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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.

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“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.

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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.