in Green Energy & Innovations

On Solyndra, Failure and Energy Innovation

Yesterday I wrote about failure, and how it could be one of the keys to success. This connects to the recent controversy over Solyndra’s failure, as well as to energy and innovation in general.

Solyndra headquarters. photo via totalsolarenergy.co.uk

I found this brilliant paragraph by Matthew Nordan, whose bio reads “I’m a venture capital investor at Venrock focused on energy and environmental technologies. Earlier, I co-founded and led Lux Research and forecasted technology futures at Forrester. I really do live and breathe this stuff.”

Failure is a fact of life in venture investing – and energy innovation. VCs provide capital to high-risk businesses that can’t be funded any other way. Most venture investments either fail completely or deliver mediocre returns. Cases like Solyndra come with the territory, and they say no more about all the other VC-backed energy start-ups than Webvan said about Amazon: The whole point is to risk failure, because you have to take on many (informed, balanced, and uncorrelated!) bets for a shot at a big outcome. Those outcomes, in turn, pay for the failures many times over – while improving lives and creating jobs. There’s a legitimate argument about whether taxpayer money should be deployed in this pursuit, but to treat even a very costly cratering like this one as anything other than de rigeur seems silly. [more]

Below are some several excerpts from reports about Solyndra’s failure.

First, the company’s original announcement. Emphasis mine. Solyndra Suspends Operations to Evaluate Reorganization Options

August 31, 2011 – Solyndra LLC, the American manufacturer of innovative cylindrical solar systems for commercial rooftops today announced that global economic and solar industry market conditions have forced the Company to suspend its manufacturing operations. Solyndra intends to file a petition for relief under Chapter 11 of the U.S. Bankruptcy Code while it evaluates options, including a sale of the business and licensing of its advanced CIGS technology and manufacturing expertise. As a result of the suspension of operations approximately 1,100 full-time and temporary employees are being laid off effective immediately.

I think it’s interesting that the press release emphasizes the macroeconomic nature of the problem, as well as the specific shutdown of manufacturing operations, since other operations could continue.

But this won’t be easy. This Greentech Media post distills Solyndra’s situation into a clever subhead: For sale: factory. In Fremont. Little used. IP portfolio as well. Serious inquiries only. Here are my favorite lines:

Any potential acquirer would also inherit a titanic-sized bookkeeping and public relations headache. Solyndra has received more than $1 billion from VC partners and over $535 million in loan guarantees from the Department of Energy. Congressional opponents of green policies like Michigan Congressional Representative Fred Upton regularly hold up Solyndra as an example of why the U.S. shouldn’t support green energy policies.

The only green jobs that have been created, one wag told me today, have been ones for accountants and bankruptcy attorneys. [more]

Well, Obama and other politicians do always tout “green jobs,” and accountants and bankruptcy attorneys need work, right?

Solyndra’s failure has become a political football, which is a valid debate but not without some misconceptions. In  a Washington Post piece, “Five myths about the Solyndra collapse,” Brad Plumer writes: 

 the fact that China hurls money at solar isn’t necessarily a bad thing, since cheaper solar prices can benefit the United States too. The Energy Department seems to have recognized that going toe-to-toe with China on direct subsidies may be futile and is instead trying to focus on complementary efforts to bolster innovation, through programs like its Sunshot Initiative. Also, for all China’s subsidy frenzy, the United States still exported$1.9 billion of solar products last year and actually has a trade surplus in solar with China. [more]

Also, a lot of the controversy has focused on the loan guarantees that the Obama Administration gave to Solyndra. Bryan Walsh, writing for TIME’s Ecocentric blog, says the Solyndra “Scandal” is Washington Business as Usual.

My response: meh. TIME’s Michael Grunwald has covered this from the start, and while he’s unhappy—to say the least—with executives at Solyndra for misleading the government on its financial health, the solar industry more broadly is doing well, thanks in part to the money the Obama Administration has channeled towards more successful companies. And it’s worth noting that in addition to government loan guarantees, Solyndra also scored over $1 billion in private capital—including from GOP-friendly investors like the Walton family of Wal-Mart. Solyndra turned out to be a bad investment—the company failed in part because it made the wrong bet on solar technology, failing to foresee that silicon prices would drop drastically. Bad investments are a part of business, especially a cutting-edge industry like renewable energy, and failure is a necessary ingredient for innovation. (Just ask the famously fired Steve Jobs.) The idea that the collapse of one solar company discredits the entire solar industry is absurd. [more]

What do you think? What does Solyndra’s failure mean for the future of solar energy in America and beyond? 

 

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  1. Solyndra’s business plan depended on continued high prices for silica based on long term shortages. Turned out to be a bad bet, but it was a reasonable wager on at the time. Investors buy hedges all the time.

    To me, the issue is how much money the Federal Government put behind this particular hedge. Rather than going in for $535M which was nearly 35% of the overall capitalization of the company, the government should have made a much smaller investment ($100M?), bringing in private co-investors on the same terms to fill out the round. If private investors wouldn’t ante up, the government should have backed out.

    Also, the company appeared to be duplicitous in its reports to the government.

    Unfortunately the political fallout here is going to largely destroy the ability of the DOE to make these kinds of investments and they will be back to encouraging innovation either offering research funds (which provide no direct financial return to the government) or committing to buy the output, even if it is non-economical or technically flawed.

    While I don’t have any specific examples, I would expect, through focused special interest legislation offering “tax incentives”, the government has spent many hundreds of millions of dollars on failed innovations by big companies. Also, in the military and spook community, there are many failed investments and overruns.

    We should broaden our definition of “national security” to include “energy security”. So long as we depend on mideast petroleum, we are not “secure”. Thus we should subject energy innovation investments to the same criteria as security investments.

  2. Thanks Dad. You make a lot of good points here. If the Solyndra case deters the government from making future bets on new energy projects, that is a huge loss for the huge company. To use the rhetoric of the right, it’s a way of letting China (a place where the government generously sponsors energy innovations) take the lead in this industry.

    And yes, the government should be investing a smaller amount of money in to a wider variety of energy bets.

    There are a few dubious ethical questions with the DOE’s loan to Solyndra, and I am not sure exactly what to say about them. I think it’s good that the FBI is investigating to make sure things are in the clear.

    But I am glad that there are many other American companies working on solar innovations, and I sure hope they can do more to bring the industry forward.

    It will be interesting to see if any more of your friends add their 2 cents on Facebook!

    xx

  3. The government of the USA is losing money in solar because the Chinese government has more money to burn. The Chinese once were “communist” and the USA was the “capitalist” leader, but have converged to become similar countries. In a better world, politicians would not play venture capitalist on the public dime.

    I wrote about another Silicon Valley scandal on my blog:
    Sam Liccardo, a city councilman in San Jose, California, exposed a report on the results of their 4 business incubators, similar to Start-Up Chile, during the last 17 years. The report was suppressed because it tarnishes the reputation of the highly touted incubators, which were emulated all over the world by politicians hoping to emulate the success of Silicon Valley. The city invested $30m in the incubators, intending to generate tax revenue and jobs in San Jose, but only a few companies remain in business and most have left San Jose.

    http://brophyworld.com/startup-scandals-in-silicon-valley/

  4. Hi Mark,

    Thanks for reading and thanks for the comment.

    I disagree with the first line of your comment. I don’t think the US government is losing money on solar *because* the Chinese government has more money to burn. Yes, the Chinese government has invested a lot more in solar (particularly through land leases and other incentives) but through smart, collaborative policy, this can work to the advantage of both the US and China.

    The excerpt I’ve included from Brad Plumer’s article has a link to the US Dept. of Energy’s Sunshot Initiative, which is trying to do just that. American companies involved in solar manufacturing, such as Applied Materials, have focused their efforts on China, to take full advantage of the many incentives supporting solar there. China excels at innovating and improving manufacturing processes, and this brings down the cost of many products, including solar panels, which reduces prices and increases availability worldwide.

    Second, as an American who spent 4 years living and working in China, I don’t think that the US and China are “similar countries.” Yes, there are similar elements – highways, fast-food restaurants, English speakers, universal human emotions – but the government structures and cultural context are so different that I would not consider them similar countries.

    I think your point about “politicians playing venture capitalist on the public dime” is a valid debate, one mentioned by venture capitalist Matthew Nordan in the excerpt that I included at the beginning of this post.

    I read your post on the San Jose incubators, as well as the San Jose Inside piece, and it sounds to me like the San Jose incubator was relatively successful, in that it spawned Callidus, a profitable company that outgrew its first home.

    Based on my experience as a participant in Start-Up Chile (and a native of Silicon Valley) I believe that the benefits of entrepreneurship hubs include more than just the easily-quantified new jobs and tax revenue. When brought together into new clusters, everyone can share ideas and learn from one another. Even if people move on to do something new in a new city, these lessons can stick with each participant. The network can live on.

    Also, one of the final lines of the San Jose Inside report says that one of the goals for the incubators was to help create a biotech industry. That industry has developed considerably in the past 20 years, and the product cycles are much longer than those in software.

    Anyways, thanks again for your comment and for making me think.

    Cheers,
    Leslie

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