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Summary:

The notion that the federal government should be creating a sort of venture capital fund to invest in green technologies was an idea that was floated during the Obama campaign. A report from New Energy Finance back in August 2008 noted that the Obama administration was […]

The notion that the federal government should be creating a sort of venture capital fund to invest in green technologies was an idea that was floated during the Obama campaign. A report from New Energy Finance back in August 2008 noted that the Obama administration was considering allocating $50 billion for a government-controlled Clean Technology Venture Capital Fund to be dispersed over 5 years, and the report pointed out that that plan showed a “certain naivete” about the administration’s understanding of the VC clean tech sector. While the administration seems to have dropped that idea for now, we whole-heartedly agreed with NEF back then, and we also agree with an interesting article posted this week from Benchmark Capital partner Bill Gurley.

Gurley points out six reasons why the federal government should not create a green VC fund, including: there is no lack of venture capital funding, good startups are still being funded by VCs, VCs don’t need a bailout, excessive funding hurts markets, and a government VC fund likely would end up backing the end-of-the-road less qualified companies. Gurley’s post is in response to a poor idea that Thomas Friedman noted in one of his recent New York Times op-eds:

I would have loved to have seen the stimulus package include a government-funded venture capital bank to help finance all the start-ups that are clearly not starting up today — in the clean-energy space they’re dying like flies — because of a lack of liquidity from traditional lending sources.

Green tech startups might be struggling — like everyone is — in these difficult economic times, but tens of billions of dollars allocated from a government-backed VC is just not the smartest use of funds. Governments should stick to providing money through traditional methods of funding: subsidies, tax breaks, grants, etc. The Obama administration has appeared to back away from that $50 billion in green VC dollars, and so should Friedman.

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By Katie Fehrenbacher

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  1. $50B is a lot of money to start something with. OTOH, In-Q-Tel has done some smart things as a government-sponsored VC fund. Maybe the feds should just need to start small and ramp up over time.

  2. Alexander Haislip Sunday, February 22, 2009

    I think we’re falling on terms here. Venture capital clearly means something different to Friedman than it does to people in Silicon Valley. I’ve heard from many late stage cleantech investors and project financiers that a secured lending vehicle that could backstop cleantech-related loans would go a long way to free up credit for companies looking to build a big factory or install a solar array. That might be a viable stimulus that wouldn’t necessarily be expensive over a short-time horizon of a year or two.

  3. To a certain extent the government is already engaged in VC, as some part of the DOE loans under section 136 and the larger stimulus bill are likely to go to startups. The only difference is they are not necessarily requiring equity stakes as a condition of the loan, which just means they aren’t good at negotiating terms.

  4. Let the Magnitude of the Clean Power Funds in the Stimulus Sink In « Earth2Tech Sunday, February 22, 2009

    [...] the federal government might not be cut out to be a green VC, its grants, tax credits and overall subsidies will prove invaluable to the industry. And the [...]

  5. Just Say No to a VC Bailout – Part 2 « abovethecrowd.com Sunday, February 22, 2009

    [...] 2) Earth2Tech: Why the Government Should Not Be a Green VC [...]

  6. It’s naturally American to appeal to revolutionary innovation – it’s worked well in many situations in our history. But there are some situations where evolutionary re-invention is more appropriate. The VC model – fund startups/entrepreneurs and wait for the disruptive technologies – worked for the Internet/Web. But this is because another robust communications infrastructure (the public switched telephone network) existed that could support the population and serve as a base for the Internet.

    But our present energy and transportation challenges are fundamentally different. They require more evolutionary systems thinking than revolutionary innovation. It’s naive (and dangerous) to think we can just throw out systems that serve 300M people – no matter how inefficient and creaky they are – and hope that brilliant entrepreneurs develop magical new energy sources and means of transportation that a) work and b) immediately scale. Otherwise said, do we plan our energy future around biofuels that don’t yet exist, or get down to the dirty work of making each piece of the system we have as efficient as it can be?

    The John Doerrs of the world – no matter how attractive their stealth battery startups might sound – are the wrong people to dig us out of this mess. We need the Norm Augustines and Fred Smiths for this one.

    http://blog.vanno.com/index.php/2008/11/23/tesla-gm-and-a-national-cto/

  7. Hi Katie. I completely agree — the gov’t green VC idea is not well thought out. Keeping the funding to traditional forms — like grants — is definitely the way to go. As you know, clean tech led in investments last year, but many of these companies and projects have stalled and need the stimulus to kick them into full speed again.

    One thing worth taking a look at is the technologies that are enabling these clean tech startups (as well as the big utilities) to ensure that their renewable energy systems, smart grids, etc. are operating most effectively and efficiently. One issue with both renewable energy systems and the smart grid is that they are usually made up of many components — each created to optimize a particular function, but not necessarily created to communicate to the other components or the system as a whole. As a result, these systems are often difficult to manage, and often times if one component is not performing optimally, it can affect the performance of the rest of the system. Over here at Fat Spaniel Technologies (www.fatspaniel.com) we provide an open platform that can monitor and manage all components of a renewable energy system, giving a single view of the entire system and showing renewable energy companies, utilities and more how the system is performing and what could be performing better.

    The reason why an open energy monitoring platform is needed is because it reins in the complexity of these systems, makes them more efficient, and reduces the cost of managing them. This is very important in the case of trying to receive government grants, because in order to do so these companies all need to show that they have the systems in place to ensure they are operating as cost-effectively and efficiently as possible.

  8. Cleantech VC Investing Takes a Nose Dive Q1 ‘09 Wednesday, April 1, 2009

    [...] sprinkling loans and grants to eager firms. The federal government shouldn’t necessarily act as a green VC, but cleantech firms certainly need a helping hand in this environment. [...]

  9. Google, Kleiner Perkins Get Behind Feds’ Latest Energy Gambit Tuesday, April 28, 2009

    [...] green VC — probably not the smartest use of government funds, as we’ve explained before. Not surprisingly, Denniston would rather see incentives put in place to encourage the private [...]

  10. Former VC to Lead DOE Loan Guarantee & Green Car Loan Programs Wednesday, November 11, 2009

    [...] idea of modeling government funds after venture capital has swirled, in various forms, around the Obama administration since back in the campaign days. Now [...]

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