Thursday, October 11, 2012

How government subsidies can lead to failure

It seems that a disproportionate number of start ups that receive grant money or loan guarantees from the federal government wind up going under. You've probably heard of Solyndra, Amonix and Ener1, to name a few. Is it corruption? Well, there may be a little of that, but fundamentally, premature financing can actually lead to business failure.

In the free market, when a start up is looking for financing, they have to go to investors and convince them that they'll make a good return. They have to demonstrate not just a good idea, but a marketing plan, a production plan, a distribution plan and perhaps most importantly, demand for the product. It takes a lot of work and sacrifice on the part of the start up. The business model is continually tweaked as they desperately try to create positive cash flow or at least demonstrate that positive cash flow is a high probability, over time.

When the government gets involved, it's usually for political reasons. They favor companies and industries that suit their agenda. There is a lot less scrutiny of the actual business plan and model for the individual company. Giving a company a big pile of working capital before they've ironed the bugs out of their business model can create a false sense of security and accomplishment. Executives may feel they can now pay themselves the six or seven figure salaries and bonuses they believe they've earned. The desperate search for efficiency is held at bay. They are now actually able to move forward with what may be bad ideas. This actually happened on a large scale, even in the private sector.

During the advent of publicly traded companies doing business on the Internet, investors flocked to just about any stock with a .com at the end of it's company name. Executives gave themselves huge pay and bonuses, and in the end, most investors got fleeced. The marketplace has gotten a lot more cautious since. The government doesn't seem to have learned anything.

Government can play a role in advancing new technology. However, given that it's everyone's money, they should stay away from investing in individual companies and stick to funding research, the results of which should be available to everyone, since we've already paid for it.

The free marketplace is a harsh and objective judge, at its best. It evaluates every aspect of a business based on the individual decisions and judgments made by consumers and end-users. Sound investors don't trade on hopes and dreams and warm fuzzy feelings. They trade results and probabilities based on hard data, observation and experience.

Everyone wants to see advancement in new technology, especially new energy technology. But to be viable in the long term, it has to come from real demand, efficiency and competence. These are things that can only be tested in the arena that is the free market. Consumers will tell us what is worth pursuing. Picking out individuals and giving them an A before they've even taken the test does not make them smarter.

No comments: