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Solyndra and the Role of VCs and Government in Cleantech

Because of the subject matter here, I’ll re-emphasize the disclaimer that you can read on my About page: The views expressed in this blog are mine and mine alone and do not necessarily reflect the views of my current (or past) employers, their employees, partners, clients, and portfolio companies.

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If you’ve been following either the cleantech world or politics, you’ll have heard about the recent collapse of Solyndra, the solar company the Obama administration touted as a shining example of cleantech innovation in America. Solyndra, like a few other “lucky” cleantech companies, received loan guarantees from the Department of Energy (like having Uncle Sam co-sign its loans), and is now embroiled in a political controversy over whether or not the administration acted improperly and whether or not the government should be involved in providing such support for cleantech companies.

Given my vantage point from the venture capital space evaluating cleantech companies, I thought I would weigh in with a few thoughts:

  • The failure of one solar company is hardly a reason to doubt cleantech as an enterprise. In every entrepreneurial industry where lots of bold, unproven ideas are being tested, you will see high failure rates. And, therein lies one of the beauties of a market economy – what the famous economist Joseph Schumpeter called “creative destruction.” That a large solar company like Solyndra failed is not a failing of the industry – if anything it’s a good thing. It means that one unproven idea/business model (Solyndra’s) was pushed out in favor of something better (in this case, more advanced crystalline silicon technologies and new thin film solar technologies) which means the employees/customers of Solyndra can now move on to more productive pastures (possibly another cleantech company which has a better shot at success).
  • The failure of Solyndra is hardly a reason to doubt the importance of government support for the cleantech industry. I believe that a strong “cleantech” industry is a good thing for the world and for the United States. Its good for the world in that it represents new, more efficient methods of harnessing, moving, and using energy and is a non-political (and, so, less controversial to implement) approach to addressing the problems of man-made climate change. Its good for the United States in that it represents a major new driver of market demand that the US is particularly well-suited to addressing because of its leadership in technology & innovation at a time when the US is struggling with job loss/economic decline/competition abroad. Or, to put it in a more economic way, what makes cleantech a worthy sector for government support is its strategic importance in the future growth of the global economy (potentially like a new semiconductor/software industry which drove much of the technology sector over the past two decades), the likelihood that the private sector will underinvest due to not correctly valuing the positive externalities (social good), and the fact that…
  • Private sector investors cannot do it all when it comes to supporting cleantech. One of the criticisms I’ve heard following the Solyndra debacle is that the government should not leave the support of industries like cleantech to the private sector. While I’m sympathetic to that argument, my experience in the venture investing world is that many private investors are not well equipped to providing all the levels of support that the industry would need. Private investors, for instance, are very bad at (and tend to shy away from) providing basic sciences R&D support – that’s research which is not directly linked to the bottom line (and so is outside of what a private company is good at managing) and, in fact, should be conducted by academics who collaborate openly across the research community. Venture capital investors are also not that well-suited to supporting cleantech pilots/deployments – those checks are very large and difficult to finance. These are two large examples of areas where private investors are unlikely to be able to provide all the support that the industry will need to advance and areas where there is a strong role for the government to play.
  • With all that said, I think there are far better ways for the government to go about supporting its domestic cleantech industry. Knowing a certain industry is strategic and difficult for the private sector to support completely is one thing – effectively supporting it is another. In this case, I have major qualms about how the Department of Energy is choosing to spend its time. The loan guarantee program not only puts taxpayer dollars at risk directly, it also picks winners and losers– something that industrial policy should try very hard not to do. Anytime you have the ability to pick winners and losers, you will create situations where the selection of winners and losers could be motivated by cronyism/favoritism. It also exposes the government to a very real criticism: shouldn’t a private sector investor like a venture capitalist do the picking? Its one thing when these are small prize grants for projects – its another when its large sums of taxpayer dollars at risk. Better, in my humble opinion, to find other ways to support the industry like:
    • Sponsoring basic R&D to help the industry with the research it needs to break past the next hurdles
    • Facilitating more dialogue between research and industry: the government is in a unique position to encourage more collaboration between researchers, between industry, between researchers AND industry, and across borders. Helping to set up more “meetings of the minds” is a great, relatively low-cost way of helping push an industry forward.
    • Issuing H1B visas for smart immigrants who want to stay and create/work for the next cleantech startup: I remain flabbergasted that there are countless intelligent individuals who want to do research/work/start companies in the US that we don’t let in.
    • Subsidizing cleantech project/manufacturing line finance: It may be possible for the government to use tax law or direct subsidies to help companies lower their effective interest payments on financing pilot line/project buildouts. Obviously, doing this would be difficult as we would want to avoid supporting the financing of companies which could fail, but it strikes me that this would be easier to “get right” than putting large swaths of taxpayer money at risk in loan guarantees.
    • Taxing carbon/water/pollution:  If there’s one thing the government can do to drive research and demand for “green products” is to issue a tax which makes the consequences of inefficiency obvious. Economists call this a Pigovian tax and the idea is that there is no better way to get people to save energy/water and embrace cleaner energy than by making them. (Note: for those of you worried about higher taxes, the tax can be balanced out by tax cuts/rebates so as to not raise the total tax burden on the US, only shift that burden towards things like pollution/excess energy consumption)

    This is not a complete list (nor is it intended to be one), but its definitely a set of options which are supportive of the cleantech industry, avoid the pitfall of picking winners and losers in a situation where the market should be doing that, and, except for the last, should not be super-controversial to implement.

Sadly, despite the abundance of interesting ideas and the steady pace of innovation/business model innovation, Solyndra seems to have turned investors and the public more sour towards solar and cleantech more broadly. Hopefully, we get past this rough patch soon and find a way to more effectively channel the government’s energies and funds to bolstering the cleantech industry in its quest for clean energy and greater efficiency.

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  • Lisa L Xu

    Haha…I knew this post was coming. I had three thoughts:

    1) I was reading about industrial policy over the weekend, actually, and
    found the distinction between “horizontal” (general private sector
    support) and “vertical” policy instruments (betting on specific
    industries) outlined in this paper to be a useful categorization scheme:
    http://ideas.repec.org/p/idb/wpaper/4695.html. We’re only really
    discussing the latter, but it’s a good read if you’re interested in
    industrial policy in Chile in general (which has had its share of
    runaway “vertical” successes, like the salmon industry).

    2) I’m glad to see you refuting Megan McArdle on the private vs. social
    benefit of investing in clean tech
    (http://www.theatlantic.com/business/archive/2011/09/why-the-solyndra-loan-wasnt-like-a-vc-investment/245978/).

    3)  Do you think the measures you’re proposing would really help to get “pilots/deployments” off the ground? It seems like they would help on the margin (which may be sufficient), as a softer form of “vertical” policy, but are there any projects you think would benefit from a stronger approach? Not necessarily full-on government incubation, a la Chile.

    Disclaimer: I know nothing about clean tech.

  • Ben

    Thanks for the comments, Lisa — although I’m not sure how I feel about being so predictable!

    1. I think most efforts should be horizontal with the exception of a few strategic/high positive externality verticals2. McArdle is actually the impetus behind this — I wouldn’t even say that I’m refuting her; I actually agree with most of what she says in that link — basically, I think between an equal amount of loan guarantees and subsidies, I strongly prefer the latter3. a. I think it would go a long way if we could reduce the initial R&D burden/alleviate some of the financing pain of these pilots/deployments (let alone a Pigovian tax)b. I think going beyond that margin runs the risk of pushing forward unsustainable/bad solutions — the goal of industrial policy is to help the private sector do things which, on the margin it is hesitant to do — trying to execute “miracles” strikes me as very bad policy

    Re: stronger approach: I think the only verticals where a policy approach that is stronger than the “soft” vision I outlined makes sense are in spaces which are pretty compellingly pure public goods (i.e. defense and public health) — so I think the government playing an active role in shaping the defense industry (as it did by forcing consolidation post-Cold War) is a good thing, but I believe the government is really dropping the ball when it comes to public health.

  • Cricketts

    Really great.

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