Plenty has already been written by many people smarter than me about why Solyndra failed, and what lessons are to be drawn from it, so I haven't wanted to write about it. I see Solyndra as having been a big but not necessarily dumb bet, one that attempted to bring expensive panels into the market but with the intent of saving costs further downstream in the solar value chain, to provide net savings for flat-roofed customers. That bet obviously didn't work out, for a number of reasons: 1) yes, panel ASPs fell faster than predicted, although everyone should have been expecting them to fall significantly; 2) the downstream channel resisted significant change; 3) some bad luck and bad timing, no doubt; and last and most importantly, 4) execution and high cash burn.
So that's that. Should there be an analysis of how the company so spectacularly failed, and a re-evaluation of how the DOE's Loan Guarantee Program has been designed and administered? Absolutely. This was a big loss to investors and taxpayers. I've already discussed my views on the Loan Guarantee Program before in a number of forums: I believe that it addresses a key capital gap in the "valley of death" for cleantech innovations, but wasn't designed well; that it creates negative selection biases; that it is far too bureaucratic in ways that undermines its usefulness; and that it leans too much on a small team to make very big decisions with somewhat limited knowledge and resources. So there's a sober conversation to be had about whether government should be seeking to address that capital gap, and if so, how it should do so.
But apparently, today's hearing on Capitol Hill was a useless political circus and not an honest investigation or analysis — by either party's representatives. It has become political football. And this may have a significant negative impact on cleantech startups that have nothing to do with the DOE programs or the like.
First of all, Congress is likely to throw the baby out with the bath water. While this particular high-profile program has had mixed success and will likely see some additional "wins" and "losses" going forward, there are lots of other DOE and other governmental efforts that are doing an effective job of providing economic return for investment of taxpayer dollars. But this episode is just going to further politicize cleantech and alternative energy, which is stupid. We need all of the above, in terms of energy choices. There's no compelling reason for anyone to have a philosophical problem with economically viable, domestically produced clean energy. But in an era when some people view energy-efficient light bulbs much in the same way that their political precursors viewed fluoride in drinking water, we can expect that this episode will result in even more political pressure for even the more effective governmental programs to be undermined and assaulted. If nothing else, politicization of the clean energy sector just adds further regulatory uncertainty to the environment we all operate in. And it could filter down to the state level, where to date, cleantech cluster creation has been a non-partisan issue.
Secondly, among 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 who are uncomfortable with the asset category in general and the sector in particular. 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. Of course, Gentle Reader, you and I both know that some of the more compelling investment opportunities in cleantech venture capital look nothing like Solyndra. In fact, the strong shift to energy efficiency among investors in the sector is evidence of this, and information-based cleantech is starting to show some interesting early momentum. Even in sectors like solar that saw the most capital-intensive investing a few years ago, much of the action is shifting to less capital-intensive plays and into other parts of the value chain. Nevertheless, this episode will make it that much harder for large institutional LPs to allocate resources to the sector, until the shift away from Solyndra-type plays becomes more obvious.
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.
The shame of it is that cleantech markets have never had stronger fundamentals. Energy prices remain high. Entrepreneurial interest remains strong. Corporations are doubling down, getting more and more involved in cleantech markets and making investments and acquisitions in the sector. The solar market in the U.S. is a net positive to our trade balance, and the solar market is one of the fastest growing markets in the country, even in the midst of the capital pullback and the nattering nabobs of negativity. The solar industry is not a dog. There are dogs in the solar sector and an overdue shakeout taking place — but the solar industry is going to be a winner for the U.S. There are already next-generation solar producers who are quietly selling their products and beating today's low panel prices. They're just not making the headlines…yet. But there will be visible U.S. venture-backed solar winners who emerge from this consolidation phase with a lot of room for profitable growth.
Cleantech is at a low point right now. 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. Eventually, they will come running back to jump in front of the parade once again. But for now, entrepreneurs need to hunker down and run lean and run hard.