Some recent (bad) news from VC investments in greentech raise more questions about whether this is the best model for pursuing innovation. Despite its glory days in the halls of the Obama administration in general and the DOE in particular, venture capital is not the cure for all ills. In particular, the factors that make venture capital successful are not always those that make new ventures successful. Understanding the difference is critical for national policy makers, venture capitalists, and scientist-entrepreneurs alike.
In an earlier post I outlined the factors that made for successful venture capital investing. These factors build on the work of Amar Bhide (The Venturesome Economy), and recognize the structural constraints imposed on venture capital. In short, venture capital works when the particular combination of technologies and markets have the following characteristics: (1) large and fast-growing markets, (2) strategic benefits from scaling quickly, and (3) large and rapid payoffs. When any of these elements are missing, the venture capital model (go big or die trying) can derail the broad development and diffusion of any promising technologies.
These technology and market characteristics aligned beautifully for information technology. So much so that VCs enjoyed a five-fold increase in investments into their funds between 1991 and 2001 (for a nice review of both venture capital as an asset class and the downside of these new riches, see Paul Kedrosky's Right Sizing the Venture Capital Industry).
This same halo, fueled by optimistic promises by leading VC celebrities like John Doeer and Vinod Khosla, has brought billions into venture capital funds focused on green technology. And as much (and calling for more) in federal subsidies to VC-backed startups.
But for entrepreneurs, investors, and others involved in this sector, the fundamentals remain. And this means that we're going to be seeing an increasing number of greentech firms serve up bad news.
For example, Solyndra's announcement of a massive layoff, coincidentally coming the morning after the midterm elections:
The company received $535 million in U.S. tax payer bailout to create jobs. President Obama and Senator Barbara Boxer visited and campaigned at the plant.
Solyndra’s own auditor, PricewaterhouseCoopers LLP, filed a notification expressing “substantial doubt” about Solyndra’s ability to continue as a going concern with the Securities and Exchange Commission. Despite this the company was given a huge bailout. The funds were used to pay executive salaries and build a plant among other things. The company said it would pay the money back after an IPO. The company has since pulled its IPO and is closing down a plant. Tax payers own 73% of the company. The company said it could not complete with lower cost products from China.
Solyndra was pursuing a unique approach to thin-film technology, designing and building "proprietary cylindrical modules incorporating copper indium gallium diselenide (CIGS) thin-film technology." So while thin film struggles against the increasingly dominant crystalline silicon—"Company spokesman David Miller tells the Oakland Tribune Solyndra needs to cut production costs amidst fierce competition from rival manufacturers in China and elsewhere in the United States"—Solyndra sats on an even more tenuous twig of that foreshortened evolutionary branch. As Michael Kanellos of Green Tech Media writes,
The problems? Tubular modules aren't easy to produce. The cost of silicon solar panels has plummeted over the past two years thanks to declining prices for silicon and competition from Chinese manufacturers and First Solar. First Solar now says it can make cadmium telluride solar modules for 76 cents a watt, not including installation. Solyndra historically has had to grapple with high costs. In the amended S-1 filed earlier this year with the SEC in anticipation of a now-cancelled IPO, Solyndra said that its solar modules sold for $3.24 a watt and that they cost even more to make.
In other words, taxpayers appear to have funded a(nother) VC-backed company—to the tune of $535M—solely based on the credibility of its being venture capital-backed. Green Tech Media has gone so far as to track the number of solar startups getting VC funding, and tracking their demise in Solar Start-Up Bloodbath 2010. According to GTM, VC funds have invested in 250 new solar firms in the last few years, and in 2009 put "more than $1.4 billion in 84 deals."
Technological innovation has never been the sole province of venture backed startups. In the end, what knowledge Solyndra's (very smart) engineers—or those in these other VC backed firms—develop or learn along the way will be lost if and when Solyndra (or any other) goes down. This is not the kind of support for green tech innovation that provides either knowledge spillovers or new jobs.
Green technology, and particularly clean energy, requires a scale and technological maturity that necessitates big company manufacturing capacity and federal and state regulation. Until we recognize that venture capital is not the cure for all ills, we can't begin to pursue the right innovation pathways for green tech.
One of the things to add with regard to VC involvement is that the insertion points for PV are highly regulated and government managed. For the large infrastructure projects–electricity, national highway system, wonder drug development, space exploration, internet–it would appear that these were fueled by the government as *buyer* rather than as *seller* or *investor*. When government is sponsoring stuff it isn’t itself purchasing, I wonder if that’s an investment warning sign.