on a weighted-average basis, more money is plowed into the winners and therefore the return to the fund’s investors benefits more from the winners than is hurt by the losers.

  • Wilmot McCutchen

    So why doesn’t the 1% step up and fund these longshots, instead passing the buck to the government, which, as you rightly point out, is not supposed to be in this business? Instead, we hear “let them eat cake.” Let them find a venture capitalist who does not demand 10X in 2 years.

    But government can, as part of its existing duties, provide a database of cleantech technology assessment where new ideas can be vetted before big money is spent on a mistake. That certainly would help constructive new ideas get funded by private capital. To have been validated by the government would be a huge boost for cleantech proposals still in the design stage.

    I believe that sequestration (geological storage of CO2 in deep saline formations) is a serious mistake, not only a waste of most of the stimulus money but also a danger to fresh water supplies and to future generations from fugitive carbon dioxide plumes. That’s another function of letting the public be heard: preventing mistakes intended by government.

    There is no way for a new or dissenting idea even to be considered by the government, let alone get vetted by the experts in the public sector through government-provided crowdsourcing.

  • Anonymous

    VCs expect to write off most of their losers well before they burn $500 million. And they expect to make money on the winners. The government isn’t charging a fee for its solar loan guarantees, so the best it can hope for is that the loans will be paid off on schedule, at no cost to the government.

  • Wilmot McCutchen

    Silicon Valley VCs expect to get at least ten times their investment (10X) with an exit in 2 years. Cleantech (other than metering and software) technology development will take longer than 2 years. Some VCs, e.g. Peter Thiel and Vinod Khosla, take a longer view, but as a rule VCs want to set up their technology development target at such close range that even with their bad aim they can score enough of the time to stay in business. Antlike blind diligence has its place, but how about some careful planning for industrial technology and real manufacturing in America, rather than marketing software and consumer products to an increasingly jobless and angry nation?

    Silicon Valley VCs grew up with and still operate with the dotcom VC business model, expecting to keep partying like it’s 1999. Patrons have always been necessary for technology, but because the VC herd conforms to this business model they can’t act like patrons at all. Their short time horizon precludes the long-term support that is needed, so because the 1% have shirked their noblesse oblige and offloaded the responsibility on government (which is not only broke but way in the hole) America is faltering in cleantech development while the VCs frolic on their yachts.

    DOE has no database of technology assessment, as the GAO discovered. So picking winners and losers is not even possible for DOE. NASA does technology assessment, so it’s not a lot to expect of DOE. Because of this lack of intelligence, we got boondoggles like sequestration and Solyndra.

    • Anonymous

      The government is not in the investment business, at least in the traditional sense.

      A very, very small portion of our budget is set aside to give promising “long shot” ideas a chance to succeed. The idea is not to earn returns on the investment, there’s not even an expectation that all the loans will be repaid. Losses are expected.

      But in exchange for some tiny, tiny losses we stand to create new industries in the US and create new, good jobs. We, the tax payers, get paid back with new businesses and employees paying taxes.

      Now, if you will do some deep thinking you’ll realize that the government did not lose all that much with Solyndra.

      While the company was in operation a large portion of the money went to salaries and that reduced the unemployment payouts and increased tax revenue. Much of the money spun its way through the economy as a factory was built and equipment purchased. All of those activities reduced unemployment and increased tax revenues.

      Sequestering CO2. A long shot, but were it possible it could be a valuable way to reduce our carbon output while we build out a carbon-free grid. If you look at how much we’ve spent this last year recovering from extreme storms and floods it’s not hard to see how much we could save in the future if we could avoid making this problem even worse. This is what we’re getting with 4% extra water in the atmosphere. Imagine the flood damage we’ll have when we raise that level to 6% or higher.

      Investing in cleaner energy won’t return direct earnings to the government. But it’s likely to create very significant savings over time. It’s a different type of investing.

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