The undoing of Solyndra

By Robert Steven Kramarz">Robert Steven Kramarz | September, 17, 2011 | 3 comments

The bankruptcy of marquee solar-panel maker Solyndra after a $535 million government loan guarantee and nearly $1 billion of venture capital is breathtaking. This was a ridiculous waste of money; a tragedy. Imagine what you could have done with a billion dollars of venture capital funding? What a difference this could have made in medical research for example.

So I’m writing this extra blog post to reveal to you how the company and VC’s involved could have avoided this fate.

Here’s the gist of it:  I believe Solyndra’s mentality was (in the last few years) not to build a viable business but instead ”Screw the public.  We’ll go public and get out fast, before the business collapses.”  Investors AND executives should avoid this kind of mentality at all cost because it usually leads to disaster.  Let me prove it to you …

The lure of Solyndra was its clever technology: rather than flat panels, the sun’s rays are gathered by cylinders coated with a mixture of chemicals. This was also Solyndra’s downfall. As the cost of conventional flat photovoltaic panels dropped, Solyndra’s could not profitably follow the price downward because of its stubbornly high production costs.  So Solyndra could not compete on price.  They had to compete on superior features and benefits, something they were not really willing to do.

Some analysts are blaming market conditions for this debacle.  ”It was just bad luck.”  “The company had no pricing power and no control over its costs.” “Why should anyone blame the company?”  In my opinion, bad luck had nothing to do with it.  Read on.

Here are the mistakes in judgement the company actually made according to the Wall Street Journal in a feature article on September 16, 2011:

1) The company exaggerated its orders. In a press release it announced a backlog of $2 billion in orders, but it turns out these were just effectively letters of intent, since the buyers were allowed to cancel or renegotiate their orders.  Most likely management believed their own fantasy.

2) The mindset of the company management was “if we make it, people will buy it.” The company had a plant that could have produced enough panels to generate 110 megawatts per year, yet they spent investment and loan money on a new plant that could generate 500 megawatts per year, when their maximum sales only reached 65 megawatts per year. The new plant saddled the company with fixed costs and a monthly drain of cash when there would not be a realistic need for its capacity for many years. Apparently the company management believed their own BS and counted on wildly optimistic sales projections.

3) The company did not focus enough on market development, i.e. communicating directly with their customers, even though the business model relied upon superior features and benefits, rather than just lower costs. If your business model relies on superior features and benefits, you have to communicate them until the market understands them, otherwise you will lose to lower priced competition. This is exactly what happened. As a result, the competition easily won most bids on price.  This is a classic management mistake.  It would not have occurred if management had its eye on the ball and was really motivated to succeed.

4) The company relied upon distributors rather than selling directly to its customers (such as solar power contractors).  Distributors do best in a price-competition environment. Complex feature/benefit calculations are difficult for distributors to explain. This is classic error in technology marketing.  It would not have occurred if management had its eye on the ball and was really motivated to succeed.

So was this just bad-luck? — a market turning against a company — or was it bad judgement caused by management who did not really care about the long term success of the company? What do you think the evidence says?

“Maybe their hearts were in the right place and they bet on the wrong horse,” joked political humorist Jon Stewart. “It’s not like there’s any damning evidence they knew in advance this horse was, in fact, a donkey.”

The fact was however, according to the Wall Street Journal, that the government loan guarantee appeared to be rushed through without waiting for final reviews meant to protect the taxpayers’ money.  It’s easy to see that reviews would have shown that prices were dropping precipitously in the industry while capacity was increasing mainly in China. Had the government waited for a full analysis before backing this horse, the donkiness of this venture would have been revealed.

More important, it looks like company management was actually betting on cashing out with an IPO before the collapse of the market for its technology.  According to the Wall Street Journal, “There was a perceived halo around the loan,” said an investor with knowledge of the company.  “If we get the loan, then we can definitely go public and cash out.”

So connecting the dots, the management plan looks like: “Make the company appear to be a winning horse just long enough to get the loan, then do an IPO, then bail out.  Screw the public.”

In the end, this plan replaced a sensible down-to-earth marketing and distribution program.  Did this kind of management mentality also replace an aggressive drop-dead research effort to cut production costs, as in a real business that could not be bailed out?  I think so.

Had I been asked to invest in this company as VC, I’d have asked a few simple questions to reveal the mentality of the management — i.e. their real purpose — and then run in the other direction as fast as possible. (The actual VC’s were either politically motivated, naive, or very shortsighted. I’m not complaining about their greed; just their politicized, dishonest, naive and shortsighted way of trying to make money.)

In the end, the investors have lost all their money and are probably embarrassed or worse.  All the investors had to do was assess the rip-off “screw-the-public and get-out-fast” motivations of company management. But they didn’t or they were complicit.  Everyone lost. Hopefully, management will now pay the price as well.

That’s my opinion. What do you think?

Tags: Jon Stewart, Solyndra, venture capital, Wall Street Journal