Thursday, February 03, 2011

Grand Game: Government Investment Edition

It's been a while, for the Grand Game. That's where I put up a link, and you bright and good-looking KPC readers look for unintentional hilarity. Today's edition: Government investment in science!

I'll go first! My favorite part is where the government shill "proves" that these are worthwhile investments....

Success is probably 10 to 20 years away, said Arun Mujamdar, director of the program, which is called the Advanced Research Projects Agency-Energy.

But the private investment is “a good sign, an endorsement of some sort,” he said. “The best thing the government can do is to catalyze investment.”

While 31 projects have not yet attracted outside help, all are continuing, according to the department. Josh Lerner, a professor at the Harvard Business School and an expert on venture capital, said he would have been surprised if most of the projects had attracted private financing quickly.

If all the projects had quickly drawn private money, it would have suggested that the projects would have happened without government intervention, Mr. Lerner said.

With a track record of six of 37 being picked up, “it’s hard not to feel it’s a reasonable indicator that they’re doing something right,” he said.

So, to cut to the chase, there are three possible outcomes:

1. These are silly wasteful boondoggles. Nonetheless, private capital might be attracted because the research is backed up with huge artificial subsidies, as is the case with ethanol. The only reason ethanol is a fuel additive is that we spend $1.50 per gallon in subsidies. Still, it's true you can "profit" in this industry, because govt policy is distorting price.

2. These are good projects, but would have been invested in by private capital, precisely because they are good projects.

3. These are good projects, but because of imperfect capital markets or basic public goods problems in research no private firm would have invested in them.

I say they are mostly #1. Sure, by dumb luck some of them would have been useful anyway, but then they are category #2.

Note the genius move of the description in the article: We know that some are not #1, because a few have attracted some private investment. And we know that the rest are not #2 because...MOST OF THEM HAVE NO PRIVATE INVESTEMENT!

He actually claims "If all the projects had quickly drawn private money, it would have suggested that the projects would have happened without government intervention."

Brilliant. The lack of private investment PROVES that the public investment is justified, and in fact foresighted and even visionary. Unfortunately, nowhere is it explained why the fact that there is no private investment doesn't imply that these are blue sky bullshit pork projects.

Now, your turn, folks!

(nod to Anonyman)


Steve said...

Oh man, I barely got past page 1. I'll keep it to my first 3 observations:

1) $151 million in grants turned into $108 million in private investment = 4x private dollars per government dollar?? They are only counting the ~$25 mil out of the $151 mil that was given to those 6 companies. Basically they are saying "Count our successes but don't count our failures!"

2) "Government doesn't take an ownership stake so taxpayers reap no direct benefits." Because when the government takes an ownership stake in a private company taxpayers are huge winners! Re: AIG, GM, etc.

3) Envia raised private money via a contract with GM. Can that technically even be considered private money anymore? I know the US sold some/most of its shares, but they have to be pretty intimate bedfellows with all of Capitol Hill...

Mike said...

"Sun Catalytix, of Cambridge, Mass, uses a catalyst to help break up water molecules when they are exposed to electric current. The hydrogen from the water is absorbed by other molecules into an energy-rich material that can be burned in an internal combustion engine or converted back into electricity, said Amir Nashat, who is the acting chief executive of the company and also a principal in a venture capital firm Polaris Venture Partners."

That's been for sale for years.

Michael said...

"With a track record of six of 37 being picked up, 'it’s hard not to feel it’s a reasonable indicator that they’re doing something right,' he said."

I understand that you need a lot of irons in the fire to get ahead, but 16.2 percent overlapping with some private investment is not the runaway success the public is hoping for

Hasdrubal said...

What's the ratio of success to failure for VC firms investing in startups at a similar level of development?

I imagine it's too soon to tell, but I figure we should be fair and neither celebrate nor roast them until we compare their results to those of people who do this for a living and put their own money on the line. Of course, vultures offer a lot more support than just cash. I don't see any mention of anything but money coming from this program.

On a how's that stimulus for you note: ARPA-E distributed $151 million in grants, but had $400 million in funding from the stimulus bill. They managed to actually spend a whole 38% of their funding on their mission! Who knew it took so much overhead to just give away money?