Will the Solyndra Witch-Hunt Hurt Venture Capital Investments in Clean Energy?

With most of the coverage of the Solyndra bankruptcy focused on the political theater in Washington, there has been very little response from within the financial community — particularly in the venture capital space.

I found out why upon talking to people about the issue. After reaching out to some of the top private equity firms and venture capitalists in cleantech, almost no one wanted to speak on the record about Solyndra. Many had friends who lost money in the deal; others just weren’t comfortable talking about such a politically-charged topic, preferring to lay low and stay out of the mess entirely.

But off the record, they all said basically the same thing:  While hitting home runs in clean energy is still difficult, the market fundamentals over the medium and long term (i.e. climate change, need for infrastructure investments, dramatically falling cost of renewables, etc) are still as compelling as they always were. No amount of hype about the Solyndra bankruptcy or political posturing in Washington will deter VCs from addressing those market needs.

After all, venture investments are inherently risky. A venture firm will make 10 bets expecting 9 to fail and hoping the one big success will make up for all the other failures.

“That’s just the way venture capital works. I don’t see it likely or reasonable that Solyndra will cause venture firms to pull back in this space,” explained Ken Locklin, managing director for the private equity firm Impax Asset Management, in an interview with Climate Progress. “I would be surprised if anyone in the venture community pulls back in a big way because of this.”

But this sector is tough, and other experts think it could have a short-term impact.

The Solyndra bankruptcy illustrates what more investors are coming to realize:  Clean energy is a very capital intensive business.

“It’s not easy to create a whole new production system for a commoditized product. It turned out that this whole sector requires a lot of money and is very technologically challenging. As a result, the speed of exits and the levels of those exits haven’t been fast enough for some investors,” said Locklin.

Because of the difficulties in hitting home runs in cleantech, investors have pulled back a bit. In the first quarter of 2011, venture investments in cleantech fell 44% compared with the first quarter of 2010. VCs are also being more cautious. Of the $1.1 billion invested in the U.S. cleantech sector in the second quarter, 67% went to later-stage companies.

So given that dynamic, will venture firms be able to raise the money they need to make investments in the clean energy? And will entrepreneurs be able to rely on venture capital?

Rob Day, a partner the private equity firm Black Coral Capital, worries that Solyndra may, in the near term, undermine the appetite of individuals, pension funds and other money managers (the so-called limited partners, or LPs) that invest in venture funds. Writing on Greentech Media’s cleantech investing blog, Day laments the potential impact on these investors:

[A]mong LPs who were already increasingly skeptical of cleantech venture capital, this is just going to further dissuade them. I’ve spoken with a few cleantech VCs lately who are out there raising funds and have spoken with LPs….

When Solyndra is the visible poster child for what “cleantech venture capital” is perceived to be, and then it blows up and becomes a political football — that’s not exactly a recipe for pension fund LP comfort.

This is all going to make it more difficult for cleantech VCs to raise funding from LPs, and thus it’s going to make it harder for cleantech startups to raise funding from either VCs or non-dilutive sources.

It’s hard to say how — or if — Solyndra will have a specific impact on investment. From my conversations, venture investors clearly believe firmly in the market drivers. But Solyndra’s bankruptcy is representative of the major financial risk in a constantly-changing, capital intensive sector like solar.

While concerned about the short-term impact, Day believes it won’t change the long-term picture:

It will come back. The core needs are too severe. The corporate momentum is too significant. The entrepreneurial energy is too inspired. But thanks to this episode with Solyndra and with other shoes yet to drop, the sector may have to develop some successes over the next couple of years in spite of the politicians — and in spite of the LPs.

In the meantime, entrepreneurs in clean energy may want to look beyond the big venture capital firms.

6 Responses to Will the Solyndra Witch-Hunt Hurt Venture Capital Investments in Clean Energy?

  1. Leif says:

    I invested ~$25,000 this year in a personal solar PV system. It should pencil out to about 10% RoI over the next 8 years here in Washington State. Show a small investor that on Wall Street? It is in my back yard and I can fondle it when I please.

  2. Rabid Doomsayer says:

    I do not think Shi Zhengrong is complaining.

  3. Tom says:

    Maybe a discussion is needed on what makes a company successful for venture capitalist and now, government backed loans..

    1. A product that needs to be cutting edge

    2. A company that is a leader in the industry

    3 A patentable product.

    4. Company that has time to innovate and perfect their product.

    5. Time to produce a product in quantity and market this product before competition reduces market share of new product launch.

    6. Access to additional funding

    It could be argued that all of these basic marketing criterion need to be present. If a product is launched and they lack one of these market criterion then a product launch should be questioned. Except condition such as included advertisements as initial cost. Low Cost of product manufacturing. Easy and cost effective funding can be obtained as needed. Products with some of these exceptions may still find a profitable launch. Solyndra had none of these options present, so all 6 market criterion are needed for success.

    Looking at Solyndra we see that they lack 2, 5 and 6. Solyndra was not a leader in it’s industry, but they had some excellent patents. They also perfected a product and a new manufacturing facility was built for production. If we could look at most new business failures, we would find that 4,5,6 are the most problematic for any new business.

    Taking Solyndra as an example, was their failure caused by condition 4,5 and 6 or some other deficiency present. Before I answer that question lets look at there coemption. That is the 5 major Chines, silicon solar chip plants (I’m not going to research there names).

    At the time Solyndra was seeking their funding the Chinese companies received loans guarantees from there government. Solyndra had to wait almost 3 years before they received there government backed funding (considered very fast for our bureaucracies) . This delay placed them in jeopardy of failing #5. The Chinese solar producers receive loans of 3-7 billion each and Tax free,. Solyndra 550 million. These generous loans meant that Chinese competitors have no outstanding monthly payments that would cut into profits. They also have no venture capitalist partners that are waiting to see a profit to suck the company dry. OK we don’t no the stakes that the venture capitalists held in Solyndra. The point is that Chinese’s companies have no partners other then the government. I really hate to say this but the Chinese government does seam to have there manufactures best interesse in heart.

    A quick look at Solyndra. Even though they had a superior product, They never had a chance to generate market share. Solyndra through private and government funds had maybe a total investment of close to a billion dollars. A billion dollars sounds like a lot of money except when you consider that it takes over 5 billion to introduce a new car line. Most new factories cost 100 million to over a billion dollars. Another 100 million to produce a major product to profitability, maybe 25-100 thousands units. Another 100 million in marketing and advertising. Another 100 million payroll until profitability.

    When its all said and done what’s 500 million. We spend more then that on a simple road project the might include a few miles and a couple of bridges. Sure 300 people (maybe?) Might find employment for maybe a year. Solyndra was to employ over 1,000 for many years to come.

    Solyndra failed for one reason, Washington politics, Washington lack of vision, Washington, Washington, Washington, AGHhhhhhhh.

    Sometimes ????? (had to stop, it was getting to depressing)


  4. John McCormick says:

    Stephen, that was a masterful piece of reporting. You are up there with Ken Ward. We are fortunate to have you on the CP page and a thanks should go to Joe, as well.