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As public and political eyes turn to the federal budget and cost-cutting, Silicon Valley startups backed by Department of Energy loan guarantees and grants are coming under scrutiny.

Solar cell company Solyndra is at the front of this. There’s a planned Congressional investigation to evaluate whether Solyndra was an appropriate candidate for the $535 million loan guarantee it received. Since winning the loan guarantee, the company has laid off workers, cancelled an IPO and closed down its first factory.

Range Fuels and the government’s support of biofuels was criticized in a WSJ editorial this month. Venture capitalist and Range Fuels backer Vinod Khosla has penned strong responses to the editorial. While the WSJ piece said Range received $76 million in DOE grants only to produce lackluster results and close down a factory, Khosla said the company only took half of that amount and argues Range is making progress. He also pointed out that the government heavily subsidizes the oil industry.

Loan guarantees to electric car startups Tesla ($465 million) and Fisker ($529 million) have also been criticized in the past. One argument is that these companies have been able to successfully raise cash from private investors, so they don’t need taxpayer support. And now that Tesla is a publicly traded company, is it appropriate for taxpayers to keep supporting its operations? Fisker could be a target, too. It has experienced several delays in releasing and producing its luxury plug-in hybrid, and has raised the planned price of the Fisker Karma by 20 percent over the past few years. Fisker has attributed the delays to the 2008 financial crisis. The car will go into production in March; Fisker raised $150 million this month and has an IPO in its sights.

Still, startups are always risky ventures, and ups, downs, delays and mistakes are inevitable as companies try to move into commercial production. Loan guarantees do boost companies and help them receive more favorable financing terms than they would otherwise, lessening some of the obstacles to success startups face. DOE loan guarantees are meant to subsidize areas that have “transformative” potential and need government backing to prove their value to the market and investors. In the case of solar and electric cars, loan guarantees typically go towards manufacturing facilities, as was the case in the recent loan guarantees to solar makers SoloPower ($197 million) and Abound Solar ($400 million).

DOE loan chief Jonathan Silver came out in support for Solyndra when we talked to him last year. He pointed out that Solyndra was planning to close the factory, it just happened sooner than intended. Solyndra has not been granted any loan funds and is reportedly on track to produce 300 megawatts of panels annually, which is higher than the 210 megawatts estimated at the project inception.

We asked the DOE for a response on the scrutiny on Solyndra lately, and here’s the statement provided by the press office:

“The Department of Energy conducts extensive and ongoing monitoring for all projects that receive loan guarantees. The loan guarantee for Solyndra is supporting the construction of a manufacturing facility which is well underway, and is, in fact, 4-8 weeks ahead of schedule. To date, the company has hired 3,000 construction workers and over 1,000 employees to fill permanent positions. We anticipate the project will continue as planned, however, we take our responsibility to protect taxpayer interests very seriously, and will continue to work with Solyndra to find appropriate solutions to any challenges it may face.”

The investigation into the Solyndra loan guarantee is being spearheaded by Rep. Fred Upton (R-Mich.), chairman of the House Energy and Commerce Committee.

Upton sent a letter to DOE Secretary Steven Chu asking for documents related to the Solyndra decision. The letter outlines Solyndra’s lack of profits (which is the case for most startups), and also points to an audit that pointed out the company’s shakiness and ultimately contributed to Solyndra yanking its IPO plans last year.

The audit is an interesting point. Although Solyndra’s technology — racks of tubular solar cells — seems genuinely innovative (see the greenhouse roofing application, right), it seems to have vastly underestimated its capital needs and overestimated what it could deliver. A PricewaterhouseCooper audit last year ahead of its IPO plans found massive losses and negative cash flow since the company’s founding, as well as mounting debt that could bury operations within a year. The company appeared to be running out of money five years into the business despite raising $970 million. After cancelling the IPO, Solyndra opted to raise $175 million through promissory notes instead.

[Top image via OpenPhoto]

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