I have been noodling on some of the issues I first raised in a blog post last week regarding how government funds could be used to help support innovation in the EV or alt-fuel space. The fundamental problem I raised was that the types of terms and conditions that will be placed on government loan guarantees might not work for startups. In particular, the government oversight and administrative burden that is being talked about for companies who take loans from the government might be incompatible with how VC-backed startups operate. Another problem is the massive dilution that startup investors (and employees) may face if the government requires 20 percent of the loan value to be matched in equity. The overall picture of how this plays out has many considerations, but I think there is one area where the government can provide support that would be politically acceptable and level the playing field between innovative startups struggling to bring their products to market and big companies. In the business of manufacturing cars, a massive amount of capital is tied up in inventory purchases prior to building the product. For a startup, your suppliers demand aggressive terms so your cash outlay for the parts and other associated costs to put together a vehicle occur many months before you actually deliver that vehicle to your customer and collect the revenue. A simple way of demonstrating this would be to imagine that you have a great car that many customers want to purchase for $30,000, but it costs you $20,000 per car to purchase the inventory for each car and you don't get paid by the customer until you deliver that car many months later. If you are trying to sell a large number of these cars, the working capital you require to support this is very large. Most established businesses with similar issues can access a revolving line of credit for working capital needs. Startups have a hard time doing this because they may not have established credit or sufficient assets to provide as collateral. If they are able to get financing, the terms are likely to be onerous. If they cannot get financing for this working capital, they must fund it with equity, which is expensive and increasingly difficult to raise. I don't have direct information on this, but I am confident this is one of the challenges that confronted Think, which recently declared that it may close its doors without financial support from the Norwegian government. The Big Three get around this issue because they have tremendous leverage with their suppliers. They do not pay their suppliers for the inventory they use until some time after that part is assembled into the vehicle. These types of terms would be impossible to negotiate as a startup. This is where the government could play a very valuable role. By providing low or no interest working capital loans which could be used only for funding inventory purchases and other similar up-front product costs (such as shipping and logistics), the government can level the playing field for startups and allow them to scale production rapidly to put products in the hands of their customers. To prevent abuse of the program and overproduction of vehicles, the government could require that these startups demonstrate a credible order book that proves (to the extent possible) that the products being built will indeed be sold to customers. A strong order book has not been a major challenge for the new crop of EV startups. Financing the working capital required to deliver products to these waiting customers is a bigger challenge, and focused government support for this will not be as controversial or problematic as direct injection of government funds into VC-backed startups. Such a program also avoids the problems, perceived or real, of having the government pick the winners among the crop of EV startups vying for government support. The program could be made available to any advanced technology vehicle startup that is able to demonstrate a viable product and a credible order book. Daryl Siry is the former chief marketing officer for Tesla Motors. He now consults on marketing and the automotive industry. You can read more here: http://darrylsiry.blogspot.com.