Baruch

College, Zicklin School of Business BUS 9551: Business Communication I; Prof. Barbara Schreiber The Solyndra effect: Insights from the biggest failure in the clean tech industry. By Marco Sachet November 30th, 2011

EXECUTIVE SUMMARY The Solyndra effect, as referenced by specialists and the media, is creating long-term repercussions for the clean tech industry. The bankruptcy of the solar panel manufacturer not only represents estimated losses of $1.7 Billion, but also carries a very negative image for the sector given its extensive political involvement. Relying on tax breaks, federal loans or any sort of government incentive is no longer an option, and the clean tech entrepreneur will need to focus on operational efficiency to maintain costs low before the sector recovers. Understanding events that led to the Solyndra catastrophe, as well as the motivations and reasoning behind each player involved, will pose important lessons for those that want to pursue alternative energy as their business. SITUATION RISE AND FALL OF SOLYNDRA Founded in 2005 with an initial capitalization of approximately $80 Million dollars, the

company produced and sold tubular solar panels with an innovative technology that was deemed much more efficient than the flat solar panels available on the market. The company quickly ramped up on multiple financing rounds, nine in total, to a total equity capitalization of $1.1 Billion dollars in 2011, representing the interests of several prominent venture capital firms. Moreover, Solyndra became the recipient of a $535 Million loan guarantee as part of the Department of Energys stimulus program in 2009, used to finance the construction of a state-of-the-art manufacturing facility. This ever-increasing flow of money led to careless expending and careless behavior by the

companys officials, exemplified by Solyndra engineer Lindsey Eastburns statement: "After we got the loan guarantee, they were just spending money left and right... Because we were doing well, nobody cared. Because of that infusion of money, it made people sloppy". Although Solyndra presented an innovative and promising technology, it was not ready to compete. As Kupiecki (2011) explained, when polysilicon prices, the main component of traditional solar panels, dropped from $400 a pound to $50 a pound in 2009, traditional solar panels could sell at much lower prices than the advanced panels manufactured by Solyndra. In 2011, after two years of marginal sales, the company closed its doors and filed for Chapter 11.

COMPLICATION NEGATIVE IMPACT ON THE CLEAN TECH INDUSTRY The association of Solyndras net result to the performance of the whole clean tech industry has already led to a 55% decrease in clean tech investment in the third quarter of 2011 according to the Cleantech Group. Politicians debate whether to shut down the Department of Energy stimulus program, and policymakers countrywide question the effectiveness of government subsidies to green ventures. The Economist Magazine (2011) notes that Solyndra was used as a tool to improve the image of the Obama administration through the American Jobs Act. The company would employ 1100 direct workers, create thousands of indirect jobs to install its panels, and ultimately become the poster-child of an up-and-coming sector. This is a dangerous association: venture capital investment is far from certain, and common knowledge dictates that four out of five VC backed firms will either fail or produce miserable results. The fact that Solyndra was heavily reliant on government subsidies and spent over $1.8 Million lobbying for its loan only made matters worse when the bad news came, fueling claims that any sort clean tech investment is a waste of money. Furthermore, the US federal government itself has lost expertise in energy investment: a report issued by the DOE in 2008 shows that, of all investment dollars the federal government dedicated to research between 1990 and 2008, only 1% was destined to energy, mainly to research basic forms of energy and not cutting edge technologies. ANSWER CLEAN TECH IS A VIABLE INDUSTRY While the clean tech and alternative energy industry is still on its infancy, it is growing at an accelerated pace. As Kupiecki (2011) wrote, worldwide clean tech investment grew 23% in 2011, while in the US the clean tech industry grew 6.8% over the same period, compared to 0.7% overall economic growth. Day (2011) states that the solar industry alone employs over 100,000 Americans and generates net exports of over $2 Billion. The presence of poorly managed companies does not mean that a particular industry as a whole is undesirable. For now, entrepreneurs in the clean tech sector must demonstrate managerial skills opposite from those showcased in Solyndra, competing in the market as if they would if based in any other industry. Clean tech investment will recover eventually, as the numbers show that it not only generates positive economic activity, but also can produce profitable returns to investors.

SOLUTION LESSONS FOR FUTURE UNDERTAKINGS The Solyndra failure impacted several venture capital firms. Entrepreneurs in the clean tech industry must be able, now more than never, to demonstrate strong fundamentals before making any request for money, be it from equity or debt sources. A few lessons to be learned from Solyndra are: First, keep funding tight. Do not raise excessive capital and invest in multi-million dollar facilities before even proving that your product can survive the market. This is an obvious point that the people that either funded or ran Solyndra clearly overlooked. Second, dont tie the risky investment to political interests or job creation. As in any other industry, government subsidies should come as a bonus, not a necessity to be competitive. Third, dont rely on governmental programs as a source of investment, as they havent been present in large scale for 20 years. Last, Solyndra does not represent the clean tech industry as a whole. CONCLUSION LESS POLITICS, MORE BUSINESS Hopefully, the long lasting impact of the Solyndra effect will be that fewer politicians and more businessmen are involved in developing alternative sources of energy. But in the meantime, entrepreneurs must focus on low costs and bootstrapped funding to survive until a handful clean tech successes stir the appetite of VC funds again.

REFERENCES Kho, J. (2011, September 23). What The Solyndra Bankruptcy Means For Clean Tech Investors. Retrieved from: http://www.forbes.com/sites/jenniferkho/2011/09/23/solyndra- bankruptcy-impact-cleantech-investing/ Kupiecki, K. (2011, October 11). The Solyndra Controversy and a Way Forward for Clean Tech Communicators. Retrieved from: http://www.85broads.com/public/blogs/kimberly- kupiecki/articles/the-solyndra-controversy-and-a-way-forward-for-clean-tech- communicators Day, R. (2011, September 16). The Solyndra Political Circus and What It Means For Cleantech. Retrieved from: http://www.cleanenergycouncil.org/blog/2011/09/16/the-solyndra- political-circus-and-what-it-means-for-cleantech/ Leonning, C., Stephens, J. (2011, September 21). Solyndra employees: Company suffered from mismanagement, heavy spending. Retrieved from: http://www.washingtonpost.com/ politics/solyndra-employees-company-suffered-from-mismanagement-heavy-spending/ 2011/09/20/gIQAMHC3lK_story.html The Economist Magazine. (2011, September 16). Why Solyndra's loan guarantees were in the stimulus bill. Retrieved from: http://www.economist.com/blogs/democracyinamerica/ 2011/09/green-jobs-stimulus Dooley, J. (2008, October). Federal Investments in Energy R&D, 1961 2008. Retrieved from: http://www.wired.com/images_blogs/wiredscience/2009/08/federal-investment-in-energy- rd-2008.pdf Chernova, Y. (2011, August 31). After Investing $1B, Solyndras Backers Finally Lose Their Grip. Retrieved from: http://blogs.wsj.com/venturecapital/2011/08/31/after-investing-1b- solyndras-backers-finally-lose-their-grip/

APPENDICES
Table 1: Sources of Solyndra financing Date Jan/06 Jul/08 Type Series B Series D Series E Source

Amount $ 79.2 M $ 75 M $ 220 M

Dec/08

Argonaut Ventures U.S. Venture Partners CMEA Ventures Redpoint Ventures RockPort Capital Partners U.S. Department of Energy

Mar/09 Sep/09 Sep/09 Jun/10 Feb/11 Jun/11

Debt Series F

$ 535 M $ 286 M $ 198 M $ 175 M $ 75 M $ 10.7 M

Unattributed Argonaut Ventures Unattributed Debt Unattributed

TOTAL $ 1.65 B Source: Crunchbase.com

Picture 1: President Barack Obama examines a solar panel CEO Chris Gronet (right) and Executive Vice President Ben Bierman, during a tour of Solyndra.

Source: US Federal Government files