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The Danger of Government Money & Risky Green Startups

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.

For more research, check out GigaOM Pro (subscription required):

Image courtesy of chego101.

4 Responses to “The Danger of Government Money & Risky Green Startups”

  1. Hi Katie.
    Sober article that should remind us of the dangers of allowing accounts to decide the flow of cash to “green projects”. We have in some ways the opposite problem in the UK, in that small start ups that have valid ideas in the arena of green products, struggle to get funding at any level. Only established companies are able to attract funds from government sources, unless they are from a university research lab.


  2. What’s the alternative? Isn’t part of the point to spur innovation? The government should be diligent about handing out money, but missteps are part of the growing process. Hopefully if some of these companies fail something will be learned and something continued.

  3. Related, entrepreneurs and companies seeking funding may also want to join – a leading online hub dedicated to helping early stage companies find financing.

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  4. The government is doing many wrongs things trying to stimulate the green industry, but helping startups is not one of them. Unfortunately a few examples of (inevitable) bad investments will be used by opponents to try and kill the DOE program (especially now, after the mid-term elections). In a way, funding green tech startups is very much like funding the NIH for basic scientific research that may or may not lead to anything usable; a lot of it ends up in dead-ends. Everybody knows it’s not wasted money.

    However, massive government funding of the manufacturing sector is not a good idea (it’s mostly politically motivated.) Economics 101 says that using government incentives to create demand is much more likely to be successful. When the demand comes, there’s plenty of private money to help develop the supply chain to satisfy the demand.