Expect this summer to be a busy one for Jonathan Silver, the former venture capitalist whom the Obama administration tapped to lead the Department of Energy’s highly competitive loan guarantee and green car loan programs. That’s when the agency will likely dole out its next conditional commitments, Silver told us in an interview this week. Already, companies including Tesla Motors, Fisker Automotive, Solyndra, BrightSource Energy and others have collectively garnered billions of dollars in commitments for loans and loan guarantees under the potentially kingmaking programs that Silver heads up.
As executive director of the DOE’s loan program office, Silver’s daunting task is to oversee the application process, the analysis and the negotiations for loans and guarantees, and he’s also responsible for staffing and working to streamline the agency’s long delayed operation. Silver heads up three related programs: the Advanced Technology Vehicles Manufacturing, or ATVM, program, which provides low-interest direct loans for green car manufacturing projects, and two loan guarantee programs (section 1705 and 1703). A loan guarantee serves essentially as a promise by the government to make good on a loan if the company can’t, and typically enables better interest rates and lower costs than would otherwise be available to a company for project financing.
We spoke with Silver on Monday about advice for startups hoping to win DOE funding, what he thinks private investors need to learn about government lending, and how he’s been able to apply lessons from the venture capital world to the public sector. Here’s excerpts (lightly edited) from our interview:
Q: On a typical day or in a typical week, how is your time split across the programs you’re managing for the Energy Department?
There is no such thing as a typical day or a typical week. That’s partly what makes it so exciting and so fun. It’s partly due to the fact that we’re still ourselves a kind of a startup. As recently as January of 2009, we had I think 15 or 16 federal employees here and a handful of consultants. Now we have over 120 people, and are continuing to grow. The good news is we’re able to get more loans processed than we were before. The other truth is that there have been a certain number of growing pains.
Q: What were some of those growing pains?
As anything in the federal government you have to ensure that the work you’re doing complies with a variety of other regulatory and legislative and statutory regimes. But I think we’re in good shape now. We’ll probably do four transactions this month, in the month of May, and three or four in June, and I think we’ve begun to hit our stride.
[Editor note: Silver explained that those expected transactions come under the three programs he's responsible for: 1703 and 1705, and the ATVM program, created under section 136 of the Energy Independence and Security Act of 2007.]
Q: So those four transactions in May and up to four in June will be across all three programs?
As it turns out, all of those will be in either 1703 or 1705, currently, although in project finance, things change all the time….It’s a very unique kind of creature.
Q: What specific changes have you helped bring about or seen in the loan and loan guarantee programs to streamline the agency’s operations?
We have done and will continue to do a large number of things. We went through an initial re-engineering effort where we organized our origination teams into domain-specific teams. So now there’s a wind team, a solar team, a geothermal team, etc.
We separated out the credit group into its own unit, which was important for purposes of developing into sophisticated credit policies. We’ve standardized our due diligence to the extent you can in what are very unique projects. We’re much more proactive in our communication with applicants after their application has been received, in a much more collaborative fashion — a back-and-forth fashion. We have automated the application process itself, which will be available sometime this summer.
Q: What lessons have you been able to bring over from the venture capital world to the public sector?
As a VC, I was looking for important, potentially transformative technologies. I was looking for companies that could scale. I was looking for projects that would have impact. The same thing certainly is true on the public sector side.
The corollary to that is that in much the same way we did our due diligence in the private sector, our due diligence looks at everything you’d expect it to look at: the underlying technology, financials, the market conditions. In addition, we also look at legislative, regulatory and environmental issues. We look at the strength of the management team. All the kinds of things I would have done as a VC, we do now.
The difference is where we show up on the financial waterfall. VC is generally the first leg (or part) of the equity tranche, and the loan guarantee is the most senior secured lending position.
But the inverse of that is true, too. The risk-reward ratios are different for venture and for the loan guarantee program. The other most obvious difference is that we don’t have a set of monetary objectives here — we have a set of public policy and social policy objectives.
Q: What practices or philosophies from VC investing have you found do not translate well in these types of programs? Any lessons you thought would work but have not proven effective?
I think there are a couple of very important distinctions between the two practices. I am specifically, deliberately not in the business of attempting to select winners and losers. Which of course is exactly what you are (at least the winners) trying to identify in the VC world. I’m trying to identify and financially support, big, important technologies that will transform their sector on the energy spectrum.
What you will see us do over time here, which you probably would not see a VC do, is we will back multiple companies in the same space. We will back companies with competing technologies. We will back companies with variations on similar technologies, because our goal is to create a marketplace of projects and ideas which the private sector will then be in a position to pick and choose from.
Q: After your six months managing the Energy Department’s alternative energy investments, is there anything that you would do differently now as a venture capitalist — any insight you can offer private investors based your experience so far in the loan program?
I think it would be helpful for the private equity community in general to become more familiar with the ways in which the federal government actually works, and the decision making processes. We operate under a set of conditions that are vastly different than they are in the private sector, and require a number of stakeholders to weigh in and participate….therefore the time frames for the decision making are somewhat different than they are for the private sector.
All that being said, I think Washington is now and will remain for a considerable period of time, an important part of — if not the epicenter — of, in this case, energy financing. So I think one of the things that would be most helpful for venture capitalists, private equity folks in general is to really understand what the federal government programs are that are relevant to their sectors, how they work, and what the underlying legislation actually says.
The folks that work in the loan guarantee program, many of them have very significant, substantive private sector experience…..We share a common desire to create structures which support and enhance what the private sector is doing. But we work under a different set of conditions and conditionalities and that is something that I think private sector folks would benefit from understanding in greater detail and with greater nuance than they do currently.
Q: The loan awards under the ATVM program have backed companies at very different stages of development. Would you explain what makes projects as disparate as Fisker’s Project Nina and Ford’s retooling efforts both good fits under this program?
They respond to different things. Part of our objective in the ATVM program is to increase national fuel CAFE standards. At the same time, we’re interested in reduction of greenhouse gas emissions through reduction of tailpipe emissions and the like. Similarly we’re interested in creating jobs in the green economy. We’re also interested in moving forward important new technologies, which will enable the United States to take leadership positions in these rapidly growing new industrial sectors. So they may qualify under some or all of those goals and objectives.
Secondarily, the projects that have been awarded conditional commitments all share a couple things in common, the most obvious of which is a fairly robust application. That falls into a couple buckets. The first would be important new technology. The second would be financial viability. One of the things we are required to do in the project finance area here is to ensure that every one of these projects has a reasonable prospect of repayment. Consequently we spend a great deal of our time doing our best to de-risk the underlying transactions so that to the fullest extend that we can we protect the U.S. taxpayer.
Q: I understand the DOE considers “the extent to which an advanced technology vehicle exceeds” the minimum 25 percent improvement when it’s prioritizing projects for funding under the ATVM program. Would you explain how that prioritization process works, and does it translate to a big advantage for electric vehicle projects?
We have a long set of attributes, or technical characteristics which we look at and which are scored. Some of the scorings have different weightings attached to them. To the extent that a technology creates a massive improvement in one of our desired policy outcomes, that’s beneficial.
Q: How much weight does the amount of fuel savings or emissions savings carry?
We are interested in and will back, as you can see from the portfolio, both electric vehicle applications as well as dramatically improved internal combustion engine improvements. We’re not looking to draw a distinction particularly between those, although electric vehicles have fewer emissions than any other kind of vehicle. So our goal is to ensure that a relatively wide variety of important new technologies in the automotive space make their way into the commercial marketplace.
Q: What needs to happen before the next award can be made under the ATVM program?
We have half a dozen or so in active and deep due diligence now. I would expect that you would see one or more awards in the ATVM space early or mid summer.
Q: For entrepreneurs at venture-backed startups who are hoping to set up and scale up manufacturing with help from the Department of Energy, do you have any advice?
The best thing an applicant can do by far is to submit a robust application. By which I mean: the technology, if it’s an innovative technology under development, it’s had the requisite number of hours of operating history to be reviewed. If it’s a commercial project, it’s viable and desired in the marketplace.
Anything that would make the project attractive from a private equity perspective, makes it attractive for us. And anything that doesn’t make it attractive, makes it less attractive for us. We’re looking at exactly the same criteria. I think it’s important for your readers to know that we’re aggressively trying to support interesting and important new technologies. But it’s also important for them to understand that this is neither a grant program nor giveaway program — it’s a lending program. Consequently we are on the debt side of the balance sheet, rather than the equity side of the balance sheet.
Q: Anything else you’d like to add?
I have been really excited and thrilled by the breadth of innovation that I’ve seen in the applications submitted. I think that the notion that somehow innovation is going offshore is deeply mistaken. I think the relevant communities here — the entrepreneurs in the United States — are generating an enormous number of interesting and innovative ideas and proposals. We are working like crazy across the whole Department of Energy to build out financing programs and R&D programs and technical programs which support that work.
I think that realistically the United States underinvested in clean energy for a long time, and are scrambling a little bit to catch up. But I think we’re doing a very good job of it now. The loan guarantee programs have really turned the corner. That question of perception and reality is sort of out of skew. The old perception and new reality are vastly different. The new reality is that this program really is beginning to work, it is beginning to underwrite very interesting transactions.
The last piece I’d ask people to remember is that we can only move as fast on our side as they can move on theirs. We are a counter party to the transaction. And if the applications come in complete, robust, with logical debt-equity ratios, and without dramatic odd features that require an immense amount of customization and fitting, we can turn around applications reasonably quickly now. So I encourage folks to apply, and I think they will find here a much easier system to navigate and a group of people here who are ready, willing, able and eager to do business with them.
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