In late 2008 George Bush’s $700 billion TARP investment put the US Federal Government into the private equity business.
With only one Limited Partner (i.e. the US Federal Government) the fund raising process was fast, accelerated by the fact that we thought the US financial system was about to collapse. Applying a unique investment approach, Bank and Automotive company CEOs were called, told how much money they would be receiving (whether they liked it or not) and to draw up the investment docs. Not surprisingly, within a few months the fund was fully invested and it’s portfolio complete.
Now in 2011, with a forecast of only $652 billion likely to be recovered, LPs (taxpayers) are left debating was actually the investing goal?
Six months after TARP, President Obama funded his own, smaller but sexier $13 billion DOE Fund I (let’s call it DOEF :)) through a $100 million Cleantech carve-out within the intergalactic $825 billion Federal economic stimulus program. The remaining $87 million was delivered through job creating DOE contracts implementing everything from utility smart grid rollouts to nuclear waste cleanup to low income home weatherization.
DOEF made it’s goal to drive “US Cleantech leadership” by investing capital in the most promising organizations. The presumption was that, like venture capital, grants could help spur R&D in strong market areas and, like private equity, loans could help later-stage companies to ramp their commercialization efforts.
But unlike TARP’s “call the CEO” approach, DOEF had to first issue broad RFPs, then consider a diverse set of responses, each with their own business, technical and investment merits. And the applicant pool included for-profit venture capital backed start-ups and even large publicly traded companies, in addition to the DOE’s more typical grantee targets (DOE’s own labs and research universities.)
Like a newly announced business plan competition, DOEF’s launch spurred any company with “cleantech” in it’s vocabulary to stop in it’s tracks, study the RFPs, and begin completing the numbingly exhaustive grant and loan applications. And if an applicant had existing capital or a VC on it’s board it immediately hired a DC-based lobbyist to increase it’s DOEF lottery ticket selection odds.
While the RFPs were intended to flush out the most promising technical ideas, their practical effect was to overwhelm the DOEF investment team (i.e. DOE technical staff) with sheer response volume. I can remember being at the DOE’s offices in late 2009 and having a conversation with a senior official who commented that Steven Chu was pushing his organization to “figure out where it should all go, but $10 billion must be out the door by year-end.” (It turns out today that the money didn’t get out as fast as they had hoped.)
Once they figured it out, DOEF handed out awards with much fanfare, marketing each of the hottest Cleantech categories where they wrote the biggest checks, including $250 million for A123 battery jobs in Michigan, Wind farms in Texas and the now infamous $500 million loan guarantee to venture-backed Silicon Valley based solar PV poster child, Solyndra. DOEF historical funding amounts and their locations can be tracked here.
And while the selections were purely merit based, its remarkable how evenly the recipient’s were located across the US, allowing politicians to confirm for LPs (voters) that their regions each got their fair share. How convenient that the best Cleantech researchers, companies and entrepreneurial ideas were perfectly distributed around the country.
As a first-time fund DOEF was funded on the promise. Now two years later the strategy has moved to execution and the initial portfolio provides an early measuring stick. There are obviously some big question marks.
Some of the biggest DOEF private equity type checks were written to fund building battery and solar manufacturing plants, with Solyndra already having gone bankrupt. If a private equity firm had lost its $500 million investment within a year of funding the entire investment team would already be looking for their next job. But the big miss highlights that the DOE is not in the best to position to identify and fund the winners, which mean more losses like this are likely.
For DOEF venture capital investments, you have to ask why companies like General Electric and Dow Chemical need additional R&D funding to accelerate their investment in cleantech? And do VC backed cleantech start-ups really need DOEFs money to do what they’re doing already? And if DOEF is the “first money in” is it likely they’ll pick the best team and technology ahead of the cleantech venture capitalists?
Last week’s SunShot program awards, a program intended to “reduce the cost of solar by 75%“, made grants to both large multinational and VC backed companies, in addition to a bunch of DOE labs and research universities. But should the DOE really be trying to directly bring down the cost of solar by backing new solar R&D? Last I checked there were a fair number of VCs who have a business investing in this sort of technology.
If it’s “cleantech leadership” the DOE seeks, let’s start with customer adoption, which drives R&D value, and therefore spurs R&D investment by all companies. Instead of DOEF trying to quickly pick the technical winners now, why not instead implement a 10-year $100 billion Federal incentive program which supports customer investments and drives revenue for the winning companies.
The US Federal Government has changed position on the incentive model enough that investors and companies discount the chances that the latest incentives are really around for the long term. As we’ve commented previously, Federal incentives for both renewable and energy efficiency investments must be continuous, predictable and bankable for the market to really invest. Unlike DOEF, which needed to push money out as fast as possible, companies and managers take a little longer to make strategic investment decisions.
So before fund-raising for DOEF II begins, let’s change direction and shift the DOE out of venture capital and private equity and into defining long term strategic incentives which drive adoption and put the US in a more competitive position in the next decade. The free market will respond, cleantech growth will follow and it will cost the LPs a lot less money.