Houston, We Have a Solyndra Problem – The Role of Government in Spurring Innovation

Once upon a time… in what seems (today) to be a land far, far away… there was a potentially world-changing company called Solyndra. Solyndra was supposed to be a breakthrough company on multiple levels. It was a company with the best next-generation tech and with government support. It was part of the broader policy thrust to show the best of government. That government could advance next-generation technologies in alignment with long-term national goals by effectively supporting private innovation.

An Ill-Fated Selection

In case you have never heard of Solyndra, here is the quick backstory. Faced with waning public investment in critical physical infrastructure, scientific research, education, and energy-related domains on one hand, and an economy on the brink of collapse on the other, the Obama administration went big (not big enough if you ask from economists). It tried to get a two-for-one deal with its $837 billion American Recovery and Reinvestment Act of 2009 (ARRA). Notable areas of spending included tax incentives for individuals ($237 billion), healthcare investments ($155 billion), and infrastructure investments ($105 billion). But ARRA also carved out a tiny pool of funds ($8.5 billion) to be provided as loan guarantees to next-gen energy companies.

As fate would have it, one of these guarantees ($535 million) went to a high-tech company called Solyndra. In 2009, Solyndra was a cutting-edge producer of solar panels for roofs. It seemingly had the most innovative technology – unlike that of any competitor. And the demand for cheap and plentiful solar power was going to be huge and very much needed (the average price of gas in the summer of 2008 was $4.10 / gallon). Indeed, Solyndra was more than a company. It was a symbol. After all, it was the first recipient of President Obama’s loan guarantee program. It had to work, right?

Political Photo Ops Are a Really Bad Idea

Unfortunately, even in this alternative universe, not all businesses succeed. Even those companies with lots of capital sometimes go belly up. Within 24 months of receiving the loan guarantee, Solyndra saw the cost of the inputs needed for competitor solar technologies drop nearly 90%. This essentially eliminated its competitive advantage. To make matters worse, demand for solar also shifted. The cost of alternative energy options (namely natural gas) came way, way down as well. Buh bye Solyndra.

Naturally, conservative policymakers and politicians had a field day. Fueling the outcry was evidence of faulty Department of Energy decision making and inaccurate loan application details from the company. However, the consensus was that the company was doomed by economic realities, not poor government choices. But the outcry was substantial and severe. Obama the socialist fails again! Solyndra was just another black mark in the long history of black marks highlighting the ineptitude of government-backed research and innovation. Heck, government can’t pick winners even when it cheats the system. Consumers and companies are better off when government stays out of the innovation game. Right? Right.

Is Government-Backed Innovation Even Possible?

Of course, we should never let data overwhelm our gut sense of correctness. Let’s ignore the fact that the Obama loan program generated a positive ROI for the American taxpayer (despite the Solyndra write-off). Has the government ever done anything to support innovation besides the internet (Thanks Al Gore)? A pop quiz…

Do you have GPS in your car (originally DOD funded)? Have you ever bought infant formula (originally NASA funded)? Ever used Google (NSF had the original algorithm)? Know about bar codes (NSF again)? Have a device that has a microchip (DOD again)? Is there a touch screen in your pocket (brought to you by the spooks at the CIA)? Let’s not forget about vaccines for Hepatitis A and B (NIH). These are only a few of the innovations that we take for granted today that were boosted/conceived of via government funding.

DARPA, NIH, NSF, NASA, and the Small Business Innovative Research (SBIR) program (across agencies) have impacted our lives in profound, often little-known ways. Often, moonshot type endeavors are not and cannot be financed privately – either due to their sheer complexity, the extended time horizons for attainment, or the sheer magnitude of financial investment needed. These types of projects instead require active government involvement. Could Boeing have built a spaceship in the 1960s that would land a man on the moon?

Even for more “mundane” innovation (see trying to cure cancer), academic research has found that government-funded research increasingly fuels innovation (vis-à-vis private sector investment). It leads to more jobs being created, greater industrial competitiveness, and broader American entrepreneurial success. Nurturing innovation has been and must continue to be a mandate for government.

The New Space Race Is Here

One (possible) major frontier of government investment in innovation will be centered around artificial intelligence. At least, that’s what the Chinese government believes. China is going all in on AI. It has been called their “Sputnik” moment. There is a deeply held conviction in Beijing that machine learning capabilities will be the fulcrum of economic activity in the coming years. More importantly, AI will displace/augment most jobs in the future (that debate must wait for another blog post). As such, China has publicly declared that it plans to leapfrog the US and become the global leader in AI by 2030.

To accomplish this, the Chinese government has put its money where its proverbial mouth is. The Chinese have already declared a $30 billion fund specifically to nurture artificial intelligence companies and technologies. This pronouncement comes at a time when the US has intentionally cut back on scientific research. To exacerbate matters, China is looking for answers globally. Chinese money has been flowing into American AI companies as well. This must raise alarm bells for US policymakers and politicians. Given the potential scale and scope of AI when it comes to defense, this is not only a potentially grave economic threat but a disastrous national one as well.

There is a new space race coming… only this time it will take place on earth. The last space race required the US government to play a leading role. This new version will be no different. The fundamental challenge is how to take action. With our current political climate, what can government actually do?

In-Q-Tel: A Model for the Future?

For some, the primary concern with government involvement is incentives and expertise. Most government staff responsible for issuing loan forgiveness or funding research-based grants lack the expertise and insight needed. Picking “winners” with blinders on doesn’t tend to yield the best economic outcomes. To address this concern, why not look to an existing model of government-supported innovation?

You may not have heard of it, but In-Q-Tel is a venture capital firm not like the others in Silicon Valley. First off, they are a not-for-profit entity. Second, they are funded by the Central Intelligence Agency to invest in cutting edge technologies that serve the US’ national security interests. Yes, it is a “state-run” investment firm. However, most In-Q-Tel portfolio companies receive substantial investment from private venture firms as well – only after In-Q-Tel backs them. One statistic indicated that for every dollar In-Q-Tel invests in a company, institutional investors go on to fund an additional $9. Talk about public-private partnerships…

The venture portfolio approach to stimulating big innovation mirrors what China is doing. Instead of having government officials choose how to deploy public funds, China has decided to provide the public funds to purpose-driven organizations with the talent, understanding, and expertise needed to make those choices. Investing in innovation is far from guaranteed. Risk is supremely inherent. This “venture” approach embraces that reality head-on. As with any investment portfolio, it is incumbent upon the manager to purchase a bundle that maximizes the risk-adjusted return.

Peering into the future, there is one additional aspect that government must explore in conjunction with embracing the venture mindset. It should improve how it messages (read, markets) its innovation-related successes to the media and its citizens.

We need to move away from auto-rebuking the “you didn’t build that” type comments outright. Government and government services are deeply intertwined with our daily lives – often without us even knowing. I have explored the asymmetries inherent in government outcomes before. Finding ways to publicly celebrate and broadcast success is vital. Especially when the perception of government and government-backed spending is so poor. Given the fickle and hyper-political nature of budgets and funding, the future of innovation may depend on it.

Wagish Bhartiya is a GovLoop Featured Contributor. He is a Senior Director at REI Systems where he leads the company’s Software-as-a-Service Business Unit. He created and is responsible for leading a team of more than 100 staff focused on applying software technologies to improve how government operates. Wagish leads a broad-based team that includes product development, R&D, project delivery, and customer success across State, local, Federal, and international government customers. Wagish is a regular contributor to a number of government-centric publications and has been on numerous government IT-related television programs including The Bridge which airs on WJLA-Channel 7. You can read his posts here.

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