Why the US government has to keep backing green startups

Lots has been said about A123 since it declared bankruptcy last week. A good deal of it, like this Steve Syre Boston Globe column, Government a lousy venture capitalist, excoriated the government for making large taxpayer-funded loans and investments to A123, Evergreen Solar, Solyndra and others. It’s an easy point to make, but it might be the wrong one. After all, the government makes taxpayer-funded bets all the time on things like education, defense technologies, agriculture and basic scientific research (to name a few). And the government was not to blame for the market failing to develop as fast as expected; though politicians are good at being optimists (except for when somebody from another party is involved).
One challenge for green energy industries is that companies involved in them face government-backed competitors. In China’s case, for just one example, the government heavily subsidizes the components that go into making these products. That does not happen here.

Also, companies like A123 and Solyndra require huge amounts of capital. Private investors are unlikely to commit billions of dollars these days in something that is still unproven. In fact, investors wanted the government to help them reduce the huge risk represented by green industries, which almost universally are more expensive than traditional fossil fuels and thus face daunting competitive odds from the start. The market would say that failures happen in such industries. But the market doesn’t care about anything but short-term profit, and that causes companies to miss out on long-term opportunity, as Harvard Business School’s Willy Shih notes here.

Shih is also no fan of government loans and grants, but over the years, I’ve talked to a number of investors in green energy, and they all more or less say that green industries are quasi-commercial, not quite research project, not quite robust enough to stand on their own. They also cite the extraordinary costs of starting these businesses. Loans and stimulus money reduced the risk. Maybe a better model for the government is to serve as more a guarantor of investments dollars in some form, analagous to what it does for banks with instruments like deposit insurance.
If green industries are the industries of the future, America needs to be good at them. We have given up on some of the main industries of the present, like cellular phones and tablet computers. Look at what we are doing in semiconductors, which our business investors have all be given up on, excepting a couple of stubborn, disciplined companies like Intel. They made myriad small decisions that have led to a place where investors don’t want to fund companies that need to buy semiconductor equipment and build plants. Other governments will.

China and Germany are just two of the countries making big bets on solar and other green industries. Some of those bets will go just as sour as Solyndra. But what private investor really wants to compete with a government in a risky business? Targeted state capitalism holds real short-term power, regardless of whether it succeeds over the long run. That seems to mean we taxpayers have to hold our noses and tell the government to put some more green into green industries, despite all their red ink. Yes, we have to learn not to repeat mistakes, but the lesson does not appear to be keep the government and our taxes away from investing in the future.

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