Venture Capital and Loan Guarantees
By Arnold Kling
It is important to understand the difference. Megan McArdle writes,
A lot of Solyndra’s defenders have been arguing that if the government is going to play venture capitalist, this is simply what’s going to happen: venture capitalists accept that a lot of firms in their portfolios are going to go bad.
But that is why venture capital has an upside. That is, the venture capitalist wins big on the investments that pay off.
A loan guarantee has no upside. If the venture works, the equity-holders get the upside. If it fails, the taxpayers get the downside.
To put this another way, suppose Dr. Steven Chu hands out all $40 billion he is authorized to provide in loan guarantees using our money, and suppose that every single one other than Solyndra turns out to be a winner. As taxpayers, we still come out behind, because the Solyndra loss is not offset by gains elsewhere.
In fact, the proportion of losers is likely to be even higher than it is in venture capital. If these were solid VC plays, after all, they would have attracted solid VC money. So this is like doing VC after adverse selection. With, I repeat, no upside.
Does Dr. Chu understand this? Or care? I doubt it. He is brilliant–he does come from MIT, after all. And he cares about green energy. That means he knows more than we do about how we should be deploying our money. End of story.