Tuesday, February 22, 2011

Rewarding Private Investors at Public Cost

Vinod Khosla wrote a feisty defense for Range Fuels in the Wall Street today.  He argues that the government provides hidden subsidies to the fossil fuel industry that tilt the playing field in favor of the incumbents.  Instead, the government should be supporting innovative solutions that are going to provide more competitive and sustainable solutions.  Though the argument may have some merit, it skirts a more important question: When is the right time for the government to step in, and how does it ensure fairness in its selection process?

Many industry observers would argue that the top tier venture capital firms have tried to corner the market for public subsidies.  No surprise there.  But availability of ‘free money’ appears to have given rise to a new profit model for venture investors.  The model works like this.  Throw big money at immature but ‘sexy’ technologies – attract hundreds of million dollars in subsidized financing – file for an IPO.  It does not seem to matter if the company has staying power or not.  Several recent examples come to mind – Fisker, A123, Amyris Biotech, Gevo, etc.  There is no doubt that federal grants and loans enabled these companies, which are far from being profitable, to raise capital in the public markets.

In these events, the taxpayers seem to be taking a double hit.  First, they subsidize the risk of private companies through federal/state funding.  That support creates profitable exit opportunities for the private investors but transfers the risk of those companies back to the public shareholders.  No wonder the taxpayers are arguing against government subsidies for cleantech companies.

As a cleantech investor I am saddened by this unfortunate dynamic because it can hurt innovations that are more deserving of support and encouragement.  The government clearly has a role in supporting innovation by spurring R&D and maintaining a healthy business ecosystem.  But it creates conflicts of interest and places unjustified burden on the taxpayers when it selectively and prematurely subsidizes privately funded businesses.

No comments: