Posts tagged ‘VC’

Fisker Chairman in 2009: Obama is Great Because He Invested in Solyndra

Ray Lane of VC Kleiner Perkins is seen in this video trumpeting how the Obama Administration is, for the first time in his memory, succesfully making investments in private companies.  His main example:  Solyndra!

The reason this is particularly timely and fascinating is that just a few weeks ago, Ray Lane took delivery of the first Fisker Karma electric car, financed with $529 million of our tax money and promoted with $7500 of our tax money on every sale,  Mr. Lane and Kleiner are investors in Fisker (and Lane is Fisker's Chairman) and therefore huge beneficiaries of Obama's largess, and Mr. Lane got the first Karma as a big thank you for his political connections that helped score the cash.

Of course Kleiner (who also hired green Crony-in-chief Al Gore) is going to be thrilled with the government money. Nothing is worse than being a VC in with a large early round position in a company and being unable to get the next stage of investment. Since it appears they could not get any private investors to fund this, the taxpayer money probably saved their investment .... at least for a while.

Update: Ray Lane is apparently ticked off by the negative publicity surrounding the Fisker Karma and the money they received from taxpayers. Tough. Surely he is used to his investors being ticked off about bad outcomes. Well, now he gets to see how REALLY ticked off his investors can be when their money was taken against their will, even without their knowledge. At least he can tell his institutional guys, when things go bad, that they came in with eyes open. What's his response to taxpayers?

For those who have not seen it, my article on how the Fisker Karma, even on all electric, uses more fossil fuels per mile than an SUV is here.

More Stimulus Ideas That Sound An Awful Lot Like Crony Capitalism

From my own state of Arizona (emphasis added)

A group of small-business proponents is asking the Legislature to guarantee startup money for Arizona enterprises.

The backers of a so-called Arizona Fund of Funds made their pitch to a handful of lawmakers Monday, saying businesses need government help to start hiring again.

That help should come in the form of tax credits, said John Kowalski, who is promoting the idea through the Arizona Growth Foundation, a group of venture capitalists working to bring more investment to the state.

The credits would be a safety net to encourage venture capitalists to invest in a pool of money that would be distributed to emerging businesses, said Kowalski, a former executive with the Arizona Small Business Association....

The government's role is to serve as a guarantor, through the tax credits, in case the investments don't yield the projected results.

While this is being sold as something for small business, what it looks like to me is just more of the same socialization of bankers' losses that helped get us into this financial mess.  I suppose this "profits are mine if it makes money, losses are the governments if it loses money" never grows old for investment bankers and VC's, but why is anyone taking this seriously anymore?

Obama Meets With James Taggert and Oren Boyle

Amanda Carey via the Daily Caller:

On Wednesday, President Obama met with a group of about 20 CEOs in a five-hour long summit, reportedly in an attempt to soothe the souring relationship between big business and big government. From almost all accounts, the "charm offensive" was successful.

By the end, Boeing CEO John McNerney is reported to have said, "We all wanted to move beyond the talk that made this confrontational environment. We made our apologies." Honeywell International CEO David Cote said after the meeting, "Government is the enabler of business"¦Government and business need to work together."

What Cote did not mention is that his company has already been working closely with the Obama Administration, and was a major beneficiary of the Recovery Act "” as were many of the other companies represented. According toRecovery.gov, Honeywell received over $44 million in grants from the Department of Energy (DOE) for renewable energy initiatives. Honeywell also raked in more than $24 million in a variety of different government contracts from agencies like the National Aeronautics and Space Administration (NASA) and the Department of Defense.

Can the Aviation Equalization of Opportunity Act be far behind?  The meeting of 19 CEO's and a leading VC (who feeds noisily at the green energy trough) sounds like the corporate state round-table.

More Fallout from Biofuel Subsidies

For a variety of reasons that have a lot more to do with subsidizing preferred business interests than energy or environmental policy, Congress has fallen in love with biofuel subsidies and mandates.  We've talked quite a bit on this site about ethanol.  Here is another example, via Mark Perry:

It sounded like a good idea: Provide a little government money to convert wood shavings and plant waste into renewable energy.

But as laudable as that goal sounds, it could end up causing more economic damage than good -- driving up the price of raw timber, undermining an industry that has long used sawdust and wood shavings to make affordable cabinetry, and highlighting the many challenges involved in decreasing the nation's dependence on oil by using organic materials to create biofuels.

In a matter of months, the Biomass Crop Assistance Program -- a small provision tucked into the 2008 farm bill -- has mushroomed into a half-a-billion dollar subsidy that is funneling taxpayer dollars to sawmills and lumber wholesalers, encouraging them to sell their waste to be converted into high-tech biofuels. In doing so, it is shutting off the supply of cheap timber byproducts to the nation's composite wood manufacturers, who make panels for home entertainment centers and kitchen cabinets.

The federal government can provide up to $45 a ton in matching payments to businesses that collect, harvest, store and transport biomass waste to an authorized energy facility. That means sawdust or wood shavings may be twice as valuable if a lumber mill sells them to a biomass energy company instead of to a traditional buyer.

This is bad news for the composite panel industry, which turns these materials into particleboard and medium-density fiberboard, and outranks the U.S. biomass industry in terms of employees and economic impact, with 21,000 employees and annual sales of $7.9 billion, according to 2006 U.S. Census data.

The article poses this as a dueling jobs situation, but the result not only leaves us worse off economically, it leaves us worse off environmentally.   And the explanation is all Hayek and the limits on information possessed by a few individuals in Congress vs. 300 million market actors.  It is pretty clear to me that, to whatever extent Congress even thought at all about this legislation, they must have assumed that wood shavings were "waste."  What happened, most likely, is some entrepreneur and his VC backers came to Congress saying that all this sawdust is just wasted and if you give us a fat subsidy, we can build a valuable business burning it for power.

But in fact, businesses (no matter how much environmentalists believe otherwise) abhor waste.    When a tenth of a percent on margins is important, a lot of people have financial incentives to either reduce the waste or do something productive with it.  Which is why there is a whole industry using sawdust and chips already to make various building products.  And I won't go into the math, but trust me that this kind of use for waste is far more efficient, both economically and environmentally, for the waste than just burning it.

Ugh! $2 Trillion

Not good, but not really a surprise:

The estimate by Orin Kramer will fuel investors' concerns over the deteriorating financial health of US states after the recession. "State and local governments are correctly perceived to be in serious difficulty," Mr Kramer told the Financial Times.

"If you factor in the reality of these unfunded promises, their deficits will rise exponentially."

Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer's analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.

Kenneth Anderson asks:

Two trillion dollars?  One question about these obligations is whether taxpayers will stick around to pay them, or instead will vote with their feet.  ("Vote with their feet" is something that has been discussed in various ways at VC "” as an aspect of a federal system and states with their own laws.)  Many of these pension obligations have been incurred by municipalities and others by states, and in some cases the obligations are intertwined.  But what happens if voters-taxpayers move out?

The assumption has long been that taxpayers are stuck, on account of jobs and other circumstance.  But query whether that is necessarily true as the baby boom generation retires.  In that case, it might find itself far more mobile, in circumstances where rising taxes at every level make relocation a more valuable decision at the margin.  For that matter, if otherwise desirable locales manage to tax their businesses away, will the baby boomers' kids and grandkids have reason ever to locate in places that lack jobs?  They might have been raised there "” but would they go back?

Would people leave California? They are leaving now, true, but would they leave in the future specifically for this reason or generally on account of the tax burden, particularly as retirees?  Or New Jersey?  What about the city of Oakland?  Or even smaller cities, such as the towns in California "” not large at all, small towns, that have already declared bankruptcy over pension obligations?  It's easy to move out of those towns.

My guess is that the Feds are going to pick up a lot of these state and local obligations, making it effectively impossible for taxpayers to escape them short of leaving the country (and creating the mother of all moral hazards, by the way).  After all, if the current administration will bail out Wall Street banks with whom they have little ideological sympathy, they certainly will do so to keep SEIU-represented government employees in jobs.

The Corporate State

From Henry Payne:

Rent-seeking is the new venture capital model, Kleiner Perkins managing partner Ray Lane explained to an electric car-conference here Wednesday.

In an extraordinary speech, Lane laid out how market socialism can guarantee profits for politically connected VC firms like Kleiner -- far more preferable to the old model of "throwing a dart at a dart board," as Lane has put it. While Silicon Valley-based Kleiner made its reputation as a financier of tech startups like Netscape, Lane confided that they are inherently risky ventures in uncertain, fast-moving markets.

By contrast, Lane expressed admiration for communist governments like China and market-socialist economies like France where government determines new markets, thus providing a more certain investment climate for rent-seekers. With Kleiner partner Al Gore lobbying for federal mandates from wind to electric cars, Kleiner would be assured of a return on otherwise risky investments like Fisker Automotive, a California electric car company.

I Didn't Get the Memo

John Tamny in TCS Daily:

In a recent Los Angeles Times op-ed, "Overselling Capitalism,"
University of Maryland Professor Benjamin Barber wrote of the "crisis"
in the capitalist mindset, where the "'Protestant ethos' of hard work
and deferred gratification has been replaced by an infantilist ethos of
easy credit and impulsive consumption that puts democracy and the
market system at risk."

Wow, I must not have gotten the memo.  Here I have been plugging negative numbers into my 1040 for three or four years in an attempt to build a business and some future wealth, and it turns out that deferred gratification is out of style.   (TJIC also did not get the memo)

Here is a big reality check for professor Barber:  The fact that a few mortgage companies got overly generous in extending mortgage credit does not mean that the work ethic and entrepreneurship is dead.  In fact, they are virtually unrelated topics.  If the price of something is reduced, more is going to be consumed.  Suppliers of credit reduced the price of credit, too far as it turned out to make a profit, and more was consumed.  This does not represent so tragic change in the human makeup, it is just supply and demand at work, like normal, and some bad business judgement. 

In fact, I can't get over the class-based condescension that seems to fill every nook and cranny of the commentary on the mortgage bubble bursting.  When in the late 1990's, rich VC's provided too much money too cheaply to yuppies running Internet companies, I don't remember anyone lamenting a shift in human motivation or a failure of capitalism.  But when banks provided too much capital too cheaply to lower income people for home mortgages, suddenly all those lower-income people are representative of the failure of capitalism and the work ethic.

New Energy Subsidies

As I wrote before, the new Democratic Congress try to end certain subsidies received by major oil companies.  All fine and good, at least as long as it is really a subsidy and not just an contract obligation they would like to get out of.

One might be led to believe that the Democrats were finally going to address the corporate welfare issues they have been promising to deal with for years.  Unfortunately, it appears that they are really only looking for an excuse for some populist demagoguing against Exxon.  Subsidies still appear to be A-OK:

The Cato Institute's Jerry Taylor and Peter Van Doren are all in favor of eliminating energy subsidies.  By that measure, they find
the House Democrats' 100-hour energy legislation -- H.R. 6, the
Creating Long-Term Energy Alternatives for the Nation Act (aka the
"CLEAN Energy Act") -- to be quite a disappointment.

Energy subsidies, of course, have been a historical disaster.  If you have ever traveled around California, a common site you will see is 1) Windmills that are not working and 2) Rooftop solar fixtures that appear badly broken.  That is because these facilities were installed cheaply as subsidy magnets, rather than actual, you know, investments that made any sense.   Here in Arizona, every third rich persons SUV has this Arizona environmentally-friendly license plate that says the truck is dual-fuel.  When I moved here, I though that was kind of cool.  I know several countries that have good CNG (compressed natural gas) economies in their transportation sector.  It turns out, though, that none of these vehicles actually fill up with anything but gasoline.  Several years ago Arizona had a subsidy for buying dual-fuel trucks that exceeded the cost of conversion, so that everyone did the conversion as a money-maker. 

And these are far from being the worst.  How many billions have been sunk into R&D rat-holes that have produced nothing except some professor's tenure?  Remember that alternative energy and energy conservation technologies are among the hottest sectors in venture capital nowadays.  The VC's I know can't get enough of these projects, and are project rather than money limited.  This means that every subsidy and grant for energy can only go to one of two places:

  • Projects that are already going to be privately funded, so that all they do is displace private funding, which makes them a total waste of taxpayer money
  • Projects that were rejected for private funding as uneconomic or unpromising, such that the spending is a waste unless you assume Congressmen and government bureaucrats are sharper than VC's in picking investments.

My observation is the two political parties differ on subsidies only in terms of style.  The Democrats appear to have no problems with subsidies as long as they go to sympathetic and fashionable companies (e.g. Google via net neutrality) rather than companies they have deemed to be unfashionable (e.g. Exxon).