The Danger of Government Money & Risky Green Startups

danger

The stimulus package has been one of the largest injections of government funds into green technology in U.S. history. But along with the benefits that tens of billions of dollars in funding brings — energy innovation, green jobs, the creation of green economy, and, in this case, the potential for reduced carbon emissions — there are also some very real and inevitable dangers.

That’s because high-risk startups, and even startups that originally don’t seem so risky, realistically have a small chance of surviving. So there will be a lot of public money that goes into failures. It’s just the nature of using government funding to boost innovation in a nascent industry. And now that much of the stimulus funds have been allocated, quite a few of these types of missteps are coming out of the woodwork.

Take Solyndra, the thin film solar company that raised close to a billion in private equity, and received a $535 million loan guarantee from the Department of Energy. Last week the company announced that it will close its first factory, will not expand its second factory and is laying off dozens of workers. The news came after Solyndra ditched its IPO plans and its CEO and founder stepped down.

Many in the solar industry noted to me that Solyndra had some of the highest manufacturing costs of its tube-shaped solar panels out there. But in the due diligence phase for the loan guarantee the DOE clearly opened the gates. I think the DOE team — led by former venture capitalist Jonathan Silver — relied on the fact that private investors had already pumped so much money into the company. The theory would be: ‘who’d think the whole lot would bet so wrong?’ But if you look back at the history of Silicon Valley, many have bet very wrong over the years and lost collectively much more than $1 billion.

Another much smaller risky bet came to light last week via the New York Times. The always-awesome Greenwire (distributed by the Times, similar to the way the Times distributes GigaOM content) reported that the winner of the Automotive X-Prize Li-Ion Motors has a particularly shady past and is waiting to receive its X-Prize funding — which partly came out of the stimulus package — so it can pay off a settlement.

According to Greenwire over Li-Ion’s 10-year history it’s morphed from a gold-mining company, to selling coffee to selling oil, to developing an Internet phone service, to finally making electric cars. The $2.5 million Auto X-Prize Li-Ion received was part of a $10 million overall prize split by several winners, and the DOE provided $5.5 million of that.

Solyndra and Li-Ion are just two companies — there will be dozens if not hundreds of these types of examples that will emerge over the next year or so. Get ready for it.

Of course both Solyndra and Li-Ion could end up developing important technology, but my point is to note that government funding for startups, particularly for nascent industries, is high-risk. It’s part of the overall system. And we’re going to have to get used to that, particularly if the government ends up boosting the DOE budget for energy innovation to keep it on par with levels of the stimulus package.

I personally think we should boost funding to levels like those that investor John Doerr and Bill Gates are calling for, but we should be realistic about the risks that come along with that funding.

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Image courtesy of chego101.

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