Potential ballot-box profits raise concern

SACRAMENTO —  Vinod Khosla is crusading for the measure on Tuesday’s ballot that would tax oil companies billions of dollars to fund alternative energy development. He says it would be a boon to the environment.

But it could also be a boon to his investment portfolio.

Khosla, a co-chairman of the campaign to pass Proposition 87 and a $1.1-million donor to the effort, invests in ethanol manufacturing companies poised to claim government grants that would be funded with the new tax. Though he has vowed to give away any profits earned from companies that receive money stemming from the initiative if the measure passes, his situation reflects a trend that alarms advocates of campaign finance reform.

Once a means for venture capitalists to pursue philanthropic interests, the bankrolling of citizen initiatives has become a financial opportunity. Their campaigns for government funding of stem cell research and the promotion of cleaner energy technologies could bring billions of dollars in public money to niche technology markets that their firms bet on.

The committees created to allocate the money under such initiatives are not obligated to follow the conflict-of-interest restrictions that guide most government agencies. Representatives of start-up firms funded by venture capital companies have seats on those panels, as do some venture capitalists.

“You have these very wealthy individuals creating pots of public money that they then play a huge role in doling out,” said Ned Wiggelsworth, a policy advocate for Common Cause, an organization that lobbies for campaign finance reform. “I’m skeptical their motives are pure when they stand to profit ... financially.”

The entrepreneurs say they’re driven by a desire to do something good for humanity; if they do well financially in the process, so be it.

They note that the start-up companies they are backing don’t have a lock on the $3 billion appropriated by the stem cell research measure -- Proposition 71 -- that voters passed in 2004, or on the billions that will be doled out to promote alternative fuels if voters approve Proposition 87.

Venture capitalists have pumped more than $2.2 million into the alternative-fuels measure, which would create a new oil output tax of as much as 6% a barrel. The goal of the measure is to reduce the state’s petroleum consumption by 25% with the help of billions of dollars in research incentives for alternative sources of energy.

Oil companies say it would drive up gas prices and does not guarantee that grant money would go to worthy projects.

The venture capitalists are among the biggest donors in favor of the initiative, behind developer and Hollywood producer Stephen Bing, who has put nearly $50 million of his personal fortune behind it.

Khosla vowed in an interview to “donate 100% of the proceeds I make from any company that takes any initiative money.”

But principals at the Bay Area firm of Kleiner, Perkins, Caufield & Byers, which accounts for most of the rest of the venture capital money given to the yes-on-87 campaign, have not made such a promise. And the firm has been increasing investments in companies that could receive some of the nearly $400 million the initiative earmarks for alternative energy start-ups.

The company’s partners declined to comment. But when Kleiner Perkins announced in a news release last month that it was doubling its investment in “greentech” companies, partner John Doerr said: “The power of entrepreneurs can make a big difference in our prosperity and our planet’s precious environment.”

The same idea is driving Proposition 87: Investment in companies developing alternative energies can help wean Californians from their dependence on oil. But in an effort to streamline the possible divvying up of oil-tax money, the drafters of the initiative exempted the board that would oversee that process from the public contract code and other government regulations.

Opponents of the measure call it a recipe for cronyism.

“The whole point of those laws is to assure that government money doesn’t get awarded for someone’s personal gain over the gain of the community,” said Allan Zaremberg, president of the California Chamber of Commerce.

Although the initiative would prohibit board members and the companies they control from applying for the grants, the companies they merely invest in or are employed by would be eligible for the money.

“These are the kind of things that should concern people,” Zaremberg said.

Yusef Robb, a spokesman for Yes on 87, calls such arguments “a lot of smoke thrown up by oil companies” to scare voters.

“All the dollars will be given out through a competitive, public process,” he said. The panel would meet in public, he said, and funding would be monitored by independent auditors, the state controller’s office and an oversight committee.

He said that the ban on grants to companies owned by board members is tougher than any existing state conflict-of-interest law, and that the money could just as easily go to a Ford Motor Co. proposal to increase production of fuel-efficient vehicles as it could to a venture capital-backed start-up developing a clean-burning widget.

“What will carry the day are the proposals that reduce dependence on oil the most,” he said.

Similar assurances were made two years ago about the awarding of stem cell research grants. A third of the money raised by proponents of that initiative, or $11 million, came from venture capitalists and their families. Most of the contributing firms, including Kleiner Perkins, have investments in lifescience companies.

Today, consumer and healthcare advocacy groups complain that the California Institute for Regenerative Medicine, created to implement the stem cell initiative, is secretive and full of potential conflicts.

“They give lip service to this notion of wanting to be transparent,” said John M. Simpson, a project director for the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “Yet when they have the ability to be transparent, it seems to me they aren’t.”

Scientists helping the institute choose projects to fund may have relationships with venture capitalists through their own biotech start-ups and contracts with life-science companies, but they are not required to publicly disclose their financial interests. They provide the information to staff at the institute, who keep it sealed.

The institute is now reviewing 232 applications for 30 grants of $2 million each and has decided not to say who the applicants are until the money is awarded.

State Senate Health Committee Chairwoman Deborah Ortiz (D-Sacramento), a backer of stem cell research, proposed legislation this year to require panel members to disclose their financial interests publicly, but the institute resisted and the bill died in committee.

Members of the institute’s governing body, which sets policy and reviews the scientists’ grant recommendations, are required to publicly report their financial interests. Many of the members have significant investments in, or are directly on the payroll of, biotech and life-science companies, according to their disclosures.

They include Edward Penhoet, who runs a biotech fund at the venture capital firm Alta Partners and sits on the board of ZymoGenetics, which describes itself as a “biotherapeutic” company. Board member David Baltimore, a former president of Caltech, also sits on the board of Cellerant Therapeutics, a company involved in stem cell research.

Michael Goldberg, another board member, is a partner in Mohr Davidow Ventures, a firm that invests in medical technology companies.

Institute spokesman Dale Carlson said the organization is guided by stricter conflict-ofinterest rules than most panels that award scientific grants. He said board members are strictly prohibited from participating in decisions that could benefit them financially.

But he also said the institute must be careful not to drive the best experts, many of whom have investments in the sector, away from its committees.

“If stem cell research is going to be successful in California, the private sector is going to have to be involved,” he said.

Evan.halper@latimes.com

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Ballot players

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Venture capital firms played a role in bankrolling California’s stem cell and alternative fuels initiatives.

Proposition 87

These investors contributed money to the campaign for Proposition 87, the oil tax initiative on Tuesday’s ballot, and have investments in alternative energy companies:

Khosla Ventures: $1.1 million

Kleiner, Perkins, Caufield & Byers: $1.1 million

Stem cell initiative

These investors contributed to the successful campaign for the 2004 stem cell research initiative and have investments in medical research and other life-science companies:

Kleiner, Perkins, Caufield & Byers: $5.95 million

US Venture Partners: $2 million

Integral Capital Partners: $83,000

Mayfield Venture Capital: $75,000

Michael Goldberg: $58,000

Enterprise Partners Venture Capital: $50,000

DIMA Ventures: $25,000

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Sources: California secretary of state, California Fair Political Practices Commission