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A Risky Strategy: Government Clean Tech Venture Funding and Social Impact Bonds

| Monday March 7th, 2011 | 1 Comment

The element of risk is part of every investment.  Some investments are more risky than others. There is no guarantee that any given investment will be successful.  Let’s take a look at two ways government intervention attempts to mitigate investment risk, Government Clean Tech Venture Funding and the proposed Social Impact Bonds.

How do these work independently attempting to mitigate risk?  Together, what is the tragic flaw negating risk mitigation?  Could this be a risky strategy?

Shifting Risk to Government
At the 2011 Eco:nomics conference by The Wall Street Journal, the topic of government funding for clean tech came up again and again.  In fact, there were defenders of government funding.

During the “Money Men” panel, both Ray Lane, Managing Partner at venture firm Kleiner Perkins Caufield & Byers, and Matthew C. Rogers, Director at McKinesy & Company appeared to agree.  Accordingly, the risk for a private venture into Clean Tech is too high, it is an appropriate role of government to step in and fund.

If the venture is successful (i.e. generates significant revenue), the private venture and their investor makes a profit with the help of government funding.  If the venture fails, the taxpayer via the government funding loses money.

Shifting Risk to Private Equity
Let’s connect Government Clean Tech Venture Funding to a similar concept of risk mitigation.  Thoughts of the Obama Administrations proposal for Social Impact Bonds come to mind.   This is government funding as well, yet with the same idea of shifting risk.

The only difference is where risk is mitigated.  A Social Impact Bond is when private equity funds “public” and/or government programs.  The core idea is to use a Social Impact Bond to transfer risk to private equity when the risk to government allegedly too high.

If such programs are successful (by predefined measures), taxpayer pay the private investment plus a profit.  If it fails, the investor loses his or her money.

The Risk of Shifting Risk Back and Forth
Taking Clean Tech Government Funding and Social Impact Bonds, respectively, it may or may not sound plausible to transfer risk from private equity to the government or from government to private equity.  (I will not digress here on the failures of each individually.)

But , let us now take a look at Government Clean Tech Venture Funding and Social Impact Bonds together.  On the one hand, we have funding by the government to mitigate the risk for private equity.  On the other, we have funding by private equity to mitigate the risk for government.

Hence, the tragic flaw.  Risk is being transferred both ways, which on net, does not really mitigate risk.  This makes no sense!

A Risk Not Worth Taking
The way to deal with risk is not to pass it between private equity and government funding or the other way around.  But rather, we need to recognize risk for what it is.  Investments are risky for a reason, as there is no guarantees to success.

Putting into place both Government Clean Tech Venture Funding and Social Impact Bonds is a risky strategy.  (This is not to say either is good strategy either.)  Rather than mitigating risk, it is merely shifting risk from government to private sector and vice versa at the same time.  The logic of having government be a safety net for private enterprise and private equity be a safety net for government is just a little too clever for its own good.


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  • http://www.hipinvestor.com Nick Gower

    It seems to me that policy has long since been a driver in industry innovation. On that same note, it seems to benefit the economy to encourage innovation with praise and reward instead of discouraging bad corporate responsibility with taxes and fees.

    Directly, do projects have different qualifications (risk, social benefits, long term/short term goals) for either funding structure, or do they jointly qualify for both. It makes sense to shift risk and reward between Gov. and VCs depending on the individual risk and rewards, and it hurts public understanding to lump these two together.

    Instead of looking at these two pieces of the government’s innovation investment portfolio as the only two constituents, let’s understand that SIB and SVF are serving different purposes, both with high potential for human impact and private profit. We should understand the concept of taking into account all risk, however, it stifles understanding to glob these two concepts together, instead of seeing them for their individual benefits/drawbacks.