Solyndra fails. Welcome to venture capital.

September 16, 2011

The Solyndra blame game is in full swing.  The company, having previously filed an S-1 to go public and taken over $500 Million in US government (USG) loan guarantees, filed for bankruptcy last week presumably losing all or most of the investor equity capital as well as the USG backed debt.  Given the nature of the risk here, I think it is fair to say that USG has been acting as a VC.

Good VC’s know that they won’t get every call right.  Hey, I sold a bunch of Apple stock after they failed with the Newton.  Similarly, sometimes we are wrong about investments and sometimes we are right, sometimes wildly so.  That’s why VC’s, including USG, build a portfolio.

Should the USG be making what are essentially VC investments?  Personally, I think not, for the obvious reasons.  But a public flogging on “why the USG lost this money” misses the point and shows is that the armchair quarterbacks in congress don’t understand the first thing about startups, venture capital, technology entrepreneurship.  For instance, this week, a congressman said, basically, “how can you be wrong after doing nine months of diligence?”  A VC knows that the ones that fail always looks stupid in hindsight.  To you and to everyone else.  VC’s also know that there is no amount of diligence that will guarantee success.  If it were only that easy we wouldn’t have had to bail out a bunch of smart investment bankers for buying mortgages at the wrong time.

For the record, here is what I suspect where the real mistakes by USG (based on the limited information out there so far):

  • This is just a guess but I suspect that the Dept. of Energy felt safe going in behind brand name investors.  However, the availability of such large amounts of non-recourse debt may encourage those VCs to take riskier investments, partially because the leverage will increase returns but also because it usually comes in after most of the venture capital so the “pot odds” drive a rational investor to stay at the table.
  • Manufacture of a commodity product is probably not where we should spend USG capital.  Alarms go off in my head when management tells us that they will be profitable when they get to massive scale.  As a nation, we need a race to low cost on low margin manufacturing like we need a hole in the head.  Solyndra would have been pulled overseas eventually even if it had initially succeeded.
  • The DOE/USG should have set public expectations for a J-curve (i.e., losses show up early, making the fund look like a bad idea but winners take more time to build value).  The DOE Loan Guarantee portfolio is $36 Billion so the Solyndra loss is less than 2% of the portfolio.   I realize that being debt guarantee, the portfolio will not “make it up on the winners” like a regular VC fund would hope to do but, if the outcome metric is more businesses and more jobs, there is plenty of opportunity for a net positive outcome to the loan program.

Regardless of how you feel about USG engaging in direct venture capital or whether the USG portfolio “returns” the investment, Solyndra is just one failure in a high risk venture fund.   The same thing happens with failed designs for military aircraft but we generally perceive that, over a portfolio of projects, these expenses provide “returns” to the country.  Get over it.

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