What Solar VCs Want

A few years ago, venture capitalists were excited to talk about solar cell and panel startups that had novel manufacturing processes that could one day make them industry giants. Today, VCs are eager to say those kinds of solar startups mostly aren’t good bets anymore.

Instead, venture capitalists are looking for materials that can significantly boost the sunlight-to-electricity efficiencies without requiring hefty investments to build factories. They also like solar software and services, which as we’ve pointed, could still be a good area for early-stage investments.

“There will be a hodgepodge of what the venture capital community is more comfortable with: software tools, consumer experience, branding,” said Abe Yokell, a principal at RockPort Capital Partners, at the Photon conference in San Francisco last month. “It’s not all doom and gloom, but it’s certainly a challenging time for certain module makers.”

Investors have become highly skeptical of investing in solar after seeing their own portfolio companies struggling to complete technology development and line up money to build factories. For example, this morning VentureWire reported, that the investors in Solyndra’s have apparently been complaining privately of the solar company’s declining evaluation, from more than $1 billion in 2008 to $200-$250 million last year.

Solar investments actually topped other cleantech categories in 2010, but the high numbers came chiefly from a few companies that were also getting federal loan guarantees to build factories or power plants. In other words, those are investments into later-stage companies and they are needed in order to meet the terms of the loan guarantee.

“The overall venture industry is trying to right itself because it’s trying to figure out how to deliver returns to the limited partners,” said Jeff Grabow from Ernst & Young during the conference.

Lately, solar companies that provide sales, installation, financing and other services at the retail end have been attracting venture capital, along with startups that focus on developing materials that could be made in house and licensed for another stream of revenues. Solar service companies that have gotten funding include Solar Universe and Sungevity. RockPort led the $7 million investment in Solar Universe, and Yokell joined the company’s board.

Meanwhile, 1366 Technologies, which is working on cutting costs for making silicon wafers, announced this week it had lined up an additional $8.4 million to add to the $20 million, B round it raised late last year. 1366’s CEO, Frank van Mierlo, wants to build a factory to produce wafers and start shipping them in 2013, but he also told us at the Photon conference that he would consider licensing the manufacturing technology.

Yokell said that, in retrospect, there might have been “too many dollars that went to me-too types of investments.” The best pitch from startups these days should include a discussion about how they could make money with far less money than their peers, he added.

“Even if you have something interesting, investors will be scared if you have to raise $150 million to commercialize your innovation,” Yokell said.

RockPort investors know first-hand the difficulties of choosing winners. The company bet on Soliant Energy, which has laid off most of its employees after it couldn’t raise enough money to build a factory to make concentrating solar electric systems. It also invested in Solyndra, which has raised more than $1 billion in private equity without making profit.

Many companies and private investors have turned to government support to reach profitability. While government subsidies provide needed capital, it doesn’t guarantee success or good returns for investors. Solyndra, for one, has been held up as a test case for the loan guarantee program, which is under scrutiny from Republican lawmakers. The California company snagged a $535 million loan guarantee from the U.S. Department of Energy in 2009 to build a factory.

It wanted to raise more money through an initial public offering but canceled it last June and has since turned to debt financing. There was a $175 million round last year and the $75 million round it announced this week, along with an announcement that the DOE has extended the repayment period.

A DOE spokeswoman told the Dow Jones VentureWire that the government restructured the loan guarantee to make it more flexible to pay back because it knew Solyndra is up against well-funded competitors, especially those from China. But the government’s changed loan terms also seemed to pressure Solyndra’s private investors to not only put up more money “to exhibit investor support for the company and justify the DOE’s loan,” and to give up some favorable terms in the latest debt financing round, VentureWire reported.

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