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By Robert Rapier on Jan 16, 2012 with 22 responses

Venture Socialism?

With the recently announced foreclosure of Vinod Khosla venture Range Fuels, followed by the fire sale of Range Fuels’ assets to Vinod Khosla venture LanzaTech, I have been getting a lot of calls from reporters wanting to discuss exactly what happened here. After all, well over $300 million was invested into Range Fuels — including tens of millions of taxpayer dollars — and what resulted were assets that were ultimately bought by LanzaTech for about $5 million.

Two articles were published over the weekend by journalists I spoke with last week:

Georgia failure not the only ethanol misadventure

Range Fuels fiasco: Finding renewal energy in Georgia forests didn’t work out

This quote caught my eye from one of the articles:

“These, quote, venture capitalists are basically venture socialists,” said Kenneth Green, a resident scholar at the American Enterprise Institute, a conservative think tank in Washington. “They’re getting large amounts of research money and loan guarantees to build pilot plants and other projects. They’re looking to socialize the costs of their efforts, but keep private the profits.”

I suppose that is an apt way to put it. These venture capitalists have found that they can defray their risks with tax dollars — and thus subject taxpayers to the risks from their projects — while they reap any potential rewards. As Vinod Khosla recently boasted, he has made a billion dollars by taking some of his ventures public, and the valuations of these companies are at least in part based on the government grants and loans they have received. But as I noted in one of the articles, none of the companies are actually producing fuel commercially. That is the true test of success from my perspective. Ten years from now it won’t matter to very many people if Khosla made a billion dollars for his investors if none of the companies were successful at producing fuel that is competitive with oil.

Khosla believes he should be applauded for what he is doing:

“Range’s original formulation may not have been successful, but such risk-taking deserves applause, not derision,” Khosla, who helped start Sun Microsystems, wrote. “In the end, success is never assured.”

I would say that sort of depends on the nature of the risks, don’t you think? In this case, the risks were substantial from my point of view, and poorly understood (and not at all articulated) by many who pushed this project. Add the fact that you risked my money and damaged the credibility of the renewable fuels industry, and I believe I will withhold my applause. Personally, I think taxpayers deserve to be paid back before any project associated with any of the Range Fuels backers is eligible for any more federal funds.

Of course as I have argued before, I would change this system up anyway so the risks from these projects are pushed back to the private sector — where they belong. If we started providing rewards for those who deliver on their promises instead of those who generate the most publicity in making them, these sorts of fiascoes wouldn’t be a big deal. Businesses fail all the time. But if they are being funded by private investors, then that’s just business.

Link to Original Article: Venture Socialism?

By Robert Rapier

  1. By Rufus on January 16, 2012 at 5:56 am

    $300 Million? About 12 hours in Iraq.

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  2. By Edward Kerr on January 16, 2012 at 8:18 am

    Robert:
    This accurate analysis points out one of the glaring problems in the “energy field” (and not just in that venue) of ‘privatizing’ profits while making the inherent liabilities public. I see that especially in the nuclear industry. {a sweet gig if you can get it, I guess……….though NOT for the taxpayers footing the bills}… It occurs to me that this paradigm needs to change if we are to move more rapidly toward a sane and stable renewable energy future. How we might go about affecting that is a bit more than my old and ‘partially informed’ brain can deal with. Anyone have any good ideas on the subject??
    Thanks,
    Ed

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  3. By ben on January 16, 2012 at 8:24 am

    So aren’t we talking about Kleiner Perkins-types and the financial architecture of way too many of these deals that are routinely long on promises and short on results? As some describe the whole IPO strategy for bioenergy as the “sweepstakes,” it strikes me that most folks have tolerated the arrangement because there’s such a reluctance to “hamper the capital markets.” These pseudo-venturist actually count on the very critics of renewable energy subsidies to pull their punches when it comes down to sesnible regulatory and tax reform of securities markets. Hence, the status quo remains the order of the day and the marketplace limps along hobbled by expedient, short-run impulses rather than any commitment to developing strategic capabilites to address America’s energy security requirements well ahead of the next, big storm. In my humble opinion, RR has been a canary in the coal mine for renewables even as his unapologetic pragmatism insists on an acknowledgment that fossil fuels aren’t going anywhere anytime soon .

    We can either tilt at windmills–or simply keep erecting them knowing that if everyone does a little, no-one has to do a lot.

    Happy MLK Day.

    Ben

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  4. By carbonbridge on January 16, 2012 at 12:26 pm

    Robert Rapier said:

    I suppose that is an apt way to put it. These venture capitalists have found that they can defray their risks with tax dollars — and thus subject taxpayers to the risks from their projects — while they reap any potential rewards…  …Khosla believes he should be applauded for what he is doing…    …Add the fact that you risked my [taxpayer] money and damaged the credibility of the renewable fuels industry, and I believe I will withhold my applause.  Personally, I think taxpayers deserve to be paid back before any project associated with any of the Range Fuels backers is eligible for any more federal funds.


     

    RR:  Succinct comments and thank you for taking time to publicly share your opinions here and also with other media reporters who are interested in your thoughts about Range Fuels’ shuttered project – now being renamed as FREEDOM PINES BIOREFINERY.

    Suffice to say that this level of bad publicity is giving the whole biofuels industry a black eye – while most of the audience doesn’t really have a clue concerning the insider details of this firm’s foreclosure, public taxpayer funds utilized and fire-sale to another Khosla-backed biofuels entity.  The word ‘ethanol’ continues to mask many truths…  This endeavor simply is moving into another chapter where public dollars are still being used to possibly generate profits for private venture capital project owners.

    -Mark

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  5. By Joseph on January 16, 2012 at 1:28 pm

    Hence, the status quo remains the order of the day and the marketplace limps along hobbled by expedient, short-run impulses rather than any commitment to developing strategic capabilites to address America’s energy security requirements well ahead of the next, big storm.

    The status quo is precisely what impedes progress on America’s energy security requirements. The problem could be quite easily solved but corporate interests are lined up against it, mostly using a circular argument to maintain the problem for their own self interests.

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  6. By Marijan Pollak on January 16, 2012 at 4:00 pm

    If US would not learn fast from such debacles, they would be repeated. On the other hand I think some kind of commision is in order to check real results, as failure can be faked, just in order to cheaply acquire money received without obligation to return it, if there was such obligations at all.
    Next, US should open international contests for ideas, regardless if they are patented or not yet.
    Alternatively, some commision could be established to rewiev new ideas and inventions no matter how “impossible” they may seems to established science, as all should remember brothers Wright and building of the airoplane, in time when official science was resolute in their opinion that nothing heavier than air could fly. That in spite of fact that they could have seen the birds every day flying, and they are not lighter than air, are they?
    I invented and patented new kind of Solar Power stations that preserve land for agricultural use and could work 24/365 on or off Grid, without need for backup from other Power Stations, producing electricity cheaper than one from the coal. My new turbines for wind can use economicaly wind with 5m/sec. speed and produce same or greater quantity of electricity on at least 20 times more locations and with much greater density of instalations than in case of standard three bladed models, also far cheaper than from coal.
    Last but not least, those two kinds of Power Stations could be joined together into WindSolars, thus using same space and producing at same time electricity from sunshine and wind.
    But, problem is, I am from small and poor country in Europe, homeland of another great inventor who greatly helped US, Engineer Nikola Tesla. While I can start the production with just 100 thousand US $, I cannot get them, because nobody believe that something so good could exist, specially official science that revere formulas with obvious flaws and hold them infalible, because long way back they teached them this is not possible and nobody dared to question such statement or analyse it to see why. Investors want it all calculated and “Showel ready” before they would fund the project, that means they do not want to risk but to take the money from inventor. Fundations that have lower limit of 500 million Euro for investment promised “unlimited” funding once I bring them prototypes, calculations and Business plans. Unfortunately old formulas do not apply and nobody want to set up new ones, even if that would require just some transformations. Because official dogma is that it is NOT possible. Untill I made small prototype, they would just say I try to invent new Physic, now when I can show that it works, they ask me to prove it mathematically first.
    Actually all that would be necesary is to measure electricity produced at various wind speeds and calculate how much energy entered turbine and then calculate efficiency coefficient, and this ask for simple division of produce Watts of electricity with Wats of energy that entered turbine. That should be all proof they need to see the difference between my and standard models in us. They ask me money I cannot pay.
    Everybody is lamenting that it would be long time untill renewables can replace oil and coal.
    I have solution, but nobody hear me.
    I contacted US embassy in my country and they say it would belong to Department of Industry, but it was removed some 6 years back as non functional. I begged them to contact and inform Mr. Obama or at least Mr. Pickens, but I was told they cannot do it……..
    I hope someone reading this could help, I could explain everything and provide results of CFD simulation that indirectly confirm my explanations. I even have plans how to stop and normalize Global Warming and prevent Climate Change.
    Regards from Croatia, Europe!

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  7. By rrapier on January 16, 2012 at 5:08 pm

    Marijan Pollak said:

    If US would not learn fast from such debacles, they would be repeated.


     

    Welcome Marijan. The sad fact is that they have been repeated again and again, going back decades. We never learn from these mistakes. I doubt that we will learn our lesson this time. I think the granting agencies will be more cautious for a while, but eventually things will go back to treating tax dollars as free money to be thrown around to whoever tells the slickest stories.

    RR

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  8. By Benny BND Cole on January 16, 2012 at 5:18 pm

    I think the federal government may have a role to play in basic R&D. I am not some knee-jerk anti-government type.

    But when the feds start playing venture capitalist—almost certainly that is a bad idea. If an idea was good, why would not the well-heeled private sector finance it? Especially with oil at $100 a barrel?

    In truth, hardly any good idea goes unfinanced in energy right now, and a lot of mediocre ideas do get financed.

    Lots of private investors have lost money on energy schemes. Exxon is throwing money at Craig Venter and algae. It won’t work, but let Exxon shareholders pay for it, not me. Venter also said he could boost oil palm output many fold. Nada also.

    Sometimes, the right-wing is actually right. On energy, they often have a point (though they eschew gasoline taxes).

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  9. By Optimist on January 16, 2012 at 5:30 pm

    $300 Million? About 12 hours in Iraq.

    Yes, Einstein, in a parallel universe, where two wrongs make a right.

    In the real world, we are running out of money, not in spite of such foolish adventures as you mention, but because of it.

    The status quo is precisely what impedes progress on America’s energy security requirements. The problem could be quite easily solved but corporate interests are lined up against it, mostly using a circular argument to maintain the problem for their own self interests.

    Corporate interests? Not unless you are referring to ADM.

    The problem is pseudo-democracy giving undue political power to the farm states, and the perception that ethanol is good for those states. You know, those hardy individualists from the heartland, who can survive anything life throws at them… as long as Washington keeps sending the checks.

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  10. By Benny BND Cole on January 16, 2012 at 7:27 pm

    Oh my–I actually agree with Optimist. The most subsidized, molly-coddled, knock-kneed, enfeebled economy on earth is the USA rural countryside.

    Everything in Rural America is federally subsidized, from roads, to power systems, to water systems, to telephone services, to train services, to airports, to crops to ethanol. Rural states get back from DC about $1.50 for every dollar they send in. The big states get shortchanged.

    I favor a balanced budget and that every state get back roughly what is sends in to DC.

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  11. By Portia Beth on January 16, 2012 at 8:41 pm

    Whatever happened to ‘due diligence’ in the Govt sector? Didn’t the Govt use their lawyers? Who signed off these Range Fuels loans/grants in the first place? Somewhere there is a document with a signature on it belonging to a senior Govt employee and he/she should be in front of the firing line. No good blaming Khosla or LanzaTech for taking advantage of a good deal. If it was really that good why did the bidding stop at such a low price and why did the liquidators accept it? More questions here than answers – start loading a few more guns and start firing the bullets a bit wider!

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  12. By Rufus on January 17, 2012 at 7:27 am

    Unsubsidized Iowa Ethanol was selling for $2.12/gal on the CBOT, Friday.

    Front month on Gasoline from Subsidized Saudi Crude is $2.80, as we speak.

    And, we’re Paying Landowners NOT to Plant 30,000,000 Acres.

    And, standing by while the Republicans fight Voluntary Blending of E-15 to a standstill.

    We’re the stupidest species ever to inhabit Planet Earth.

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  13. By rrapier on January 17, 2012 at 1:58 pm

    Rufus said:

    Unsubsidized Iowa Ethanol was selling for $2.12/gal on the CBOT, Friday.


     

    One of the things I discuss in the book is how to increase the penetration of E85 in the Midwest. But it is going to be an uphill climb:

    Fuel Prices Climb as Subsidies Die

    Gas prices averaged $3.28 a gallon on Monday, according to AAA, up from
    $3.07 a year ago. E85 ethanol averaged $2.95. Since ethanol is less
    energy-dense than gasoline, however, the price when adjusted to equate
    to a regular gallon was $3.88 per gallon, according to USA Today.

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  14. By Benny BND Cole on January 17, 2012 at 2:23 pm

    And ethanol is mandated.

    Imagine if “urban liquid fuel” use was mandated by President Obama. We took urban wastes and converted into liquid fuel, and forced Americans to put it in their cars at 10 percent of volume used.

    The outrage! The screaming on the right! The socialism! Communism? Islama-commies like Obama!!!!

    But with corn and ethanol? That’s okay. You know, farmers are a good bunch and deserve perma-subsidies.

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  15. By Ben on January 17, 2012 at 4:18 pm

    At a recent visit with one of the most senior members of a Congressional appropriation subcommittee (with interest in energy programs), the subject of Freedom Pines Biorefinery came up. There’s a consensus that the public’s investment (in the site) merits some scrutiny. One hopes sensibility prevails here lest the feds take on a zealous interest in the officers. We wish these folks well in this silk purse from a sow’s ear. And we are ever mindful of the old axiom: No good deed goes unpunished. The jury remains out on this one. The lady has her work cut out.

    Ben

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  16. By Optimist on January 17, 2012 at 6:18 pm

    Whatever happened to ‘due diligence’ in the Govt sector? Didn’t the Govt use their lawyers? Who signed off these Range Fuels loans/grants in the first place? Somewhere there is a document with a signature on it belonging to a senior Govt employee and he/she should be in front of the firing line.

    True. But, as has been detailed elsewhere (see for example Public servants – more money, less accountability – Public anger is rising over realization that people in government can get away mostly unscathed with behavior that would get regular citizens in big trouble), government workers function in an alternate universe where benefits are guaranteed and accountability is unheard of. As the man says: Somehow, when government officials commit offenses we get euphemisms about conduct being beyond legal limits and improper behavior.

    Maybe this sounds familiar: Do we really want to provide powerful government agents with full immunity even when they break the law and misuse their power? Isn’t that situation the opposite of what our nation’s founders had in mind? It’s in totalitarian nations where officials are untouchable, and lowly citizens had better obey or else.

    No good blaming Khosla or LanzaTech for taking advantage of a good deal. If it was really that good why did the bidding stop at such a low price and why did the liquidators accept it?

    But just because government is failing, and in some cases spectacularly, doesn’t mean it’s OK for Mr. Khosla and associates to simply load up on our tax $$ and give us a nice speech about how they will (eventually) free us from the cluthes of Big Oil. As soon as they can figure out how to put the noose around our necks…

    We’re the stupidest species ever to inhabit Planet Earth.

    Well, some of us, anyway. Then again, we’re also the most intelligent. In a related discussion:

    Unsubsidized Iowa Ethanol was selling for $2.12/gal on the CBOT, Friday.

    Good news for Iowans, I guess. How come it has to be that cheap before they buy their own produce, Rufus. Or is it because they know how well ethanol works? Or doesn’t work.

    Front month on Gasoline from Subsidized Saudi Crude is $2.80, as we speak.

    Where’s the subsidy, Rufus? Or are you in favor of leaving Israel to fend for herself?

    And, we’re Paying Landowners NOT to Plant 30,000,000 Acres.

    I’ll spot you that one. Never can have enough farm subsidies, can we?

    And, standing by while the Republicans fight Voluntary Blending of E-15 to a standstill.

    Wow, they got something right! Always a first time, eh? Way to go, (undercover) pres. Boehner!

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  17. By Rufus on January 17, 2012 at 8:11 pm

    I am, absolutely, in favor of letting Israel “fend for herself.” I didn’t tell those Europeans to move to the Levant, and I have no desire to continue paying their rent, there.

    But, the subsidy I was referring to was the present deployment of 15,000 troops in Kuwait, and Two, sometimes 3, Carrier Groups keeping the Straits of Hormuz, and Indian Ocean safe for Oil Shipment. Not to mention the $800 Billion + we blew in the latest “War to Protect Gulf Oil.”

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  18. By ben on January 18, 2012 at 5:32 am

    A majority of Americans would support ending foreign assistance to Israel immediately since they support ending all foreign assistance. That is hardly anti-Israeli sentiment so much as it’s a manifestation of what we might be desribed as the Popeye Syndrome: “That’s alls I can stands, I stands no more.” Folks are fed up with subsidizing the pretensions of Washington politicians and the self-interested manipulations of those who whisper into Uncle Sam’s ear or otherwise plot against objectivite policy with the threat of recrimination. President Washington’s Farewell Address still rings true with average Americans and that should scare the hell out of those with loyalties that transcend our home-grown interests. Scarce resources–we are in massive debt–dictate that we revise current policies to reflect a new reality in an era of fiscal constraints. Let there be little doubt that adjustments are coming, but the argument can be made that such changes are a muddling that does not relect much in the way of leadership let alone courage.
    We can do much better. And we must.

    Ben

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  19. By Benny BND Cole on January 18, 2012 at 11:59 am

    Rufus–The cost of Iraqistan is north of $4 trillion, and I guess oil is at the heart of it. Our coprolitic and parasitic military-foreign policy complex is bankrupting the USA.

    BTW, the government can get out of energy start-ups.

    “By Sabrina Willmer Jan. 18 (Bloomberg) — Goldman Sachs Group Inc. is seeking $2 billion to $3.5 billion for its first dedicated energy private-equity fund, according to two prospective investors.”

    Sheesh, Goldman alone can raise billions for energy start-ups, etc. Let the private-sector do this.

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  20. By Optimist on January 18, 2012 at 4:39 pm

    But, the subsidy I was referring to was the present deployment of 15,000 troops in Kuwait, and Two, sometimes 3, Carrier Groups keeping the Straits of Hormuz, and Indian Ocean safe for Oil Shipment. Not to mention the $800 Billion + we blew in the latest “War to Protect Gulf Oil.”

    What? No mention of WMD? He’s about to hand them to Islamic terrorists for crying out loud!

    Oh, I’m sorry. That was just ten years ago…

    We can do much better. And we must.

    Sigh! Maybe in 2016?

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  21. By fg on January 20, 2012 at 4:16 am

    Uh? Did I read that right ?

    the recently announced foreclosure of Vinod Khosla venture Range Fuels, followed by the fire sale of Range Fuels’ assets to Vinod Khosla venture LanzaTech

     

    This is not a harm-length transaction. I hope the bankruptcy judge looked very hard into this one.

     

    What was Khosla’s initial investment in Range Fuels and how much did he pay for the assets? 

     

    Range Fuels would have failed anyway but that looks really bad. Big potential conflict of interest there between Khosla vs other investors (and the DoE, by the way).

     

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  22. By rrapier on January 23, 2012 at 2:13 am

    FG said:

    What was Khosla’s initial investment in Range Fuels and how much did he pay for the assets? 

     


     

    I don’t think Khosla has disclosed what he invested, but the total investment was over — and some reports say way over — $300 million. The assets were bought for $5 million.

    RR

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