In Role as Kingmaker, the Energy Department Stifles Innovation

by Darryl Siry, Wired

Of all of the Department of Energy programs intended to advance the green agenda while stimulating the economy, the Advanced Technology Vehicle Manufacturing incentive to spur the development of cleaner, greener automobiles is perhaps the most ambitious. But it has a downside.

cuttingtreelimbsThe energy department has approved direct loans to Nissan, Ford, Tesla Motors and Fisker Automotive totaling about $8 billion out of a budget of $25 billion. The magnitude of this program dwarfs other DOE campaigns like the $2.4 billion given to battery and electric vehicle component manufacturers and the $4 billion disbursed for “smart grid” projects.

To the recipients the support is a vital and welcome boost. But this massive government intervention in private capital markets may have the unintended consequence of stifling innovation by reducing the flow of private capital into ventures that are not anointed by the DOE.

To understand this apparent contradiction, you have to look at the market from the perspective of venture capitalists looking to deploy investors’ capital and startups looking to attract it.

Venture capitalists evaluate a company on the basis of whether they think it will succeed and generate returns for their portfolios. While this evaluation is a function of many things, one key question is how much more capital the company will need to get its product to market or a liquidity event so that the venture capitalist can see a return. The more capital it needs, the more dilutive it will be to the early investors.

In cleantech, and in particular alternative fuel vehicles, the capital requirements for companies bringing a car to market in significant numbers can be extraordinarily high, reaching into the hundreds of millions of dollars if the company wants to build its own manufacturing facilities.

To a venture capitalist, this capital requirement can be daunting. This is why government financing is so attractive. In the case of the advanced technology manufacturing loans, the DOE steps up for 80 percent of the total amount needed. Private sources fund the other 20 percent. This amounts to free leverage for the venture capitalist’s bet, with no downside. Hedge funds historically used massive leverage to generate outsized returns, but if the trade turns against them, that same leverage multiplies their downside and can lead to financial ruin. In the case of the DOE loans or grants, the upside is multiplied and the downside remains the same since the most the equity investor can lose is the original investment.

The proposition is so irresistible that any reasonable person would prefer to back a company that has received a DOE loan or grant than a company that has not. It is this distortion of the market for private capital that will have a stifling effect on innovation, as private capital chases fewer deals and companies that do not have government backing have a harder time attracting private capital. This doesn’t mean deals won’t get done outside of the energy department’s umbrella, but it means fewer deals will be done and at worse terms.

According to Earth2Tech, venture capitalist John Doerr commented on this at the GreenBeat conference earlier this month, saying “If we’d been able to foresee the crash of the market we wouldn’t probably have launched a green initiative. Because these ventures really need capital. The only way in which we were lucky I think is that the government stepped in, particularly the Department of Energy. Led by this great administration that put in place these loan guarantees.”

Several sources within startup companies seeking DOE loans or grants have admitted that private fundraising is complicated by investor expectations of government support. None would speak publicly due to the sensitivity of the issue and the ongoing application process.

Aptera Motors has struggled this year to raise money to fund production of the Aptera 2e, its innovative aerodynamic electric 3-wheeler, recently laying off 25 percent of its staff to focus on pursuing a DOE loan. According to a source close to the company, “all of the engineers are working on documentation for the DOE loan. Not on the vehicle itself.” Another highly placed source at Aptera told many potential investors wanted to see approval of the DOE loan before committing to invest.

Read the rest at this link.

One thought on “In Role as Kingmaker, the Energy Department Stifles Innovation

  1. R & D Coalition Overview:

    Less than 20 car companies applied for $25 BILLION DOLLARS in taxpayer money managed by a certain group of people at DOE in order to get loans to make green cars for Americans’.

    There was enough money to help every single one of the car companies that applied. The administrators applied their interpretations of the law in order to benefit the large lobby group-related firms and avoided every one of the “unconnected” companies.

    The amount of lobby and influence money spent is in direct ratio to the amount of money awarded.

    The smaller companies, due to lower overhead, could have dramatically more productive results with the money than the large burdened companies yet the money was given out based on political career advantages rather technology advantages.

    All of the people that reviewed the applications had political and financial connections to GM, Ford, Chrysler and the large Detroit recipients.

    Each of those smaller American companies had technology and resources that presented a strong economic threat, if they got the loans, to the large politically connected companies that did receive funds.

    Some of the companies that have gotten money have backed out of making the electric cars they said they would make. But they still get to keep the money.

    Some of the companies that got the money have already wasted more money than other companies applied for as their total request.

    Most of the companies who got money were in dire financial situations

    Some of the companies that got taxpayer loan money are not even American companies and/or are doing their manufacturing offshore with non-American employees.

    The decision about who would get money was made in 2008 by a private group who then pretended there was a lengthy review throughout 2009 but in fact, the money was pre-wired for a select few.

    All of the things that the rejected small companies (who did not pay lobby fees) were rejected for, were the same things that the insider big companies were doing.

    We will continue to keep you updated.

    R&D Team

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