The Solyndra bankruptcy

A couple days ago, on August 31, tubular solar-cell company Solyndra filed for Chapter 11 bankruptcy. This fact is notable for a few reasons, most prominent among them being the fact that the company received a $535 million loan guaranteed by the US government, which guaranteed the loan in order to promote the solar industry.

Because of the government involvement, and the "green energy" connection, this bankruptcy is turning into something of a political football, with predictable battle lines forming almost immediately. This blog post on the Forbes website describes the two sides of the argument, and then makes the argument that "Solyndra’s failure, while unfortunate, is hardly an indictment of federal energy technology policy. Failure is to be expected with emerging, innovative companies, whether they are financed by the government or the private sector."

A similar argument is made in this blog post from the Huffington Post website, in which the authors make the case that "it would be a serious mistake to over-interpret regarding the Solyndra crack-up, whether to generalize about the solar industry and cleantech or to broadly indict particular technology and development policies" and that "the blow-up of one particular loan guarantee to one particular company with one particular technology should not be spun into any broad new chilling of U.S. efforts to compete more aggressively in cleantech and other advanced manufacturing industries."

As professional investors who also back private companies with venture investments, our perspective on this matter is that the environmental angle is a gigantic red herring (or in this case a "green herring") and the bigger problem is the idea that tax dollars should be used for venture investment at all.

As investors, we are not particularly fond of the "cleantech" craze that has seized Silicon Valley and many private venture investors (many of whom were backers of Solyndra as well), but if private investors want to throw their money at businesses that they judge to be worthwhile investments, that is their concern and we don't begrudge them their right to do so. However, when the government ventures taxpayer money, an entirely different dynamic comes into play. As Milt Friedman said on many occasions, "very few people spend other people's money as carefully as they spend their own" (see for instance this video).

While the bloggers in the two articles cited above argue that government dollars are necessary to foster innovation, the fact is that if a company is innovative and is judged to have a high likelihood for future success, there will be investors who will be willing to fund that innovation for an opportunity to participate in that success. The technology companies which made Silicon Valley what it is today (and which provided much of the wealth of the founders of Solyndra and of their private investors) were built on private investment, not public investment.

No matter how much the authors of those blogs promise that greater government focus on "developing rigorous, market-informed finance strategies" will enable wise investment in the future, the fact that government investors are committing taxpayer dollars rather than private investors committing private dollars completely changes the equation. We believe this is true regardless of whether the government is committing those taxpayer dollars to solar technology companies or to any other business.

With taxpayer dollars, the market forces which penalize imprudent investment are absent: the providers of those dollars cannot in any way hold the person(s) who invested them accountable for their imprudence.

Those readers who are familiar with venture capital investment and the dollar amounts involved will appreciate the fact that $535 million is an enormous venture investment in a company. They will also appreciate the fact that getting a venture capitalist to give your company $535 million is an inordinately difficult thing to do, and would entail extremely rigorous examination with many blunt questions and no beating around the bush with small talk.

On the other hand, getting a loan from a bank which has the prospect of collecting interest on the loan if things go well, and of receiving their money back from the government if things do not go so well, is an entirely different proposition.

The operative point in all this is that it doesn't really matter whether the company in question is a solar-cell company or some completely different business -- the government should not be in the business of trying to determine which companies will be winners and receive taxpayer-backed loans or venture investments.

Critics of this position will of course argue that there are some very long-term projects which are appropriate for the use of taxpayer dollars, such as putting a man on the moon or building freeways, and we would agree. But those projects are owned by the government. Giving taxpayer dollars to someone's business as an "investment" is different and it should fall within the sphere of private investing, where those who make those investments bear the risks, have a vested interest in making sure the money is not wasted, and then can profit from the success if they invested wisely.

We believe investors should be aware of the Solyndra case and the issues involved, and should see through the distracting "green" debate to the deeper issues that this case reveals.

Here is a recent video in which Taylor Frigon President and Chief Investment Officer Gerry Frigon discusses the recent Solyndra news.