After Investing $1B, Solyndra’s Backers Finally Lose Their Grip

Solyndra Inc. once seemed destined to help spark a second wave of venture investing in clean technology. Now the solar-panel maker–which today announced it plans to file for Chapter 11 bankruptcy and lay off all 1,100 of its workers–is an example of how difficult it is for venture investors to make money in manufacturing-heavy businesses whose products compete in commodity markets. The “Solyndra Effect,” one clean-tech investor said, now refers to the chill sent down the spines of potential limited partners of venture capital funds by the massive writedowns experienced by investors in the solar company. Solyndra’s case is especially tragic, given that the company raised more than $1 billion, making it one of the most well-funded start-ups ever, and surely the biggest bust for the venture capital industry in terms of equity raised. Despite warning signs, Solyndra’s investors continued to wager more money as they began losing their grip on the company. As VentureWire reported in March, the Department of Energy, which supplied the company with a $535 million loan in 2009, pressured the venture firms to reinvest to demonstrate investor support. Several major equity investors had to convert their preferred equity into common stock as part of the $75 million secured debt round. Those preferred preferences, cherished by venture capitalists, protect investors, guaranteeing they get a defined return on investment in the event of a company’s sale. At least three of Solyndra’s backers–Madrone Capital, RockPort Capital and the George Kaiser Family Foundation, which is the largest shareholder–re-upped in that recapitalization round. It’s not clear whether Solyndra’s earliest backers–CMEA Capital, Redpoint Ventures and U.S. Venture Partners–or Virgin Green Fund, which led the company’s third round in 2006, did the same. Now, as the company prepares to enter Chapter 11 or sells its assets, the government will want its money back. According to a DOE spokesman, $527 million of the $535 million loan has been drawn down. It’s not clear which secured debt holders will get paid back first–the case will go to a bankruptcy court to sort it out–but the venture capitalists holding equity may be out of luck. It’s also not clear who would want to buy Solyndra’s assets. Specialized equipment used to make this type of panels isn’t exactly a hot commodity.  What is clear is that Solyndra’s backers faced the difficult decision whether to continue reinvesting as it needed more capital. At the height of the market in 2008, Solyndra had raised some $600 million and was valued at more than $1 billion. By last year, after the market turned, the investors were contemplating raising new equity at a valuation of just $200 million to $250 million. Like a gambler in the hole, the venture firms’ bets grew larger and larger, making it more difficult to back out, even as competition among solar panel manufacturers, especially in China, got tougher. “It’s a tough choice [for venture firms]: We’ll cut it off or give the company more rope to do what it needs to do,” said Christian Zabbal, managing director at Black Coral Capital, a family office that invests in clean technology companies and venture firms. (Black Coral is not a limited partner of any of Solyndra’s investors.) As an LP evaluating a venture firm’s decision to keep funding Solyndra, Zabbal said he would ask when a firm got in, at what valuation, and what was its rationale. But he said he can see how an investor can get wrapped up in a company to which it already committed a lot, and not get out soon enough.  At least one of those venture firms, CMEA Capital, has decided not to raise a new fund at this time. VentureWire reported in June that the San Francisco-based firm, which raised a $400 million pool of capital in 2008 and was one of Solyndra’s original backers, told limited partners at its annual meeting that it has no plans to raise an eighth fund. CMEA said it needed to come up with new investment tactics to generate better venture returns. In an interview with CMEA Capital Principal Rachel Sheinbein yesterday after her firm made a follow-on investment in wind turbine component maker Danotek, she said her firm would continue examining new investments “very selectively. We have a large portfolio to manage at this point.” Asked whether the Solyndra experience affected CMEA’s strategy, Sheinbein said: “In the venture world you have to be looking forward. It’s not that one particular investment changes your philosophy. It’s a constant learning from companies we are in.”

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