A123 Systems, Solyndra: Bad mix of private capital, government loans

October 25, 2012

ANN ARBOR—One’s a battery maker and one made solar panels. But what do political footballs A123 Systems Inc. and Solyndra LLC have in common besides bankruptcy?

Both received hundreds of millions in government funding along with private capital. University of Michigan professor Peter Adriaens says that particular funding model is a bad mix that sets up competing priorities.

“The priority of government capital is to create jobs,” said Adriaens, professor of entrepreneurship at the Ross School of Business and a professor at U-M’s College of Engineering. “A private investor’s objective is to generate returns in the most capital-efficient way possible.

“Government loan guarantees come with golden handcuffs that require or pressure a company to create jobs here in the U.S., whether that fits the business model or not.”

A123 Systems, which makes advanced lithium ion batteries and received $249 million in government grants, plans to sell its operations to Johnson Controls Inc. Solyndra, which received $527 million in government loans, is liquidating and selling off its assets. Both loans have come under fire by critics of the Obama administration.

But Adriaens doesn’t see it as a partisan issue. He hopes the market and the government will draw the right policy lessons from the failures. There’s a role for government in the clean technology space, he says, but not as an investor.

And venture capitalists should know better, Adriaens says. The likely reason private investors in A123 and Solyndra went along with government money is because they saw it as a way for a fledgling company to buy some time. Other solar companies turned down similar loans.

“Investors know that developing a new product usually takes longer than the entrepreneur thinks it will take,” he said. “So any kind of money for some extra runway buys time. Another reason is because loans so large help buy costly infrastructure. And that’s fine, as long as it doesn’t interfere with the business model.”

He thinks government funds are better spent fueling initial research and development, offering tax incentives, and creating incubators where inventors, investors and companies can meet.

“I’m all for clean technology. That’s my primary interest,” he said. “I think there is a government role here. But I think the role is about building the ecosystem, building the industry. Building the industry does not mean building a company. Startup companies have a lot working against them. The last thing they need is something else working against them. This government investment, though a big cash injection, might carry requirements that make it onerous for the business to be successful.”


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