Tim Draper keynote at OnDC ’09–“Land of the free, home of the brave”

How free are we?

The government spends 40% of what we make.

We spend more for our average prisoner than for an average student.

Going through the airports, almost every time I get the probe.

Some construction permits take more than 6 years.

How brave are we?

There are more lawyers per worker than any other country. More bureaucrats per worker than any other country.

Average salary for a public worker is higher than for a private worker now.

Speedy trials? He shows picture of OJ Simpson.

Are we still free to own guns?

We’ve become very politically correct, except maybe me. But I’ve always thought I was correct politically.

How happy are we?

Do we all fit into a mold and become automatons?

Thoughts:

  • Pay increases for bureaucrats based on GDP growth, not cpi. (Right now, they are incentivized to create inflation, not GDP growth.)
  • Drop the border with Canada. They have oil. (And they want to do this.)
  • If a department can do the job with less, give them raises.
  • If a department fails, eliminate it.
  • Free trade.
  • Right to work. (Right to work states are outperforming the rest of the union by quite a bit.)
  • Leave venture capital alone. It works.

All these were VC funded: copier, semiconductors, PCs, Skype, etc, etc.

Also, solar panels, Electric cars, space launches, wind energy, genetics, etc, etc

The “Draper Wave” shows that the recessions are all part of an economic cycle. VCs create a bunch of jobs, new innovations, the market gets excited, and inflated, then the market comes crashing down. The Private Equity business comes in, buys companies, fires half their workforce. (He shows how VC funds create surges in innovation and jobs, then private equity comes in and fires lots of people, creating another recession.)

It’s time for another VC resurgence.

Viral marketing works. Hotmail has now reached 500,000,000 people. All web based email has reached about a billion. Skype has reached a billion even faster.

It’s a global game now.

The game has changed for governments too. Each government used to govern a geographic territory. Now we have competitive governance. Better communication, perfect information, simplified supply chains. Governmens have to compete for great businesses, for capital, for entrepreneurs.

As he goes around the world, he notices how governments around the world are doing a great job attracting capital and entrepreneurs. The U.S. is not. The U.S. is adding more difficulty, more regulation for entrepreneurs. Imagine if the world completely opened up, and you could pick and choose. You might pick Chile’s privatized social security, you’d pick something about Singapore, US freedom of speech, maybe Sweden’s ______.

He looked at the government spending chart at usgovernmentspending.com. It’s gone from 7 1/2% to over 40% in the past 100 years. That may be a good thing, but I want to see whether it really is.

He showed charts of government spending per capita (normalized per capita) In 1820, India, US and China were all dirt poor. He has charted spending over time, and he has determined that US GDP growth is hurt by the increase in government spending. He can show this correlation.

He spoke with SBIC head Seth Greene today about the government’s plans to invest in Infrastructure, Market, CleanTech. The government can:

  • make us secure (Tesla loan example)
  • create the market platform that works–Sarbox after 10 public years
  • encourage good behavior–such as green incentives

His fund used to tell entrepreneurs that if in five years they could do $20 million in revenue and $3 million in profits they could go public; but now, with Sarbanes Oxley, that entire $3 million in profits would be taken up by compliance, so the entrepeneurs don’t go public.

He thinks Sarbanes Oxley should only apply to companies of a certain size and only after they’ve been public for 10 years.

What the government should not do:

  • Do not invest equity capital
  • Do not regulate/tax venture capital
  • Do not scrutinize entrepreneurs
  • Do not hire and spend

Government does a great job of identifying problems: energy, security, health care, traffic, polution. I understand there is more traffic here (in DC) since the stimulus because everyone is coming here.

Business Solves problems:

  • Energy (EnerNoc, Konarka, GreenFuel)
  • Security (Lumena, SafeView, Tesla)
  • Health Care (Athenahealth, Epocrates)
  • Traffic, Pollution (Skype, Hotmail, Meebo)
  • Poverty (SugarCRM, SocialText, World of Good)
  • Education (Baiku, Google)

He ran though a number of companies that are solving big problems in energy. Oasys does water purification. Tesla lets you go very fast (0-60 faster than a gas car) and this is the wave of the future. When you drive an electric car past a gas station you realize you are driving by a dinosaur. (And gas does come from dinosaurs, so this is just the circle of life.)

Reva is the India version of the Tesla. I drove one around.

Technology just continues to march on. Think of all the inventions in the past 50 years. Airplane, etc.

Imagine all the inventions that may be coming. Clean air and water. Near infinite energy supply. Green buildings. Batteries that last. Self-navigation electric cars. Education holodeck. Space travel. Immersive 3-D entertainment. Genetic disease prediction. Cure for heart disease. Cures for cancer, aids and malaria. Non-invasive surgery and security. Near thought communications. (I have moved a mouse cursor with just my mind, with a new technology.) New life forms. Food drop.

Liquidity is a problem. Mark to market from FASB 157 is a problem for our economy.

We have set up something called XChange, to provide liquidiy.

My daughter said, “everyone was rich before, and now everyone is poor. What happened?” I had to think about it for a minute, and then said, it’s all about the deal. If we make deals with each other, everyone is better off. (He walked through an example of lettuce, tomato, beef farmer, etc, cooperating to make a perfect cheeseburger)

We are all better off if we are freely able to trade with one another. Let’s say there is a big wall between us and China. Our semiconductor would be a slide-rule. Except for Micron there are no memory semiconductors here in the U.S. We’d have no flat screens. Without China, there’s no memory. Without computers, there’s no software. Without software, there’s no new media. (We’d go back to hieroglyphics).

The biggest problem we have is friction to free trade. Tariffcs, customs, quotas, import duties, licenses, standards, subsidies. When you see these reported in the press, you know someone is trying to hinder free trade.

This is what I call the Sucking Sound of Socialism:

Good Words and Bad Words

  • When you hear Entitlement, think Opportunity.
  • When you hear Rights, think Earnings.
  • Government Intervention, think Business Solution.
  • Bailout, think “let losers die.”
  • Regulation, think Freedom.
  • Patriotism->Protection->Poverty think “Free Trade.”

Audience question about XChange, the private stock market. He said, this is only for qualified institutional buyers, so it doesn’t affect the individual investor, unless the government saw that it was working well and they changed their mind. This is a way a company can be traded among qualified institutions, it helps the entrepreneur who wants to buy a house, but can’t get the company public. It helps VCs, because we have a lot of portfolio companies that can’t get liquid yet, and our investors need some liquidity.

Sarbanes Oxley rules are all designed to protect the individual investor, the widows, the orphans, to protect them from themselves, I guess. So the XChange would only work for institutional investors. But I believe personally that individual investors should be free to do what they want.

Audience question about the new Tesla. Tim said the upcoming Tesla will be $40-80k. The high end will have a 300 mile range, the low end will be 120 miles. I see this as being the Great American Car. I see Tesla as the next GM. It’s very exciting. If you have new technology, Tesla can incorporate it in a matter of months where it may have taken GM five years. You’ll see more computerized things in a car, like iPod connections, computer stuff, etc.

Liveblogging: OnDC ’09 Next Generation Education

Moderator: Saad Khan, Partner CMEA Ventures

Panelists: Jose Ferreira, CEO Knewton; Jeff Shelstad, CEO Flat World Knowledge (new type of publisher that uses open source concepts for textbooks); Brian Jones, Senior Counsel, Dow Lohnes LLC (former general counsel of US Dept of Education.)

Saad. Presumption is that education needs to be reformed. What are the problems?

Jose. Internet and computing has revolutionized other industries, it is inevitable that it will revolutionize education also. It will solve the distribution problem. Makes distribution of content almost free. The best professor at HBS could only reach so many people. Koby Bryant is paid so much because he can entertain so many.

Brian. There is a political dimension to the K12 system that you don’t always see in post-secondary. Enormous sums of money coming into education from the stimulus bill, to improve student outcomes and teacher effectiveness. There’s a real fertile ground there. That is exciting. Particularly the amount of money the Federal government is investing.

Jeff. Coming out of the print side, the internet has already had a distruptive impact on textbook industry. Students can find alternatives to textbooks. We think textbooks needs to be redefined, built differently. He (Knewton) is taking one tact; we’re taking another. Perhaps we’ll merge eventually.

Jose. At local CVS there are 30 types of toothpaste. Yet, we standardize education for everyone. What we do at Knewton is we personalize it. We serve it to students based on what they need–sentences, paragraphs, pictures, videos, games. Depending on how you learn. And how you retain. Hyper personalized learning will power this flood of content on the internet which I think is coming.

Jeff. Flat World — we are trying to transfer the power of what takes place in the classroom to the teacher, so make the book match your course, rather than vice versa. To the student, we’ll deliver the content in any format they want at a fair price.

Saad. SRI report looked at effectiveness of online education vs. in classroom personal teaching. Online was more effective. Are you seeing that?

Brian. The post-secondary sector has shown us because of diversity of providers, is emphasis on different types of students and different modes of learning. The rise of the for-profit school sector is that it is serving non-traditional students. The for-profit sector has led the way in online delivery of content. We have students that work during the day, so classroom mode doesn’t work for them. K12 is a late comer to that, but we are seeing an emphasis on outcomes and a new openness to these alternatives. We have a competely online charter school in DC. It was controversial. Some people said, aren’t they really home schooled, and aren’t we giving taxpayer money to home schoolers? But what is coming out is that this mode of education is working for these kids. For whatever reason. Engaged parents. Maybe parents have religious reasons for not wanting their kids to participate in traditional schools. But the outcomes are positive. The more we focus on the true deliverable and the outcome of the technology, you’ll see door swing open and resources will follow.

Jeff. I got an online degree from Duke. They were an early pioneer in part off-campus part on-campus. In an online environment, the important of the instructor is actually raised. I had some poor expeiences in the 16 courses I took at Duke, some great experiences. Depended on the instructor. I think students like the flexibility of online, but I”m not sure I believe the report. I still the faculty member is vital in this process.

Jose. A couple interesting things about the report. Most online eduation has been astonishingly bad. U of Phoenix is big in online. My former employer Kaplan is in this too. Online is the future of this company. (And of the Wash Post). Their model is assisted self study online education. Attend a chat room with a mediocre teacher once a week. In 10-15 years that won’t be the model. It will be, you want to learn German? In 8th grade. You’ll go online and get one of the best teachers in the country, a dynamic teacher from Exeter. There will be thousands of courses.

Saad. Megastudy out of Korea, is a public company. They got the best Korean teachers, syndicated their content, delivered it oline, shared revenue with teachers. Hundreds of millions in EBITDA. They turned some teachers into millionaires. Gave them the Kobe Bryant audience you mentioned.

Jose. In 2000 there were 45,000 online German students in the country, now there are something like 2 million. If a parent wants the child to learn Chinese and the school doesn’t offer it, it won’t matter. Any course will be available. That movement will transform education in this country. Any elective.

[I just followed Knewton and Flat Work Knowledge on Twitter.]

Brian. Higher education in this country is very high-brow; they don’t like outsiders, particularly those seeking a profit, coming in to do things differently. There are 4,000 charter schools in the country. That is where you are finding openness to this kind of technology. We are the first charter school authorizer in the country–we hired the Boston Consulting Group. We built a technology infrastructure. We have 99 charter schools in the city. Hospitality high school. Residential school serving low income kids. Our infrastructure lets us compare schools so consumers can see what school would work best for them–plus mission specific criteria, so the hospitality high school gets measured on unique criteria as well. I’m surprised we were the first to build this kind of technology to assess outcomes.

Saad. Assessment is a good thing to look at. There used to be zero transparency in advertising. Feels like there should be a big opportunity to get transparency in student performance, across schools, etc. Are you seeing a lot of assessment technology?

Jeff. Yes, in higher ed, it’s a significant movement. To deliver assignments through a platform, and feed a professors gradebook, is a service the industry moving towards. It’s happening. Some great platforms out there. A big movement for all institutions, faculty and students.

Jose. You can’t built personalization without assessment, very granular, very discreet (self-contained), and no hiding results. I joked with my investors–if our adaptive learning platform works we’ll have data to show it. If it fails, we should go out of business. A typical Kaplan course will raise GMAT by 35 points. We have a 50 points guarantee. We give virtually no money back. We are measuring 100 points on average. We take text book content, like we took text prep. So the reporting shows how good the class was doing on each concept. The teacher might get an email showing that the students as a whole are struggling with certain concepts.

Brian. In the $4.5 billion that DOE is distributing to states in the race to the top, the state has to be able to assess a teacher in part based on their students’ achievement. The kind of technology Jose is talking about is essential in moving things along. Some states make it difficult to evaluate teachers. At the K-12 level there are infrastructure things that need to be addressed. School districts and states are going to have to change or get left behind. We have to realize, though, there is some resistance there.

Saad. What is the most helpful thing the government could do to help you be successful as you push boundaries of education technology?

Jeff. Eliminate tender? (laughed) If you take UMass online, a competitor to U of Phoenix, it has been successful. University of Illinois launched and failed. Why was UMass successful, but Illinois wasn’t? That’s a classic case study. There are incentives and infrastructure issues.

Jose. Govt should put more computers in schools. I never even thought about getting government money, so I raised venture capital. If nation’s best and brightest had been going into education and not finance during the last 10-15 years, we probably would have solved the problems already. There has to be incentive for top minds to go into this field.

Audience question: can a young person today apply themselves without a formal education and get the skills you need to succeed? (Like Bill Gates did?)

Brian. Most of the research is pretty clear that on average, the more education you have, the better off you will be in the marketplace. You cite Bill Gates as an example. You also have Michael Jordan and Tiger Woods–but you don’t necessarily want to use those examples and have kids think they can succeed without education, even though a few do.

Jeff. Big publishers are very scared of the electronic world. They will move very slow in terms of transparency. They want to control everything.

Jose. I talk to the big publishers all the time. Some are changing. Oxford (sic) is thinking of this.

Jeff. Five companies control 85% of the market.

Audience–I have no doubt adaptive learning will create better test scores, but what you learned at Harvard, you didn’t just learn from a professor or a textbook. You learned it from 80 other people in your core. How will that change by technology?

Jose. I believe schools in the future will have fewer teachers, 5,000 electives, but still a blended model. You’ll still have kids in schools, being socialized, learning from other kids. Lets say 5 years down the road we have OUP’s content. Maybe we’ll have 10 million kids that do geography that learned geography. The 10 million and 1th kid comes; our system will query, which kids previously had this problem, and also, what learning style did that kid have? We’ll find out what they did next, and which way they learned it. So then we can produce that same learning experience — anonymously — and use it to power the learn of one kid, on one night, on one concept.

Audience. I’m not questioning the value of the system. But the concept of a PhD is to have a thought that no one really had before. [She seemed to care more about the personal interaction of students than the panelists.]

Brian. We have a program that has 85% of their program online, but one day a week they come to brick & mortar. They can also engage in extra curricular activities.

Audience comment: I’m looking for people that can learn how to provide solutions in very complex situations. I find that very bright young people cannot communicate. They have a ton of information. But they can’t connect the knowledge to reality. The problem with the US educational system, you do not teach students how to learn. I see technology being helpful to create learning paths for individuals, and accomodate applying knowledge. I think you are missing providing them with process that can be tailored to individuals and groups.

Audience question. Every new technology comes with evangelists (I’m one) promising that it will change everything. Why now? Why is this different?

Brian. Now, because there has been a culture shift in education that is undeniable. There is a focus on outcomes. That is different. It began in the 1990s. We built on it since 2001. I’m talking K-12 here. It was led by policy makers, but the technology has enabled it. Since the 60s billions have been spend on education, but test scores are lower. It’s bi-partisan now. Some hold on to the status quo. Look at how teachers unions have responded to Pres. Obama’s plans to assess teachers–they whined at first but are coming around.

Saad. I’ll add that technology lets you go direct to the student. There is the class, where the channel is the school. But social networks and the web let you go directly to the student.

Jeff. I think it’s a great question. The textbook wasn’t supposed to exist in 2001 when I was in the industry in 1996. The difference, jumping on Saad’s point, but I think it’s going to be slow still, but the consumer is more powerful today than it was when I was at Prentice Hall, but it will be slower than we all think.

LiveBlogging: Financial Reform Roundtable at OnDC ’09

Moderator: Jonathan Axelrad, Partner, Goodwin Procter

Hale Boggs, Partner, Manatt, Phelps & Philips, LLC

Dixon Doll, General Partner, DCM. Venture industry for 25 years. Menlo Park. Beijing. Tokyo. Focus on early stage technology and cleantech. I just served for a year as chairman of National Venture Capital Association here in DC.

Paul Thanos, director Financial Services at Department of Commerce. We focus on policy advocacy and analysis. Working with banks, insurance companies. We also do some work with VC and entrpreneurship.

Bob McCooey, SVP, Nasdaq. With IPO market the way it is now, I’m glad I have time. We are seeing a more robust market.

Jonathan. What is the most important thing the federal government can do right now?

Dixon. I’ll get to that, but before that, let me refer you to a 4-point plan that I’ve distributed. We are debasing the currency by 20% – 1.4 trillion – which is the worst since 1945. I’ve met the person in China in charge of investing all their surplus. If we don’t get our deficits under control, we could precipitate another crisis if China decides not to continue to invest in us.

US Venture Capital industry is the envy of the world. China is copying our model. We’ve created 12.1 million jobs. Growth rate of venture companies is 3x others. 92% of job creation happens after IPOs, which is why we need Bob (Nasdaq) and the other exchanges. 1 of 3 Americans have been impacted in quality of life from a life sciences company.

NCVA has a 4-pillar plan to restore liquidity in the US Venture Capital industry. 1. Taxation – R&D tax credits; keep capital gains where they are. If we aren’t capital friendly to entrepreneurs, they’ll go elsewhere. We’re in a global war for talent. 2. Regulation: I agreed with previous panelist that we need the government to stay out of the way. We hope venture capital can continue to be excluded from regulatory reform. We’d like government to streamline Sarbanes-Oxley. We’re not calling for the repeal of it, but it should be less expensive for companies to go public. I agreed with the gentleman from the White House who said the government should fund DARPA, NSF, etc. I got a 4-year scholarship to get my Ph.D. One reason we have fallen behind in math and science is that that government support has somewhat gone away.

Jonathan. What is the government doing to address the types of concerns we all have?

Paul. Unemployment of 9.8%. Biggest economic problem we are facing right now. VCs and entrepreneurs are important in creating jobs. Partly as a result of that, we are creating mechanisms to make it easier for VCs and entrepreneurs to give us policy input. What would make it easier for entrepreneurs? Creation of a innovation policy council recently. Commerce Dept has commercial officers in 100 countries. Part of their job is to help US companies go global, penetrate foreign markets, become more competitive. We have worked hard to make sure VC portfolio companies are aware of this service. We want the resources of the commerce department are leveraged in the best ways possible.

Jonathan. Hale, you are a private fund specialist. There are discussions on increasing regulatory burdens on all kinds of investment funds. Reporting requirements. Are these good proposals?

Hale. A lot of Californians here–not to watch the Redskins. So AlwaysOn put a conference on here. Some are here to get a piece of the federal money. That’s all to the good. The other reason we are here is the regulatory issues. Nothing comes without a price. We’ve mentioned Sarbanes-Oxley, which followed Enron and Worldcom, etc. The folks I work with, VCs, investment bankers, CEOs — they would say these rules have deterred good people from joining their firms, have not been helpful. If there is signifcant and onerous investment reporting, it could stifle the private equity folks from doing what they do. If VC firms with 10-15 employees have to hire a compliance officer, it’s hard to see how that kind of regulation would achieve what it is trying to achieve. The regulation of placement agents would be a regulatory overreaction. There have been some abuses with pay-to-play schemes that involve kickbacks. But what is being proposed is disallowing the use of placement agents–that’s a sledgehammer and not a scalple. Placement agents play a role. Smaller funds need these services to raise their money.

Bob. You can’t come here, listen to a bunch of panels, and go back to your lives and think things will happen with others. Whether you are in a VC fund or an entrepreneur, your voice has to be heard. Local representatives. SEC. Anyone crafting legislation. If they don’t hear from you, they’ll write it and pass it without enough input. And it won’t be affective. We have invited some CEOs of Nasdaq companies who came to meet with their representatives. We have people in Congress who voted for Sarbanes Oxley and still don’t know what it does.

Dixon. The people who draft the bills are well intentioned, but Sarbanes Oxley didn’t prevent the Madoff scam and other pyramid schemes. Small companies up to $75 million in revenue get an exemption. That’s ridiculous. It should be 10x higher than that. The amount of money you have to spend is amazing. IPOs went to zero — first time in 35 years. Five years ago my colleague asked Spitzer, “doesn’t it bother you that many Nasdaq companies have been orphaned” with the partition between bankers and analysts. He said, it was an unintended consequence and blew it off.

Bob. 600 of our Nasdaq companies had no research at all on them since the banking settlements — but we have teamed up with Morningstar and Nasdaq has paid for research to be done on all of them.

OpenTable and other tech companies are coming to market. In past 21 days, there have been 30 banker bake-offs for technology companies.

Dixon. I’m going to one tomorrow.

Bob. We see IPOs coming back; we have built out services for these companies. As you look at exchanges today, we have been successful because we provide investor relations, corporate governance and other services. There needs to be reform in the marketplace. Our customers have demanded more so we’ve been providing more to them.

Jonathan. This panel is not championing additional regulation. A lot of observers look at the mess we are in, and think it is the fault of lack of regulation. Is there any regulation that should be addressed?

Dixon. I don’t believe there is any from the standpoint of the venture industry. Back in 1978 I met the chairman of the venture association who cited a study that showed almost no IPOs. They came back and recommended the pension laws be modified. This was an example of how relaxing regulation played a positive role. This allowed them to invest in more risky, emerging growth companies. That basically turned the tide and got us out of the hole we were in back them. That led to a bubble that ended in 1983 when PCs and disk drive companies were hot. Led to more bubbles, and cycles. We don’t use leverage. If our entire industry went out of business, it would be a speck on the back of an elephant. We don’t take retail investors. So there is no need for protection for circumstances that don’t exist.

Bob. The problem right now is the philosophy is re-regulatory environment in Washington, where what we need is de-regulation.

Paul. We need an empowered systemic risk regulator. With AIG, it was insurance and financial services. It wasn’t clear who was regulating them. VCs are not a systemic risk problem.

Hale. Things that incentivize good behavior, co-investment funds for technologies that are deemed to be for the public good. That’s the kind of regulation that is meaningful. I have no problems with regulations or requirements attached to that kind of investment. But regulation for the sake of regulation — the idea of a systemic risk regulator may sound good, but how does it work?

Jonathan. The VC operating rules, which enabled US pension funds to start investing in venture capital, were truly a game changer. Those same pension funds and endowments, which have been the fixed funds behind VCs, are finding themselves unable to invest in these same funds, for various reasons. Some have too much in alternative asset classes, compared to their overall value, which is dropped. Is this a time when the government should take affirmative steps to re-energize the flow of capital in the venture industry? Should governments directly invest in VC funds?

Dixon. I don’t think so. I’d be shocked if institutions like Harvard and Stanford will make the same mistakes again. There should be some alternative liquidity. The history of involvement of government investment in venture capital was ugly. In China, all the municipalities wanted to pool their money and replicate the US venture model, but the managers there didn’t understand the model. Government makes a poor venture capitalist. But it can be a good support for VC if it understands its proper role.

Jonathan. Paul, we’ve all observed that regulation is being implemented by a vast patchwork of federal agencies. This creates a lot of cracks, into which some like financial industry, can fall. Should there be a single regulator?

Paul. It’s a good question and provocative. UK has a single regulator. FSA. There are many arguments that it operates more efficiently than our system. But you can also say they had similar problems to what we had here. The reality is that here in the US it is difficult or impossible to eliminate any of the regulators here. We are not going in that direction. We are going towards transparency, efficiency. It will play out over the next several months.

Dixon. The world is going global and talent is going where they have the best environment, tax treatment, etc.

Liveblogging OnDC — David Boaz, EVP Cato Institute

Entrepreneurism and free markets work. Johann Norberg from Sweden at Cato institute says entrepreneur is a hero. A hero makes the world better for people. That’s what entrepreneurs need. They need freedom to create and freedom for consumers to choose. There are obstacles to that. Corruption is the biggest obstacle in many countries. Because we eliminated more obstacles than anyone else, we led the world in prosperity. For my lifetime, half the world was free, half was socialist.

During my life, many people thought that planning could create more wealth than freedom and free market. But over time it became clear by looking at all the data and all the comparisons, that central planning doesn’t work as well. Look at North Korea vs. South Korea at night. Half is lighted. Half is not.

Free markets still face challenges from interventions of all sorts, cronyism, corruption. We’ve always had some elements of this. In the past 13 months they’ve gotten pretty painful here. Bailouts, TARP, Health care takeover. Frenzy of special interest lobbying. Obama complained to George Stephanopolous on TV a couple weeks ago that some people think he’s taking over the whole economy. He’s not. Just health care, finance, education, automotive, etc, etc.

This what is Nobel prize winner Hayek called “the fatal conceit.” The idea that smart people can make better decisions than consumers in the market.

I don’t think Obama really wants to nationalize the means of production. He just wants to use government money and regulations to expand political control over the economy. The more this happens, the more lobbying will occur. It won’t surprise anyone that lobbying expenditures are rising. All of this investment in lobbying reflects what Willy Sutton said when asked why he robbed banks, “that’s where the money is.” Why do companies lobby Washington, “because that’s where the money is.”

Ralph Nader organization: “the amount spent on lobbying reflects how much the government intervenes in the economy.”

Hayek explained this in “The Road to Serfdom”:

As the coercive power of the state will alone decide who is to have what, the only power worth having will be a share in the exercise of this directing ….

If you want money flowing to the companies that have powerful lobbyists and good congresssmen, maybe this is a good idea, but we must realize that politicians rather than consumers will pick winners and losers.

The $700 billion TARP was mostly cooked up in secret, but no sooner was it out than lobbyists flooded the hill. By the time it passed it included provisions for Puerto Rico’s rum producers, makers of children’s wooden arrows, things in Nancy’s Pelosi’s district, all kinds of pork projects. Official story is always that every project that is funded goes through a federal procurement process, but that isn’t true.

The truth is that when you lay out a picnic, you get ants. And this is the biggest picnic ever laid out.

The Washington Post is doing a pretty good job of telling us what is happening. For example, at JP Morgan Chase [I missed what he said about them.] Citigroup’s general counsel is now working in DC, not in New York. Chairman of Blackrock used to talk to federal officials a couple times a month. Now he talks to them everday.

The problem is not just wasteful spenidng. It’s the intrustion of politics into business decisions. This is what has wrecked economies all over the world.

What do you get? The President firing the CEO of GM. Members of Congress pressuring GM to keep inefficient dealers open. Every CEO has a board, plus 536 bosses in Washington.

This creeping hand didn’t start in the past year. The biggest entrepreneurial success in the country may have been Microsoft. But in our modern politicized economy, some call it the parasite economy, no good deed goes unpunished for long. The government started launching investigations of monopoly, some competitors joined the attack. I don’t like how the govt lured Microsoft into this. Washington people started to threaten Microsoft that they had to play the Washington game. So in 1995 Microsoft hired a lobbying firm, hired a PR firm, got involved in trade associations. In 1998, Bill Gates wrote, “it’s been a year since I’ve been in DC. I think I’m going to making the trip a lot more.” I think that is a tragedy. Our most important asset is human talent. And now some portion of the brains at Microsoft is spent, not on pleasing consumers, but on getting on the right side of Washington.

Same story with Google. Again, some nerdy brililant engineers invented a product that revolutionized our lives. I can’t imagine doing research without Google. I couldn’t do my job with Google Desktop search. And some of us appreciate it. And others don’t like to see a company becoming indispensable. Google got the same kind of treatment Microsoft did. Now both companies have to compete in courts, halls of congress, halls of Federal Trade Commission and Justice Department.

Two hunters in the woods see a bear coming. One starts putting on tennis shoes. “You can’t outrun a bear.” “I don’t have to, I just have to outrun you.”

We are not yet at the level of Russia. “Because the government plays such an immense role in their economy litle can be done without bribing officials.”

I did wince when I saw that Mr. Gao (sic) from China said that the US doesn’t have a Chinese version of socialism, but “socialism with American characteristics.”

Sales of Atlas Shrugged and Road To Serfdom have been soaring.

Maybe mine is an anti-keynote addreess. I see titles here like “Tapping The Trillions”.  I wish the March of Entrepreneurs to Washington was to ask the Federal Government to stop doing all that they are doing.

There are “Political entrepreneurs” who make money by gaining influence in Washington. There are “Market entrepreneurs” who make money by selling products in the consumer marketplace.

Market entrepreneurs are the good guys. Too many people come to DC to become political enterprenreurs.

He said the term Laissez Faire originated in like 1680 in a conversation between Colbert (sic) and Ms. Lejandre (sic), the mercantilist minister asked how the French state could be of assistance to them. The entrepreneur basically said, “Leave us alone.” If government leaves entrepreneurs alone, they will raise the standard of living 8 times in the next century.

My keynote message is this: farm the great plains, not the capital. Network with computers, not politicians. Invent new ways for consumers, not to get influence in Washington.

Ask government to cut corporate tax rates, remove regulatory obstacles.

Ask them to stop centralizing everything.

Audience member asked a question about how to balance government involvement and the private sector. David said the government should do much less. He mentioned the entrepeneur who invented shipping containers. The containerization of shipping drops shipping costs by 97%. Government is going to do procurement, I think it should do a lot less regulation. We know about our unsustainable commitments to entitlements and deficits. Even if you are aware of this problem, it’s even harder to detect the cost of having the government involved in doing everything.

Another audience member asked a question about long term vs. short term. David answered by saying the investors generally take a longer term view than governments. Governments usually take at a short-term view–based on the next election. When the prescription drug benefit was passed, did Pres. Bush care about the fact that it would cost  a trillion in the next decade? No, he wanted to do something for the seniors before the next election. Capital markets are much better at long term investments.

When you get drunk, you will get a hangover. We have made a lot of bad decisions, there is no easy answer to solve this. Reducing corporate taxes will create more jobs. When you make it more difficult to fire workers, people become more reluctant to hire. Even if my plan were implemented today, unemployment would go to more than 10%, but I do believe it would come down more quickly after that.

Another audience member said she thought Google did a good job working with Washington on the spectrum auction. David said, I think Microsoft initially came to Washington for defensive reasons because they were being assaulted. But once they get here and hire a lobbyist, there is a danger of getting sucked in, when a lobbyist says, “if we can get this comma changed in the tax law, then that company will pay instead of you.” Maybe the answer is don’t make your lobbyist a senior vice president, make him a junior vice president.

Liveblogging OnDC: Cyber Security

Panel on Cyber Security

Moderator: Robert Rodriquez, retired secret service agent

Panelists: Richard Russell, Deputy Associate Director of National Intelligence for Enteprise Solutions, Office of the Director of National Intelligence; Lt. General Minihan, USAF, Managing Director Paladin Capital Group; Alan Wade, President, Wade Associates (former CIO of the CIA, 2001-2005)

Robert. Why is it difficult to conduct business with the federal government?

Al. My background was CIA, working with technical programs. I was CIO when I retired. I had gotten involved in adoption of technology by the government, and why the adoption rate became so slow. This was particularly relevant after 9/11 as we saw bad guys do things quickly, and we wondered why we were slow. So I went to work with some smaller companies to see how adoption rate could be faster.

Robert. I run an organization for the intelligence community to look at web and web technologies. We get requirements or needs. They come to us. We discuss it. We research the universe to see if there is a capability that meets the need. We bring it in. Pilot it. The function we perform is taking a look at where we are going. We may not be providing the long-term future. We have intelligence agencies with far more robust staff to look at those things. We help the intelligence community make business decisions.

Alan. If I were to point to one aspect of technology that makes it difficult for the govt to adopt product of small entrepreneurs, it starts with the -ilities. Scalability is one. Government looks at things at scale. Most small entreprenreuers don’t think about this at scale. Reliability is incredibly important. All these questions come out in your first interaction with government officials and if you are not prepared, it will affect your discussions.

Richard. Some businesses have technology we like but they haven’t thought about scalability, they like the product the way it is. Since there are thousands of IT elements within government, so how flexible is your technology? I’ll ask what is the seat cost for this capability and what is the total cost of ownership. When you ask that question, some people don’t have an answer. That stops the proceeding. I have to make businesses decisions on behalf of the taxpayer. Sunsetting old products costs money, so if I replace it with yours, I need to know the training costs, etc. Be prepared for these tough questions–how the product works, security of it, scalability of it, flexibility of it, and what is the real cost vs. the product we are already using. Do homework, be prepared, the meetings will go well.

Robert. What should small business entrepreneurs do to partner with the federal government?

Lt. General Minihan. I’ve used trust, familiarity and leadership, and I’ve signalled that the govt is risk averse. So coming here and getting that understanding is good. The govt is not gadget driven. You have to be able to answer the questions Richard and Alan brought up. The government is more receptive to entrepreneurial solutions than it was 10 years ago. I want to be able to see deployments of your technology, so I can certify that it will meet my needs.

Robert. You mentioned risk-averse and no option for failure. But things are moving so fast. The adversaries move fast. Are we are greater risk if we stay with legacy systems?

Alan. The question is, where in the overall stack is this application? We can move very quickly in some parts of the stack. You should be able to explain your technology in terms of the mission, if you can show how you can move quickly without affecting the entire enterprise. The agencies won’t take risks in the deep dark part of the enterprise where something goes wrong and brings the whole mission/agency down.

Richard. Defense and intelligence created my department, to create an environment where technologies can be deployed and fail without taking out overall capabilities. That is not to say that some of our deployments haven’t become enterprise-wide. But you should be able to say what is the niche that you have, what can you do better than others? You should find a mission partner, build a relationship of trust with them. I just had one case where people came to me and said we need this capability. They said, we’ll give you our money to get this. DOD joined it too. That made it a going proposition. If I have a mission demand, someone wants something piloted and tested, then it makes my job a lot easier with my leadership than if I just surfed the web and found something cool. We have to know what the mission is.

Richard. Presidential directives, 14 bills on the Hill relevant to Cyber; Rand and Heritage focused on Cyber. What areas of Cyber are important today, for the entrepreneurs here?

Lt. General Minihan. You see a maturing process. DOD has been doing this for a long time. We have a Cyber Command at Fort Meade with the NSA. Many issues are kind of settled. You have the DAI, DHS, teh whole piece, that’s looking at how … You’ve got Melissa Hathaway. Piece that hasn’t come to fore yet, is the leadership piece out of the White House. Then you’ll see the priorities set. As soon as there is sharing, the focus will shift back to the private sector. If you are an investor, you should make your way horizontally across the government to the private sector, to see how you can make use of the dual use opportunity. Assurance. Authentication. Response–diagnostic (real time) not forensic (after the fact.)

Richard. My person view is, if you want to see the govt do something badly, get them to do it really fast. So much of our economic power rests squarely on Cyber Security. We can be attacked with horrendous effects. But if you want to see an attack of biblical proportions, look to cyber security. Over the past years we’ve seen how banks, govt agencies, can be shut down, because the only way to protect themselves is to shut down. If suddenly, all the banking institutions on planet earth had to stop doing business, what effect would that have on us? If you couldn’t go to Walmart, or get gas. That’s why the federal government needs to be involved in cyber security. We need to be able to depend on everything to work. How many of you have checked to see if anyone from a foreign company has tapped into your intellectual property and copied it? That’s another aspect of cyber security–competitive espionage.

The question is, what is the holistic view for the future? How will public private partnerships work in this regard?

Robert said something about China and $50 billion per year in industrial espionage.

Al. In some ways, this isn’t a technology issue, it’s about how humans interact. The reason this is so huge, is that technology gives us so many advantages, that we want it and we want more. Every new system gives you some frustration, but we still want more at a human level. The White House reports correctly focus on the human dimension of this. We start with how humans understand how interactions happen, what policies there are. We need better tools for understanding what is going on right now, in the networks. The effect of changes in the network. We need tool for this. We need ways to measure security. We don’t have fundamental concepts on how to measure security. I think we are at the very beginning of this. This is not a mature market. it’s a rich area, from policy to implementation.

Robert. How would you compare the need for tools from 2001 to now? And where you would look for them?

Al. As the pace of innovation continues, more and more the govt will have to interact with people who understand commercial technologies. To pick up from General Minihan’s remarks, the speed with which decisions have to be made. We don’t need retrospective audits. We need to know about right now–if there are bad things going on.

Robert. How difficult is it to manage something you don’t own?

Lt. General Minihan. I like the notion, that it’s not the governments’ to manage. But that means you have to wake up and ask yourself what you must do to protect the security of your product or service. If you enter it like this, the cyber domain is something we can dominate for decades to come, as weaponry was in the 20th century. The strategic coin of the future is the intellectual property you have developed–not the industrial base, which we did a good job protecting before.

Audience question about different threats we are facing, we hear that China is our biggest trading partner but also our biggest cyber threat. What tools do we have to deal with them?

Al. I wouldn’t get too hung up on where the threat comes from. If there is something bad happening, as an enterprise manager you don’t care if its self-inflicted or externally. You just want to get systems back up. We don’t have to think about all these tools as a response to an external threat. Many of the tools will protect the enterprise from self-inflicted wounds. There is a close alignment between best practices in this area and how well run enterprises are.

Audience question about the horses already being outside the barn.

Lt. General Minihan. I would rephrase the question. There is a vulnerability to IP right now. All of us are exposed to this right now. It’s limited partially by the inability of most adversaries to process all the information they can get. So I don’t think it’s near too late to act strategically against the lower half of the iceburg that I talked about. But we need to shift our conversations. We need to share the responsibility–the public/private partnership has to work.

Audience member referred to Minihan’s comments about more private access to security risks.

Minihan. The government is not asleep at the wheel. There are some things you don’t have to share publicly. But there are many things that could be shared, in my view, that would share the responsibility for solving the security problem. Until we release enough of this classified information to get people saying, oh, now we understand why you are emphasizing this.

Audience member asked about open letter to Pres Obama that applauded innovation strategy, called for more spending on cyber initiative, it was signed by 12 CEOs of major IT companies.

Robert. Govt conducted 2/3rd of R&D in 1960, now they don’t. Our major corporations spend more on marketing. H1B issues–some of the top entrepreneurs and innovators are leaving the country. The liquidity in our markets is weak–almost frozen. 9.6 years to get to return, it used to be 4.6. IPO market is down substantially. M&A is up, but people get fired after acquisitions. Most job growth is after IPOs.

Al. I think govt is on the same side here. NSF is calling this national cyber leap year — leap ahead with technologies. Sponsoring academic research, create communities of interest. Government is beginning to move forward on R&D side.

Minihan. How I reacted to that letter: I would be asking where are the dollars for shared opportunities for private/public. I thought it was a reasonable way to suggest that the White House should be thinking beyond the federal side of cyber security. They don’t know and own the systems. I thought it was a decent shot at that. The signatories were a normal cast of characters.

Robert. How would you rank the opportunities in cyber security on a 1-10 scale.

Richard. I’m least qualified to talk about this. Because of the emphasis of the government there is a substantial opportunity here. I would ask, what is the quantum leap relative to cyber security that you can offer? The only way you can stay ahead of the enemy is with substantial leaps. Mike McConnell said there has never been a system created that cannot be hacked. So if the other guys can watch what systems we are creating, we have to make a quantum leap ahead.

Alan. You can align defensive strategies with best practices.

Minihan. It’s unprecedented, fully funded, and will not be finished in your lifetime.

Robert. I view this as a great opportunity for innovators and entrepreneurs. We are looking for disruptive technologies.

Liveblogging OnDC: Lt. General Minihan (ret.)

Speaker: Lt. General Minihan (retired)

He was in intelligence for years. Usually in that role, no one is happy with you. Usually you get phone calls between midnight and 6 am. (I believe he ran the NSA previously.)

Now he is Managing Director of Paladin Capital. He is going to talk about Cyber Security.

[Note: All of the following is paraphrased....]

In the iceberg there are two risks. The tip of the iceberg is the threat most people talk about. It’s like amateur hacking and stuff. But the structured threat is to our system operations and survival, not just performance. Rogue nations, professional intelligence operations, criminals. They’ve been there for 20 years. Not amateur.

The domain of cyber is where we all live, work and play. Our competitors are in the lower part of the iceburg. We are competiting against real international criminal operations, real nationstates, and they have all the facilities of global intelligence operations at their disposal. This is what we are talking about in the public-private partnership.

The critical sharing is dual use in the reverse sense. In the cold war, the dual use was the govt had it and might share with private industry. When I directed NSA, the private sector owned 90% of our infrastructure. For my predecessors, it was the reverse.

So vulnerabilities are now shared by private and government. There has to be a policy framework for dual use, where we can deploy transformational infrastructure. What the building codes and standards? How do we certify that it’s working? How do we share it back and forth? You may have some customers that are more risk averse than cost sensitive.

I’m a minority in this, in this town, but I believe the govt has to start sharing classified information with private industry. As you understood the risks in the 20th century, until you have access to classified information, you will not understand the risks we face.

I like to separate trust from security. In this town, trust is the higher thing than security. It’s bridged by assurance. I need to trust in the face of a natural disaster or terrorist attack, I can deal with it. I’m more risk averse than cost sensitive.

Incident response needs to be active not passive. I’m expecting to play soccer not football. While you may have something that I consider to be on the defense of my network, I’m thinking that all the technologies you provide me are going to be useful for defense but also for attacking those who attack me. I’m a compliance-oriented customer. I’m enforcing through activity the cessation of attacks on me. These are some of the ways a government customer will think about things.

I knew what to do, when I was in school, what to do if the nation was under attack. We have to get to that same condition around Cyber in the 21st century. Even in grade school, when I used to get under my desk, as part of the alerting system. We ceded responsibility for national security to the national government. Most of us grew up not worrying too much about our individual responsibility. As you’ve transitioned to the 21st century and as you think about Cyber, we have to reseed back into this audience individual responsibility for understanding our vulnerabilities. There is a business opportunity here.

The record will reflect that I’m 36 seconds away from being done.

Liveblogging: AlwaysOn: Tapping the Trillions

Moderator: Michael Zolandz, Partner, Sonnenschein

Owen Barwell, Deputy CFO, Dept. of Energy; Christine Tezak, Senior Analyst, Energy & Environmental Policy Research, Robert W. Baird & Co; Wes Coulum, Exec. Dir Gov’t Relations, Morgan Stanley.

Owen. Out of our $24-25 billion budget, most of our money doesn’t go to what is reported in the press today. We spend around $9 billion as stewards of nations nuclear stockpile. $6 billion cleaning up from cold war activities. $4-5 billion to run the nation’s science labs. Only after that do we get to spend money on civilian energy activities. Our dept. is really the dept. of nuclear military energy and science. Last year it was clear that both presidential candidates thought energy was important. So we were trying to prepare for changes that were coming. Under the new administration it has been a massive shift. Almost a 180-degree shift in energy policy. The economy has resulted in the Recovery Act. We were endowed with $40 billion in Recovery Act money in addition to our normal $24-25 billion annual budget. Most of the money in the Recovery Act is focused on the energy problems that are in the press today. So our energy efficiency and renewable division normally has a $2 billion budget, but now they have $16 billion that is supposed to be deployed quickly. Our organization that oversees the grid, has a $200 million annual budget, and now they are endowed with $4-5 billion to get us to a smart grid. Very difficult to manage a 30x greater budget. We have obligated $17.5 billion already. We are overseeing how quickly it gets deployed and how wisely it gets spent. We have 3 major loans programs: one is the advanced vehicle manufacturing program which Fisker referred to earlier today. Nuclear, biofuel, grid technologies–somewhere around $100 billion in loan guarantee authority. It’s been great to be a part of this as well. It has been an extraordinarily busy and challenging time.

Wes. The scope and size of what government has put out there is unprecendented, in terms of grants and loans for private entities. The stimulus package was about a trillion, deficit is a trillion and a half, so we are getting to some very big numbers. Compared to the past, we had tax credits in the energy space, some grants for renewable energy, but nothing like today. You have $7.5 billion for broadband infrastructure, $10 billion for life-science research. It’s unprecedented across the board in scope. Given the seizing up of the credit markets, the new administration had the opportunity to put their money into their spending priorities. So how do private companies get a piece of this? We are seeing the credit markets start to loosen. There have been renewable energy tax credits in the past, they are moving forward. One important thing is that these are government contracts and programs. You approach them differently. There are procurement rules and guidelines that companies need to think about to get this funding. When you do get a grant or loan guarantee, there should be private funding to go along with it to create a multiplier effect. Think about the state and local govt also. Funding center has shifted from New York to DC, but state capitols are also important. States are given money to dole out also. States have programs. They have individual laws and regulations also. California is the primary example of stimulus in the renewable energy space. Fed govt is the big player. As capital markets return, there will be more private sector funding for follow on funding to build on what has already been established.

Christine. There’s a bit of chicken and egg in the renewable energy–they got everything they asked for in the bail out and in the stimulus. But the economy is so weak, they are still struggling. If the economy has contracted and the number of KW hours you sell has shrunk, as a utility you may not be able to sign a purchase power agreement on renewable energy projects. You don’t get the cash until the service is delivered. So it’s a challenge to get utilities and regulators to get back into the procurement process before the demand has returned. We are close to the tipping point. It will be critical to see how the industry adjusts to information sharing among jurisdictions. Or will each area insist on doing their own pilots. The whole machinery can be moving if something works in one area and other areas get on board. We need a good news story. The Obama administration wants to convert to cleaner, greener, as part of their overall program. Jobs, photo ops, “here’s your government dollars at work.” As Congress comes back in January for Climate legislation, we want this momentum to be in place.

Michael: We are approaching half of the money being deployed already. What gets private companies attention from the government? What are the characteristics of success?

Wes. It takes some experience with govt procurement and contracts. Govt officials will look at these applications. You probably need to hire some consultants to help you through the process. Financials will be important. How will the project be financed. What is the financial strength of the project is important. And getting applications in early is important.

Owen. Fundamentally these are new programs in unprecendented times to accelerate a lot of what we do, but at the end of the day, you are a customer trying to deal with the fed govt, so those who understand the procurement process, whether it is a loan or grant, they already know how this works. Frankly, this can be quite exclusionary. We are doing our level best to try to engage companies and individuals to get them famililar with the program along the way. I really care about trying to get our message out. That is why I’m here today. While the opportunity is huge, this is far from “dumb money.” Working with us is harder than working with Wall Street. Senior debt, credit risk, they pretty much want their money back. Even that criteria in recent history may have been lenient. For the government, we also want to back technologies that may not be funded by the private sector in the normal environment, so we have a lot of rigor. Our deputy general counsel said, referring to the complexity of the rules and regulations that apply here, he referred to regulatory Darwinism. If you are sophisticated, you should be able to get through the hurdles. But on the other hand we should make it as easy as possible. We’re somewhere in the middle. You do need some kind of advice to understand the interace. Don’t be afraid to pick up the phone and make contact directly with someone in the department.

Michael. There are two criticisms of the stimulus: it’s not moving fast enough, and then what happens after it ends? The renewable companies got everything they wanted, but it’s still not enough. What does it look like 6-12 months from now?

Christine. Some of the companies hope to be able to accelerate their deployments, doing in 2 years what would normally take 5. This means purchasing has to happen. So we will see if the orders will come fast enough, so that companies can commit their manufacturing, so costs can come down, so we don’t have to subsidize everything. Another question: will this go into some act in 2010 to perpetuate this going forward. We may continue to struggle for deployment in this industry. We are hoping to see the ramp up and the response from the industry to this money, so we can see the manufacturing gears moving, so it becomes self-reiforcing.

Michael. Traditionally when you talk about federal dollars was it was research. But you are saying we are looking at manufacturing again. Is that an alternate view that hasn’t traditionally come from fed funding?

Wes. Yes, it’s now loan guarantees to build manufacturing plants, not just research. Inherently these are risky projects and risky technologies. Probably analysis a year from now will show where we are at. Will we need to extend loan guarantees in a year? Or can the fed govt pull back and let the private sector take it from here. These are risky projects and there needs to be some certainty.

Michael. How much interdepartmental cooperation is there?

Owen. I have seen a lot of cross department collaboration. I was with Ed Montgomery, Presidents advisor, he pulled together people from Labor, Energy, states, HUD. Energy Secretary has been working closely with HUD on weatherization. It’s top down and bottom up driven. We have people that want to work across those boundaries to get things done.

Audience question: how is the DOE responding to visibility requirements to show Congress they are doing what they are supposed to be doing.

Owen. recovery.gov and recipientreporting.gov — there has been an unprecedented (unprecendented has been used an unprecedented number of times today), the office of budget and management has reporting requirements for all of our transactions. They are all online. We disclose all obligations, estimates and reports of recipients about jobs created. We have made significant investments in the past so we can generate financial reports. So I could go into the office this morning and generate reports to the penny on how much we have invested so far.

Christine. The biggest problem is succeeding in how to get the money in the first place. Utility companies have a hard time understanding all the requirements up front. The follow on reporting required is not that challenging, compared to the application process.

Wes. Private companies are not used to reporting like public companies. The transparency and jobs numbers are going to be important 6 months from now to demonstrate how effective the programs have been. So it’s key.

Christine. I can’t imagine it’s something that VCs and financial investors are already looking for.

Audience question for Christine. Europe has a lot of manfacturing and renewables. How do you see us doing manufacturing for renewables, including wind energy, when Europe is looking at longer term horizons?

Christine. The most important thing we need to do as a nation in 10-20 year time frame. Wind is not the only one struggling. I don’t think you’ll see durations extended here. The way Congress pays for things with tax credits, we’re going to continue to hamstring ourselves, until we determine what our carbon reduction strategy is going to be. I don’t think any subsidies, even if they are extended 10 years, will get you the manufacturing base we need. We need to figure out carbon pricing.

Michael. What do you see as the possibility of a second stimulus?

Wes. You won’t call it a second stimulus, there may be efforts to finish spending the first. It depends on what happens the economy. A lot of promises were made. Next year is an election year, so politicians will talk about jobs that were created.

Michael. What is the expected timeline for deploying the resources from the first stimulus?

Owen. The funds have a time limit to them. Our focus has been to get the funding obligated as quickly as possible. Once we put the money in the hands of states and local govts, we are doing our best to make sure they have plans to execute. It’s not stimulus unless it’s actually spent. Our focus in 2010 will be to make sure the recipients of Recovery Act funding are spending it.

Liveblogging: OnDC panel, Entrepreneurs March on Washington

Moderator: Bill Schnoor, Goodwin Procter.

Panelists: Henrik Fisker, CEO Fisker Automotive; Jonathan Wolfson, CEO of Solazyme; Wes Bolsen, CMO of Coskata; Andrew Perlman, GreatPoint Energy.

Coskata has raised $40 million in funding. Fisker has raised nearly $200 million in equity. Solazyme and GreatPoint Energy have also raised capital. Solazyme does algae fuel.

Fisker: some ventures need government support because they require hundreds of millions of upfront capital. We applied for the federal loan so we could beat the foreign competition to market with our plug-in hybrid. Our first car seats four people plus luggage. Our second car, the $40k model, would have come to market 3 years later if we didn’t get the federal loan. We do have to pay it back. It was not a grant. We are trying to take a lead worldwide with this new technology. We need to be able to export these vehicles.

Bill. You got some press coverage when the federal loan was announced. Can you comment on that?

Fisker. There was some misinformation. American has historically helped industries and countries get on their feet — Marshall Plan in Europe is an example. The important thing for us was that we were using this loan (which we will pay back) to get ahead of the competition. Some people asked, why can’t they do it without federal help? We could have. But it would have taken extra years. Toyota owns the hybrid market in most people’s minds, because they were first to market. The important thing about this government loan is that it gives us a chance to compete with the conglomerates in the rest of the world. I know we couldn’t have gotten $500m from the private sector this fast.

Jonathan. Solazyme was founded in 2003. We use algae to make renewable oils. Our main focus is to produce large scale low cost low carbon fuels that drop into the existing infrastructure. Most cars run on petroleum based fuels. Our tech takes algae and actually grow them in the dark in stainless steel industrial fermentation equipment, by feeding them low cost biomass feedstocks. They can convert that incredibly rapidly into oil.  It takes a few days. The good news is we can leverage the pre-existing infrastructure, using existing facilities. We can create diesel and aviation fuels. We have been demonstrating both in standard unmodified vehicles, doing thousands of miles, with unblended fuel. You can understand that the environmental footprint is an important piece of the puzzle. CA has hired some experts to measure the environmental footprint of these. So we’ve demonstrated this works, now how can we scale up with a cost-structure that works? The way this tied into DC was that when tax bills were being discussed in 2006/2007 that would give $1 per gallon tax credit to certain types of fuel (cellulose ethanol to cellulose alcohols). We had to engage against the auto industry to get the legislation changed to cover cellulose biofuels. We were a small 20 person company when we realized we had to be involved with DC. We recently announced two contracts with the Navy to test our fuels in aviation and shipboards. We have been delivering quantities on those contracts and will deliver more over the next 10 months. This shows how government can be involved. DOE of course will be very important in policy. But we had to look to DOD as well.

Bill. What about the funding aspect? Have you gone after grants and loans?

Jonathan. We’ve raised almost $80 million in equity. If you include unannounced partnerships and some level of govt funding (DOD contracts) then we have over $100 million in total funding. We have the state of California (which many think is almost bankrupt) a grant from them to develop cellulose fuels there.

Wes. Coskata was founded 3 years ago. We wanted to have a distruptive technology that displaces oil. We want to do it from non-food sources. Mr. Khosla is our Series A venture investor. Series B was General Motors. Series C was Blackstone, largest private equity fund. We have successfully scaled this technology. We have a semi-commercial facility outside of Pittsburgh. It works on woodchips, grass, municipal waste. We can put our technology everywhere. Why can’t we eliminate landfills? We did away with enzymes, pre-treatment. We use gassification on the front end. There are some people talking about building a pipeline from the midwest to the coasts, spending $7 billion. With our technology you don’t need a pipeline. We can deploy our technology anywhere. We haven’t taken a dollar from the federal government. We’ve never announced our funding levels. But it’s 2-3x what has been reported. We want to create jobs, reduce our dependency on foreign oil. We can reduce water use by half to create a gallon of gasoline. We have created a long-term viable fuel, that is cost competitive with gasoline. What we need from the federal government is consistent policy. Our investors don’t want less commitment from the government to getting off foreign oil dependency. After today I’ll be meeting with a number of people in the Senate energy committee to make sure the definition of biomass covers our product. Coskata will be rapidly licensing our technology.

Bill. Policy in Washington affects all of you. An article in the Times yesterday said lobbying costs in Washington have grown significantly in the last year. So how do you approach lobbying? Direct, by joining groups, by using PR? What has been most effective means for you to advance your cause on the hill.

Wes. We’ve had a good story. With General Motors launching their investment in us at the 2008 auto show, it helped us get the message out that we are ready to compete today with gasoline. It’s not 5 years away. This isn’t the technology you’ve thought about with enzymes. We’ve joined a few organizations, but I find that sometimes a message gets lost. So we’ve gone direct to our own Senators and Congressmen. They want to hear that you are considering their state. With a feedstock flexible message we can show that we can deploy our technology in Mississippi, California, etc.

Jonathan. Making sure you have a message that resonates is the most important thing you can do to affect change. We are in South San Francisco, founded in Palo Alto and Menlo Park. So we are very much a Silicon Valley company. Traditionally, SV companies did not come to Washington. We realized soon that the industry we are in requires coming to Washington much sooner. SV is really a meritocracy–best technology, marketing, strategy wins. We are comfortable in that world. The message in Washington should be that policy should be driven by the ends–and should be technology neutral, not favoring one technology over the other. This resonates with people. We say, when you create rules, regs, legislation, think about the end result you want. Set those ends, then let the market work out the details based on the ends. We have found a lot of like-minded companies that agree with this. Some trade organizations and small group visits can help. You can go in with examples of how some policies have not been ends-driven, some have favored some tech over others, making the playing field unlevel. Those are very effective.

Fisker. You have to have some private capital before going to DC. I needed to learn how the whole system works. It takes hours or days to explain. It depends on what type of company you are who you need to go and see. You need some face time with the politicians. They have so many things thrown at them every day. There is no simple answer–it’s many different avenues. Getting your story out, going to DC, etc.

Bill. As a history major, a book that I loved, that I recommend to my clients, is Lyndon Johnson: Master of the Senate. He got an incredible amount done. Our process is not end-result driven, its a constituent driven process. You have to understand that.

Bill asked a question about reducing our dependency on gasoline, what the prospects are, etc.

Fisker. We are going to see multiple energy sources, gasoline, biofuels, electric cars. With electric cars you’ll need an incredible new infrastructure. I believe that within the next 10 years we are going to see an emergence of these new technologies that will easily be over 20% of the market, because as people start adopting them, you’ll see the impact on your budget as well as on the environment. US is one of the cheapest places to fill up your car with fuel, but when you drive electric it will be like 3-4 times less expensive than fuel. And in Europe, where gas is so much more expensive, the incentive to drive electric is even greater.

Jonathan. You will see things like cleaner ethanol replacing gasoline; but you look at where Solazyme is focused, it’s on diesel and aviation fuel. We see the future being a combination of fuels. Our technology focuses on one area. It won’t be an either/or. There will be ethanol for quite a while. I’d like to see electric vehicles. What people don’t talk about is, where do the electrons come from for the electric vehicles.

Wes. Today the base level of all electricity is coming from coal. This is addressed in the Energy Bill. To reduce our dependence on oil we need a lot of things. Coskata doesn’t produce aviation or diesel. I’m talking about the government resolve, it needs to be consistent. Let’s use what we have today, start making a dent. As new technologies emerge, we should go there too.

Bill. Ethanol was adopted with a tremendous amount of government support, came from the Midwest, but the political backlash over using food sources for ethanol has occured. So there is debate about the sustainability of food and non-food ethanol. Do you have a person working with environmental groups in your company?

Wes. Corn-based ethanol is a good product, has been unfairly treated by some who call themselves scientists in that field. We need to support them–they started all this 25 years ago. There probably won’t be much investment from private or government in food-based ethanol, it’s going to non-food based biofuels. You can’t build a facility that needs biomass and cut down all the trees, because that will only work for one year. So sustainability has to be considered, it has to make sense.

Jonathan. We should be measuring the direct and indirect carbon affect of everything. We should rate biomasses. The fears are that the ratings will be politically driven. You don’t want to be so reactionary that you step on something before it has a chance to succeed.

US News reported asked question. You said that in the 50s, 60s, and 70s, you didn’t have Silicon Valley going to Washington. What changed?

Jonathan. The difference is that in energy, government policy does matter and some companies have won because of government support. The silicon industry didn’t require government to take off. We are in a very old industry that is very heavily regulated. And new regulations are being discussed every day that will affect our ability to go commercial.

Wes. “Washington DC has become your new Wall Street. That is the answer.” When lending isn’t happening, everyone looks to Washington.

Bill. My IT clients think there is one govt agency that matters, the Patent Office. My life science clients think there are three, including the FDA. But energy companies and others may find there are 50 government entities that matter.

Live Blogging: AlwaysOn On DC: Henry Fisker keynote (new automotive company)

He left BMW to start a next-generation car company, with high-end design and eco-friendly. He worked in the car industry for 20 years. He realized a new business model was needed to get cost of development down. Fisker Automotive has taken the time to development to be less than 5 years and $1 billion. Usually hundreds of millions are spent on building a factory before the cars are produced. They decided to spend all their money on the design, not on a factory. So their development costs are low, capex costs are low.

They have assembled a startup team with major talent from the automotive industry. Core management team has more than 100 years of experience. Director of Powertrain Engineering worked on Ford EV1. He mentioned several other board members and senior management team members with significant industry experience.

They are producing a Plug-In Hybrid Electric Vehicle. First 50 miles are battery only. Total range is 300 miles.

  • 100+ mpg equivalent
  • Over 300 miles range
  • 400 horsepower
  • Top speed of 125 miles per hour
  • Can choose driving option: Stealth and Sport Drive Modes plus Hill Descent (Regenerative Braking)

They have about 50 patents on the vehicle. If you drive less than 50 miles, you can go completely in electric mode. We have the only luxury vehicle where you can drive into an emission-free zone (he mentioned Berlin). Driver can choose which mode to drive in.

In a normal hybrid, the gasoline engine drives the wheels. In ours, the gasoline engine only charges the battery. So in the sub-50 mile range, our car uses no gasoline. 79% of US drivers on weekdays drive less than 50 miles per day.

Kleiner Perkins is our largest investor.

Goverment support. We applied for a loan from the Federal Government. We got approval for $528 million loan.

Plug-in hybrid market looks like it will be the fastest growing.

Consumer incentives to buy a plug-in hybrid. $7500 federal tax credit if the battery is big enough. In the rest of the world, there are a lot of incentives as well, such as the elimination of car taxes based on our low level of CO2 emissions. In Beijing, you can only drive electric scooters in the city — no fuel vehicles allowed.

Our Karma, we hope will take about 3% of the plug-in hybrid market. Our car will be delivered started next June. We have pre-sold 1,500 cars so far. Our customers come from premium brands mainly — 60%. Mainly BMW and Mercedes. 3% are former Prius owners.

Our vehicle competes with BMW, Mercedes, Jaguar, Audi. Eco-Standard is $80,400. Eco-Sport is $87,400. Eco-Chic is $98,900.

Some customers have asked for animal-free auto. What that meant was no leather. So they have a model that is based on Italian design that doesn’t use any leather.

He believes the only way we will get more people into eco-friendly cars is to create a beautiful vehicle that buyers will be passionate about.

We have created the world’s largest solar roof. It can cool down the interior while you are gone, or recharge the battery while you are gone. You can get a couple free miles per day on a sunny day. We use reclaimed wood trim, world’s first automotive 10.5% multifunction touchscreen. We can add new functionality by reprogramming this.

We have selected 45 premium retailers in the U.S. market to sell this vehicle. Our dealers all own multiple dealerships. He showed a map of the dealers in the U.S. Plans to expand to 100. (There were several in California and one in Las Vegas.)

For a small company like us, we need media attention. Fortunately there is a lot of coverage of plug-in hybrids. We believe in putting vehicles into films and other alternative ads, rather than traditional ad campaigns.

The majority of the US loan ($360 million) will go to the creation of a smaller, affordable vehicle by 2012. Factory will be in the U.S. It will be retooled. Goal will be to manufacture 100,000 vehicles per year. We plan to export more than 50% of these vehicles. This will leverage 62% of the design and engineering of the initial Karma K1 platform. Targeted price point is $39,900 USD net of $7,500 tax credit.

We are starting with a $80,000 car, going down to a $40,000 model, but hopefully we will go down more than that in the future eventually. We hope to become a large and significant player in the world as we build a brand that is a pure green brand. In a few years we expect competition from Lexus and BMW, but we want to build a brand that is only delivering green cars.