President Obama has been hit with a one-two punch in recent weeks with two scandals that both involve risky tech startups, politics, money and the question of how to create innovation around national infrastructure, one for energy and the other for communications. While I covered solar maker Solyndra’s bankruptcy, which took down with it an over $500 million government loan, Stacey Higginbotham has been writing about wireless network company LightSquared’s plans and emerging political story.
Here’s where I see these two narratives connecting in various places, and some potential lessons from these two scandals:
1. The political climate. Both Solyndra and LightSquared faced hearings from Republican committees last week, looking to investigate whether the White House stepped in and helped garner these companies federal support — for Solyndra that was the awarding of a $535 million loan, and for LightSquared it was both a conditional waiver from the FCC for its spectrum plans, and the potential interference from the White House of the testimony of an influential General. LightSquared is now the subject of House Armed Services Committee hearings, and Solyndra is fodder for the House Energy and Commerce Committee hearings.
As the Guardian put it: “One of the consequences of Republicans winning control of the House of Representatives was always going to be embarrassing probes by congressional committees. Now the results are starting to come out.” Cronyism is the new term of the month, and Republican Presidential candidate Michele Bachmann even started using it about Obama in her speeches.
2. Technology risk. Solyndra and LightSquared were born out of “big ideas” that delivered innovative, though high-risk, technology. Solyndra has already proven to be a bust — the risks took over — so I’ll start with it. Solyndra’s business plan focused on making solar panels without using silicon (the material that traditional solar panels use), with the idea that the price of silicon would go up. Instead, silicon prices went down, and it couldn’t compete with traditional solar panel makers. Solyndra’s other innovation was based around building a panel out of a series of tubes that cost more to produce, but the company thought would be cheaper to install, and thus would have lower overall costs. That never proved out in the market place because the company’s high manufacturing costs led it to run out of money before that thesis could be proven/tested over time.
LightSquared hasn’t yet become a disaster, but it’s ambitions are so large that Stacey thinks it could be building a castle made of sand. The company aims to create a combined satellite and terrestrial network that could provide a competitive wireless broadband alternative to the nation. LightSquared’s tech risks come from the interference its spectrum causes with GPS signals, as well as the massive amount of funding it needs and overall questions about the viability of a wholesale business model involving 4G.
3. High flying investors. These two companies wouldn’t have gotten off the ground without large amounts of funding from a few (and potentially influential) investors. For LightSquared, that’s Philip Falcone, the owner of Harbinger Capital, which has a $3 billion majority stake in the company. For Solyndra, it’s George Kaiser and his firm Argonaut Ventures, which held 39 percent of the solar maker, with Madrone Partners, USVP Venture Partners and Rockport Capital Partners holding far smaller shares. Solyndra raised over a billion dollars from private investors plus the $535 million government loan. While investors like these commonly have high appetites for risk, when the ventures start relying on government money or support, the public and lawmakers have decidedly less of an appetite for risk.
4. The government picking (the wrong?) winners. Solyndra received a government loan from the Department of Energy’s loan guarantee program, which doles out funds to the dozens of companies it has selected. In essence it picks energy winners and losers. It has now come to light that the DOE helped Solyndra restructure its loan earlier this year when Solyndra was imminently going to go bankrupt, and the DOE even restructured it so Argonaut would get its most recent funding paid back before the government loan (tax payer funds). In the case of LightSquared, the FCC has been granting waiver upon waiver for the company, even as its spectrum became suddenly (and surprisingly) problematic because of the GPS interference.
5. Ambitious infrastructure goals. LightSquared’s goal is to offer a wireless broadband competitor in an increasingly duopolistic U.S. wireless broadband market, and the FCC and the Obama administration share that goal. Solyndra was looking to contribute to the rise of clean power and distributed rooftop solar generation, which is a carbon-free decentralized power source, and could help fight climate change. The Obama administration and the DOE share that goal, too. But developing new infrastructure for both energy and communications, takes massive amounts of funds, and large partners. Both of these things are difficult for startups to achieve, with or without technology and business plan issues.
6. How does the government support tech innovation without attaching to risky startups? There are, no doubt, other ways for progressive administrations to spur technology innovation. For clean power, the DOE has other subsidy programs and projects that seem to be working better than its loan guarantee program. There’s the Investment Tax Credits, the 1603 treasury grant program, which are much less risky, as well as the R&D-focused APRA-E program that doles out small grants for university and startup research.
7. The incumbent technologies have a lot more political connections, and money. While in recent weeks Republicans are pointing to the potential political connections of Solyndra and its investors, and LightSqaured and its investors, the incumbent technologies that these companies are competing with have far more political influence and funding. Some of the top spenders of lobbying dollars in 2010 were AT&T (s t) and Verizon, (s vz) which don’t necessarily support wireless broadband competition, and coal-heavy power Southern Company, which has interests in keeping its fossil fuel infrastructure in the ground.