Apr
21

Generous Government Help: Innovation Fatigue Lessons from A123 and K2

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A few years ago, K2 Energy, an innovative start-up with a breakthrough in smart batteries offering several performance advantages over existing battery technologies in the market, was on the verge of finally commercializing their technology. They had just won the support of significant investors, and over $20 million in funding was about to be received. Then came a nearly fatal blow from an unexpected source: government help. Not help to K2, but to their largest competitor, A123 Systems. Out of the blue came news that A123 was receiving a grant of $249 million as part of the Federal Government’s plan to stimulate green energy.

This help to a competitor did more than just strengthen the competition. Now that A123 has failed and filed for bankruptcy, we can also say that this case of government help was more than just a huge waste of money that harmed the economy in general. We can also say it was more than just another government-sponsored failure that threatened to transfer US technology to foreign nations (how much technology, if any, was given away in the now-on-hold A123 deal with China is unclear).

For K2, the help was nearly fatal because its own investors, when they saw the news of the massive government grant to A123, decided to abandon K2. They felt there was no way little K2 with $20-something million from investors could ever compete against A123 with that kind of government backing. K2’s investors pulled out and that would have been the end of the story for K2, were it not for extremely tenacious and brave founders and leaders who insisted on forging ahead on their own. K2 clung to life, resisting innovation fatigue, and now was emerged with leading products and a global presence. The future is bright again for this tenacious company. No thanks to help from the government.

Selective funding of individual companies by the government always sounds like a great idea, at least to those who feel good about “doing something” and being generous, and certainly to those who receive the funds. But there are almost always overlooked consequences to this giving, and when one considers who and how such decisions are made, it should be no surprise that the allocation of funds to companies is often a misallocation. The odds of a poor decision are high because the politicians and bureaucrats who make these decisions often lack the market and technical knowledge to pick the best and most promising companies to fund, and instead may be tempted to make decisions on the basis of political expediency, favoritism, or other reasons influenced by murky agendas. But even if the decision is brilliantly made with top-notch intelligence, it is still inevitably a distortion of the market. Favoring one company means pulling funds out of the economy, funds that could have been part of natural market growth in needed areas, and moving those funds artificially to a favored target. What is the justification for that? Sure, there’s always an excuse offered, but rarely a justification.

Favoring one target artificially can actually mean destroying several others unintentionally, especially small innovators without vast political connections who may have the best solutions for the future. When it comes to innovation, I recommend letting “natural” market forces pick the winners and losers. When bureaucrats do it, it’s often worse than just wasting the money that could have helped the economy naturally. It can be a lethal blow to those with the most promise.

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