The Real Lessons of Solyndra
Having raised $1 billion in private equity investment and $500 million in U.S. federal loan guarantees before imploding, Fremont, CA-based solar panel maker Solyndra is now a political football. Finger-pointing and the assignment of blame are expected to continue throughout the year, leading up to the 2012 elections. Solyndra has the potential to become a Whitewater-like issue for the upcoming presidential campaign.
Entrepreneurs need to understand the Solyndra case. This isn’t just because of the lessons surrounding the federal loan guarantees. It’s also because what happened at Solyndra uniquely captures the nexus of technology, business models, government policy, and a changing landscape in global competition. In the final analysis, Solyndra failed due to a fatal mix of bad luck and questionable business decisions. This happens every day in companies of every size and in every industry. It is precisely for this reason that the lessons of Solyndra are so critical for entrepreneurs today.
So what lessons can we learn from Solyndra’s failure? My colleagues—Ikhlaq Sidhu and Paul Nerger—and I from UC Berkeley’s Innovation Economy Working Group examined the publicly available information on Solyndra, and here’s what we found.
Many factors led to Solyndra’s demise: the firm may have tried to scale too quickly before testing its distribution channel, analyzing the industry’s technology curves, or fully understanding its competitive position. As well, Solyndra does not seem to have adequately anticipated China’s entry into the solar panel market, a key oversight when the company might have been expected to foresee just such a strategic challenge. And as far along as the summer of 2011, it was unclear if Solyndra management was aware of the impending implosion of the firm. The confusion in the company’s governance may have been compounded by the fact that there were so many investors and interested parties involved, thereby handicapping Solyndra’s ability to focus strategically.
Solyndra’s failure presents many key lessons to businesses young and old, the most important one being that technology by itself does not constitute “innovation” in the modern economy. Cutting-edge technology—which Solyndra possessed—must be complemented with a cutting-edge business model—which Solyndra did not possess—or the enterprise is bound to fail, which was the unsurprising result in this case. Here are a few more lessons from Solyndra debacle:
1. It was unwise of the company’s leadership team to raise $1.5 billion in private and public money before knowing whether their technology and business model would work.
2. New businesses always need to plan for course-corrections, but Solyndra appears to have reserved little cash to enable it to adapt or make adjustments in its business, instead choosing to spend almost $350 million to build a new and ultimately unnecessary factory.
3. The company chose to invest in a photovoltaic technology—copper indium gallium (di)selenide (CIGS)—that, due to its uniqueness, did not benefit from the economies of scale yielded by the competing and more ubiquitous crystalline silicon technology.
4. The China factor. When government policies are part of the business model – for example, the tax incentives provided in Germany or China’s national funding of solar manufacturers – free enterprise firms are not in control of their own destiny and are likely to be affected to their detriment.
Going forward, it is crucial that there be shared responsibility between government and the private sector when growing new industries. However, a final lesson overlooked thus far in the ongoing Solyndra discussion is that “order matters.” Private investors initially funded the company’s science project for CIGS technology development, and government resources were brought on later to build a business—a troubling combination and the precise opposite of what has worked historically.
Government has done a good job in the past of funding “big science” technologies (e.g., the space program or the Internet) and should continue to do so. It’s then the responsibility of private investors to commercialize these technologies by funding the companies that result. Government is good at funding “big science” research, and the investment community is good at funding and building new companies, and that’s where each should focus. But with Solyndra, the private investors did the funding of the science, and government then came in to fund the growth of the business. That ordering was backwards, and the results were disastrous.
If there is a single lesson to be learned from the Solyndra debacle, it is the timeless one that sound business judgment and a relentless focus on ROI must trump all other considerations if we are to be successful in building an economy founded on innovation.