26 September 2011

Defending Solyndra - or why DC isn't ready for the new economy

Solyndra is a Bay Area solar company that sucked down about $500 million in private sector funding and then got another $500 million in government money before filing for bankruptcy. As further proof that national politicians and media aren't ready for the new economy, everyone is talking about what a terrible investment this was. I disagree.

The old school finance is all about minimizing risk. Making a loan at, say, 10%, the old school banker tries to minimize losses.

Venture capital is different. It is about maximizing returns. Taking a stake in a company, a venture capital firm can get a return of 100% or 10,000%. So venture capitalists (VCs) are not as worried about losing money. They take risks because they know that startups are uncertain and because they'll get back lots on the few that win, hoping to make enough to offset the ones that disappear.

The success or failure of a single company is no proof that a VC is good or bad. You have to judge a portfolio of companies before you can know.

Think about the investment in Solyndra, a solar energy company. Even if it didn't work, more jobs would be created for a time. More would be learned about what did and didn't work in an industry that promises to be huge within a generation. The community had more to gain than just its return on capital. And of course, had it worked, the benefits would have been huge. There is no equivalent to Google or Gentech in the solar energy space. Not yet.

The US economy did not really take off after the Great Depression until massive sums were spent for World War 2. Once the war ended, the economy did not falter. So many of the technologies that came out of aggressive government spending during the war - beneficiaries of money spent to solve problems in fields as varied as aviation, computing, diagnostic equipment, and medicine. Companies like TWA and IBM were able to turn these technologies into business opportunities. Lots of money was "wasted" pursuing bad ideas during the war, but those didn't matter; what mattered was that the failures occurred in a sea of activity that included great breakthroughs and seemingly mundane - but important - problem solving that made these industries possible.

We have a glut of unemployed people and a lack of practical ways to make solar power competitive and widespread. It seems to me that it would have been a waste not to spend money to use the glut to fill in the lack. VCs invest in dozens or hundreds of companies that you never hear about for every one that becomes a household name. The fact that the government could not avoid a bad bet investment in such a space is not proof that such investments are bad. With unemployment so high, it seems like the government has even more to gain from such investments. The Solyndra investment should not be criticized - it should be learned from.

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