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How Solyndra could affect small business loans

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Congress’s scrutiny of Solyndra is expected and should be accepted as a natural postmortem to a failed investment decision. That said, I am concerned that the direction of this scrutiny will lead toward the over-regulation of these guaranteed loan programs — thus rendering them unusable by the companies most in need of them.

Also, I fear that companies seeking loan guarantees might resist applying for them for fear of being part of a congressional hearing.

Solyndra had a potentially disruptive technology that was going to make solar panel production and installation less costly, with the result being a shorter payback of energy cost savings. Solyndra fell victim to the vagaries of the polysilicon market it was competing against. When the cost of polysilicon fell, the value proposition of Solyndra disappeared. This is unfortunate but not that unusual. If the introduction of new technology were not risky, then these companies would not need the guarantees. Risk connotes the possibility of failure, and Congress should look at the total program — not just the one guarantee.

If the guarantee has to be honored, it will be the first such loan guarantee that the Department of Energy has made that has gone bad. Now, $535 million is a lot of money, but it represents only 1.4 percent of the department’s loan guarantee portfolio. Compare that failure rate to that of the venture capital community. The most optimistic of venture capitalists will tell you that if one in three investments succeeds, that would be a home run, and traditionally the success rate is not much better than one in 20 — a 95 percent failure rate.

The government does have a place in the research and development of new technologies. The government does it every day when it decides who should receive research and development funding, and it is what has made the Small Business Innovation Research Program a success. If the result is successful, then jobs are created.

Perhaps the government needs to improve not only its due diligence process but also its public relations. It would be naive of me to think that politics does not play some part in the awarding of funds or the guaranteeing of loans; however, it is imperative that the decision to fund or guarantee be made as a business decision only. Our firm, Katz, Nannis + Solomon in Needham, Mass., has been involved in providing financial management guidance to entrepreneurial companies at all levels of the growth curve. Our clients have succeeded because both the good and the bad of the company were exposed through invasive questioning by the potential investors or acquirers. If the questions about customers, competition and product cannot be satisfactorily answered, the deal is not done.

Failure in the high-tech entrepreneurial space is unavoidable. What is needed to reduce it are an extremely detailed and complete due diligence process and the understanding that risk is part of what we do.

Nannis is a partner in Katz, Nannis + Solomon, an accounting firm, and chairman of the National Small Business Association.

By the numbers $535 million Money loaned to Solyndra that was backed by federal guarantees 1.4% Percentage of the Department of Energy’s loan guarantee portfolio

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