Put Not Thy Faith In Venture Capital

It’s vital the West becomes independent of its oil-supplier foes – Russia, Iran, Saudi Arabia, Venezuela and so on. The good news is smart developers are switching from computers to alternative energy. The bad is that VCs have switched too, and they want subsidies. If the Feds grant them, the leaders of the world’s fear states will stay fat and happy for decades.

The switch:

Silicon Valley has emerged from the year-2000 technology bust with a new mission: finding clean-energy technologies that will free the U.S. from its reliance on imported oil and rid the atmosphere of emissions that may be warming the planet…

Venture-capital investment in Silicon Valley reached $1.7 billion in the first three quarters of the past year — five times what it was two years earlier. Financiers there believe they can use the same kind of focused funding efforts that created the information and biotechnology industries to revolutionize the energy field.

In my (ample) experience, VCs aren’t at all focused – they spread their money across competing companies, then cull them when they decide on the winner. Unfortunately, that’s usually before the market has spoken, so they usually kill the golden goose. Here’s how they’ll kill this particular one (my ellipsis):

Mr. Khosla ( a VC) said success could be achieved with minimal assistance from the government. With scientists and engineers working at full tilt, Congress need pass only three focused measures.

One would require automakers to produce a large number of “flex-fuel” cars that can be driven using gasoline, ethanol or electricity in the next decade. The second would require 10 percent of gas stations to offer ethanol fuels.

And to ensure that Saudi Arabia and other oil producers cannot undercut the viability of the ethanol industry by suddenly slashing oil prices to $25 a barrel, Congress should provide a price floor to ethanol producers through subsidies that are phased out as oil prices rise, he said.

These three measures are anything but minimal – the first would raise auto prices and the second and third would raise gasoline prices. This diversion of money from consumers to the VCs is market-distorting and so inefficient.

The best thing government can do is to level the playing field so the best technology wins. That’s not hard, since all the oil companies are desperate to diversify away from their nutty suppliers, they have massive investment capital, and if they let their competitors create the new technology, they’re toast.

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