Feb 23

Sarah Lacy Overestimates the Power of VC Money in the Energy Crisis for TechCrunch

I was going to write a comment on Sarah Lacy’s response to Thomas Friedman’s post on the bailout, but figured a post was warranted.

Sarah Lacy doesn’t seem to understand much about the auto industry. This post is detrimental to the clean energy movement and I wish she’d done more research before posting it.

In sum, Sarah Lacy thinks that if the government offers stimulus money to VCs in a sort of competition for someone to find the cleanest tech, that this is somehow “bailing out winners”. OK, let me get this straight: the U.S., which is falling desperately behind in creating clean energy cars behind countries like Japan, Germany, and even India, shouldn’t give money to promote innovation even though energy independence is key to our national defense and economy? Is that correct?

Sarah, I worked in the auto industry for three years. I made a lot of money in it because I came equipped with a lot of information. THE U.S. HAS MORE AT STAKE IN THE ENERGY RACE THAN JUST ABOUT ANYONE ELSE AND WE ARE FAILING MISERABLY. Yes, you see Intel chips, Google, Apple, and eBay all out of the U.S., but our auto industry is going to be extinct if we don’t do something.

In order to solve mass poverty in the Midwest, we have to bailout the big three to an extent. When you buy an American car, you pay more for the pension of a worker than you do the steel. With so many baby boomers retiring and the Big Three not having an answer to all of these promised pensions, you will have millions of people who worked their entire lives to receive absolutely no retirement. Should we just say “tough”? You picked a loser to work for, so you will just have to bag groceries at the supermarket to pay for your meds? It’s not my fault that the Big Three preferred to spend money on marketing over innovation, but I also understand the economic repercussions of millions of senior citizens being dropped on the curb to fend for themselves.

That being said, the Big Three are not innovating and smaller firms will have to be the innovators. However, there is a lot more infrastructure involved in clean energy than there is in IT, and small firms can’t handle this by themselves. There are pumps. Safety regulations. Clean vehicles are physical goods that must be disposed of. Anytime you involve a massive infrastructure change, you really do have to involve the government. And what Thomas Friedman was calling for was for VCs to come up with a sustainable way for Americans to drive which we would then support in our infrastructure.

Here are some facts that Friedman probably knew that Sarah Lacy apparently does not:
1.) Electric vehicles are currently not very profitable. I knew a manager at Toyota. The Prius is a loss leader for them and is quite expensive to produce. Without government subsidies, it would be unlikely to be on the roads at all. The only reason why this manager liked carrying it is because customers would come looking for a Prius, find out how expensive it was, and then buy a a Corolla. If you think any company would take on the massive overhead with the hope that these vehicles will be cheap to produce, you aren’t being very realistic. The American people stand to gain the most by having clean air and energy independence. These cars can eventually be profitable, but it’s going to take some investment initially and I don’t see enough of that coming from the private sector.

2.) The U.S. is currently exporting biodiesel to Germany, a government that does subsidize it because it promotes cleaner air and energy independence. How do I know this? I visited a biodiesel plant that actually did the exporting. Other countries see the value of bipassing the oil industry, which is capital rich but doesn’t actually employ a lot of people. Using alternate fuels means we can ignore corrupt governments like Saudi Arabia, Venezuela and Iraq. They will cease to be world players.

It is truly embarrassing how little the U.S. knows about diesel. The Europeans have been using it for years, and diesels can actually run on biodiesel blends (which can be made from waste and not corn like people often think) with no modifications to the engine whatsoever. It also has mechanics that are one step above a lawnmower and unlike electric cars, they are incredibly cheap and easy to fix.

3.) The government is often involved in clean energy–you just don’t see it. There are wind farms in North Dakota created by Native American tribes. They now supply enough energy for both the reservation and a nearby military base. And what paid for the infrastructure? Subsidies. The electric car is a direct result of legislation that California threatened which would have required automakers to improve gas mileage significantly. GM produced an electric car, and Honda created the Insight when they saw the GM electric car. GM scrapped their car, Honda didn’t. You will see more solar panels in Germany than you will in the U.S. Why? Because the German government subsidizes it. The U.S. government subsidizes energy saving windows and thermostats. Why? It’s in our collective best interests. If I said “Give me VC funding for my product because it’s in our collective best interest”, would I honestly get funding? Are you honestly that optimistic about the private sector?

Automakers are in the business of making money, and creating cars that better the environment and help solve a geopolitical clusterf**k will not make money without a serious boost. It does make me feel safer when I go to bed though. So I, as a taxpayer, am willing to invest in clean energy. Consider us, the taxpayers, a big venture capital firm who is looking to improve our quality of life. Money is money is money, and I guarantee ANY maker of clean energy cars will gladly take some stimulus money for their projects.

Before you go on and on about the Tesla, ask them how much of their cost is invested in their technology, and then figure out if you think the average American could actually afford that. Or how that person would actually go on a road trip when their car only goes 225 miles without a charge which takes 3.5 hours at least. The Tesla is still a bit of a toy. Sorry.

Some people (not all people, mind you) in Saudi Arabia and Egypt want to blow your brains out because you support a government that supports oppressive regimes in their countries. Alternate energy allows us to exit these relationships while cleaning the air that we consume. This is a geopolitical and environmental issue, so giving tax money to innovators is an investment, not a bailout.

So Sarah, stick with IT or do your homework please. Friedman is on to something.

  • Sherry

    Handing out money left and right will cure nothing, especially borrowed money.We need to look at our issues in the long term.The high cost of gas this past year did serious damage to our economy and society, yet Freddie and Fannie continue to get all the blame.The trickle down effect made everything cost more from increased production and shipping costs.Now that gas is back down the cost of everything else has not followed. After a brief reprieve OPEC is vowing to cut production until they get their 80-100. per barrel again. We need to invest in America becoming energy independent.Create cheap clean energy, green jobs, reduce our dependence on foreign oil.We should never allow others to have that much control over our economy. We are at their mercy and they have none. It would cost the equivalent of 60 cents per gallon to charge and drive an elec car. There is enough potential wind energy in the state of ND alone to power every car, truck and SUV in America if they had elec powertrains. WE have so much available, solar, wind, hybrid and plug in technologies. Invest in these, make them affordable to the average joe. Wake up America. I just read a great book called The Manhattan Project of 2009 Energy Independence Now by Jeff Wilson. There is no one single factor in our society that has such a huge impact on our economy than the cost of fuel. Wouldn’t that be a good place to begin to dig ourselves out of this mess we are in>?

  • http://michellesblog.net Michelle

    Sherry, who should invest in solar, wind, hybrid and plugin? Do you know how much capital it takes to support these? The American people are the biggest stakeholders and I don’t see VCs footing the infrastructure for them anytime soon.

    People somehow think that anything the government supports is just wasted money. It’s only wasted because we don’t demand that our politicians spend it wisely.

  • http://www.resortyoga.com Isabella Jones

    Thanks Michelle for your thoughts -I appreciate the common sense perspective. It’s nice to read something that not only makes sense but is productive and positive.I am passing this along.

    Isabella Joness last blog post..A Healthier “US”, post #1

  • Pingback: Nothing better than a good old fashion smackdown

  • http://www.daverea.com/ Dave

    Hi Michelle – I’ve only just recently begun watching your blog (as a consequence of my interest in Linux against Poverty) so I’m glad I came across this post.

    Your take on the business side of alternative fuels for transportation highlights an important truth (VCs are in business to make money, and bootstrapping alt energy in this country will take a longer time than they’ll tolerate to go cash-positive) but you need to adjust your stance that American car companies are “not innovating”, or “falling desperately behind” our foreign competitors. I work at the General Motors fuel cell powertrain R&D center in upstate NY, and I can assure you this is not the case.

    As I type this, GM is operating the largest fleet of zero-emission fuel cell (i.e. Hydrogen) powered vehicles in the world. The cars aren’t operating in protected little bubbles, under the careful supervision of engineers – they’re “in the wild”, keys-to-customers vehicles that are being driven by everyone from celebrities to average consumers. You can check it out at the Project Driveway web site. There are plenty of YouTube videos out there, too.

    I work with a phenomenally dedicated group of engineers, scientists and technicians who are moving as hard and fast as we possibly can to get mass-market fuel-cell powered vehicles onto showroom floors. I’d wager our operation doesn’t make a dime of profit for GM, but they fund us anyway – because the company’s leadership believes in our (and America’s) potential to take the automobile out of the environmental debate. Just as it did with gasoline infrastructure, and interstate highways, I believe our government has a role to play in funding a Hydrogen infrastructure, and in helping to fund innovation for the good of the public and the security of our nation – so we agree there.

    Every time I talk to people about fuel cells, I hear their frustration that the technology isn’t coming fast enough. There are a lot of factors that contribute to whether a technology can cut the mustard in the automotive world – reliability, efficiency, safety, durability, and dozens of others – and it’s a tall order for the industry to meet in a decade what it’s taken over a century to achieve with the internal combustion engine. There’s still plenty of work to do before fuel cells, all-electrics and other exotic alt-fuel vehicles will make it in the mass market, but to say that America’s engineers and industries aren’t doing enough to make that happen is to do a very large disservice to all those who are working tirelessly to get you behind the wheel with these technologies under the hood.

    Amelia Earhart once said, “Never interrupt someone doing something you said couldn’t be done.” If you’ll excuse me, I should probably get back to work now…

    (PS- Kudos on the blog! The web needs more quality bloggers who speak their minds, do their research and can actually write well!)

  • http://michellesblog.net Michelle

    Dave,

    Thank you for updating this post. It is always good to get news on what car makers are doing and I’m glad that GM is taking some proactive steps.

    However, I’m actually a bigger proponent of biodiesel than anything else. Unlike BMW, Mercedes, Volkswagen, and Suburu, no American car company is pursuing this route. Diesels are more reliable, last longer, are simpler mechanically and have been used for a century. 80/20 blends of diesel/biodiesels are already on the market and can run your diesel with no modifications to the engine. I’ve sold diesels. Unlike electric cars, there is actually profit margin in them.

    New diesels on the market are cleaner than ever. Please explain why American car companies are not pursuing technology that has been a staple in European markets for a century.

  • http://www.daverea.com/ Dave

    Hi Michelle – thanks for your followup.

    Unlike many in my field, I didn’t get my start working on fossil fuels in Detroit before transplanting to fuel cells – working for GM R&D was my first automotive job, but I’ve learned a lot about automotive engineering, and the car world, in the 3 years since. So I’ll give this my best shot!

    GM’s Opel and Vauxhall divisions actually have a vast array of diesel powerplants, and they’re wildly successful in Europe. Saab, too (a GM brand until this year) is a diesel (and biodiesel) pioneer. On several business trips to Germany and Spain, I’ve had diesel-powered rental cars, and they all got phenomenal fuel economy. Unfortunately, they’re not terribly clean, and therein lies the rub.

    The US has some of the most stringent passenger vehicle emissions laws in the world, and hardly any of the diesel engines used internationally will meet our standards for particulate output or NOx. Volkswagen is a notable exception, but their US diesels are tuned for emissions at the expense of their excellent fuel economy potential. Other companies have tried to meet US standards with complicated scrubbers and exhaust systems that would make Rube Goldberg proud – but they’ve all been too expensive and not reliable enough.

    Sadly, diesel as a passenger fuel is also pretty stigmatized here in the ‘States. GM and other carmakers tried – and failed – to popularize diesel in the 70s, and it’s had a bad name ever since. Nonetheless, the BMW you cut your teeth on has brought back a diesel-powered 5-series to the US (yay!) and I don’t think Mercedes has ever stopped selling their diesel-powered E-class (though you can’t buy or drive them in NY or CA).

    In order for diesel to succeed in the mainstream domestic auto market, I think two things need to happen: First, consumers need to realize that the diesels of today are nothing like those of three decades ago. They’re cleaner, quieter, smoother and more reliable. Second, the emissions laws need to be revamped to be less absolute. In engineering everything (and I mean everything) can be reduced to a tradeoff analysis, and our emissions laws refuse to scale with other important variables in the equation. If a 4-door sedan can get 50MPG (or more) on biodiesel, the emissions laws should cut it a break – because that fuel efficiency and biodiesel compatibility doesn’t come for free. (From Wikipedia: “…the 20–40% better fuel economy achieved by modern diesel-engined automobiles offsets the higher-per-litre emissions of greenhouse gases.” Hmm… Apparently not in as far as our congresscritters are concerned!)

    I should point out that diesel engines have not been in common use in automobiles “for a century” – the first automotive diesel demonstration was in 1930, and diesel didn’t find wide use (even in large trucks and heavy equipment) until the ’60s and ’70s. This was largely due to advances in manufacturing that produced engines that stayed reliable despite the high pressures and more-dramatic temperature cycling of diesel engines.

    Given my experiences with diesel in Europe, I’d love to own a diesel-powered car. A good friend and cycling buddy makes his own biodiesel here in upstate NY, and uses it to power his WV Jetta TDI – and you can bet if I had a diesel-powered car, I would be right there in the barn whipping the stuff up with him!

    Please, keep on advocating biodiesel – it’s amazing how many people see blogs (even little crumby ones like mine) and we need to spread the message of alternative transportation fuels as much as we can. But please be careful not to spread the wrong message about all the good progress that is being made on our side of the pond!

  • http://michellesblog.net Michelle

    Dave,

    It is true that popular vehicles like the Volkswagen Touareg TDI became hard to find when California and the Northeast banned new diesels from being imported in the middle of this decade due to NO2 emissions. But guess what? 2009 models are cleaner burning AND faster than ever. You can now purchase a 2009 Volkswagen Jetta TDI or a diesel BMW 335. 80/20 blends of diesel clean up this equation even more, and we can even start experimenting w 70/30 or even higher proportioned biodiesel blends.

    FYI, Rudolph Diesel first exhibited the diesel engine in 1900:
    http://www.cyberlipid.org/glycer/biodiesel.htm

    The U.S. auto industry has a lot of trust issues it would have to overcome to be vibrant again. People just don’t trust their reliability, and after watching American cars become virtually useless after 80,000 miles in some cases, I don’t either.

    In regards to hydrogen fuel cell, I am curious as to what we would have to do to equip fuel stations. How simple is the technology, since it would affect reliability?

    I’d also think $40 billion a year Exxon would have something to say about it (bastards).

  • http://www.daverea.com/ Dave

    There’s a big difference between demonstrating an engine (something they were doing with H2 Fuel Cells in 1892) and refining it (sorry, couldn’t resist the cheap pun) to the point it can be used on a large scale. But all semantics aside, I think we can agree that diesels (bio especially) have a lot of potential for the US, if only attitudes can get turned around. It wouldn’t be the first time that foreign marques stick their necks out, and the big three let them do the market testing, all the while incubating their own versions and watching to see how the competition is received.

    The type of fuel cells GM uses in cars, called PEM fuel cells, work on pure gaseous Hydrogen. But to equip a fueling station for them, you just need the same basic stuff as a gasoline station: a tank, a pump, and a dispenser. You can watch a fillup (albeit of one of our competitors’ vehicles) over here. The key difference is that the Hydrogen gas is stored at high pressure, so the equipment, the tank and the filler nozzle are different and more specialized.

    It costs about $1M to put in a H2 filling station. The GM team that analyzes well-to-wheels energy solutions determined that it would take about $20B to put a Hydrogen station within 10 miles of 80% of the US population. Every major city already has a Hydrogen production facility, and there’s enough Hydrogen produced in this country already to run millions of cars annually. Considering the new stimulus bill probably allocated at least $20B to research on how to milk cats, the government – with its sudden resurgence of interest in infrastructure – ought to be able to bankroll a few filling stations. Meanwhile, we’ve got to get the cars on the road!

    As you can see, it’s a bit of a chicken and egg problem. In my opinion, it might be a perfect candidate for some subtle encouragement from the public sector…

    Alright, time for bed… Cheers!

  • http://www.allthestuffido.com Jay B Sauceda

    Dave and Michelle, I agree with both of you. My only concern with the argument that the Big Three aren’t innovating is that in large part, besides skyrocketing fuel prices (due almost completely to speculators) falling sales of domestic vehicles has a lot to do with the consumer’s inability to find sufficient financing.

    I would definitely agree that there are a lot of folks who will never go back to driving Hummers and Suburbans, so the decision to market those types of vehicles over the last few years was a great blunder that relied heavily on the idea that America will for the foreseeable future continue to have dirt cheap energy prices. But with that in mind, I know of a lot of people who have repeatedly mentioned considering the purchase of more economically sized domestic vehicles recently and simple can’t due to the financing issues.

    Be it a big or small company, short term financing is what really greases the wheels of our economy. This is the big hold up in our system that is crippling many companies, and not just the Big 3 auto makers.

    It can definitely be argued that throwing money at 3 companies who have had sustained losses for the last few quarters without proof that they can reverse those trends is a mistake. But I would also argue that throwing money at an industry that funds a company like Facebook with a 40+billion dollar valuation without concrete proof of its value is also risky business.

    It boils down to the simple idea that throwing money at anything doesn’t solve any of its problems. It just helps the people who have to worry about them sleep a little more easily for a few more months.

    No single industry will pull us out of the downward spiral that our economy is in and using the Big 3 as a scapegoat doesn’t help us either. There are a lot of people in a lot of industries at fault for our crisis. Ultimately to best solve our problem we need the most people employed in the most number of places. With improved consumer confidence comes improved consumer spending. With improved consumer spending you find improved business profits. With improved profits you find banks that aren’t freakin the hell out. When they’re not freakin the hell out, people can get back to work and promoting their big IT or Auto ideas. Innovation is what our country does best. There’s just a big kink in the hose that fills the capital pool right now. Until we can get the kink out, everyone is gonna hurt regardless of industry.

    Jay B Saucedas last blog post..Rockers…

  • http://michellesblog.net Michelle

    Jay B,

    You are 100% about financing. With as many people as we have defaulting on loans and worrying about depreciating housing costs, I don’t see a lot of people buying cars regardless of the availability of loans. I hope the U.S. takes this slow time to reevaluate its priorities and go back to its roots.

    As much as you say the U.S. is innovative, the last cars the U.S. has produced have been less than innovative. This is a country that created the Ford GT, which back in the day, destroyed the Ferrari. We have to go back and focus on engineering the way we used to instead of always looking at the bottom line. It’s the only way we’ll survive globalization.

  • Zoujiaofang