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A123 Systems, a battery maker and recipient of over $250 million in Federal grants, will join Solyndra and Ener1 as Federal funded clean energy companies that have gone into into bankruptcy protection.  Reading over the Boston Herald article on the company, you almost get the sense that this company spent more time begging politicians for money than it did making batteries.  Of course, the media has a way of glossing over the facts, but it’s obvious that this company was politically well-connected and benefited immensely from this.  It’s also equally obvious that loads of Federal cash did very little to make their business successful.

At its core, this is the problem with Federal attempts to “boost” the cleantech sector.  The companies that get funding are inevitably the ones with the most political connections, rather than the ones with the most viable business strategies or the most innovative technologies.  In essence, we’re actually undermining cleantech innovation by investing in the “losers” and forcing their more viable competitors to play with a competitive disadvantage.

The United States has a highly developed system of private funding, which includes private equity and venture capital firms.  These firms have expertise in providing funding to start-up companies and also helping them navigate their way through the many business challenges they face.  The Federal government, in spite of good intentions, simply does not have this.

Moreover, Federal bureaucrats and politicians have misaligned incentives here.   A true venture capitalist stands to lose a grand deal of money if their investments in start-up companies turn out poorly.  When the Federal government turns into a VC, politicians and bureaucrats get to play with house money; they don’t lose money if their “investments” turn our poorly.  Rather, the taxpayers are stuck with the bill.  For this reason, they are more incentivized to dole out funds to people they like, or even worse, people who help them get elected (e.g. large campaign donors) rather than find the companies with the greatest chance of success.

With all the political wrangling, what gets missed is how huge our advances in energy have been over the past few decades.  And it all happened because of a result of the efforts of entrepreneurs, business people, and venture capitalists.  The United States has many problems, but there’s government program that can ever be as powerful in addressing those issues as the private sector can.