The story behind Solyndra’s rise and fall

If you hadn’t heard of solar startup Solyndra before, get ready to start hearing a lot more about the company. But not because of its great achievements. Solyndra just became a high-profile casualty of the youthful solar industry as Solyndra failed to compete successfully against larger solar rivals in a global market that depends heavily on government subsidies.

The solar panel maker, known for its novel technology and for clinching a flagship $535 million federal loan guarantee in 2009 to build a factory, was supposed to become an American success story of greentech innovation and manufacturing. That loan guarantee, which came from the stimulus package, was meant to propel Solyndra from a startup to a full-fledged maker of solar panels and show how the U.S. will become a leader in clean power and green jobs.

Cue the sound of screeching wheels and a car crash here. Those hopes were largely dashed this morning as Solyndra said it plans to file for bankruptcy and will lay off its 1,100 full-time and temporary employees. That Solyndra had struggled before, but had more recently been drawing in customers and reducing its cost of production, makes the news even more shocking.

But as the news began to circulate Wednesday morning, the big question is: What went wrong?

The company’s own press release spelled out some of the reasons:

“Despite strong growth in the first half of 2011 and traction in North America with a number of orders for very large commercial rooftops, Solyndra could not achieve full-scale operations rapidly enough to compete in the near term with the resources of larger foreign manufacturers. This competitive challenge was exacerbated by a global oversupply of solar panels and a severe compression of prices that in part resulted from uncertainty in governmental incentive programs in Europe and the decline in credit markets that finance solar systems.”

Founded in 2005, Solyndra isn’t alone in facing these challenges. In fact, many solar startups who are building their first big factories in the U.S. now will have to deal with the same pressures and figure out how they can survive. Some of these startups, like SoloPower, Abound Solar, Calisolar and 1366 Technologies, have also received federal loan guarantee offers to help them complete the factories.

The rough and tumble solar market

Solyndra's 300K Square Foot Factory

The global solar industry has gone through rapid changes since Lehman Brothers filed for bankruptcy in the fall of 2008 and heralded the arrival of the recession. Banks stopped making loans, and major solar manufactures began to see customers delaying or canceling orders. China-based Suntech Power (s STP), now the largest solar panel maker, laid off employees and saw its factories running at 50 percent capacity by early 2009. SunPower (s SPWRA), located in Silicon Valley, had to delay production plans, and its CEO, Tom Werner, said the first quarter of 2009 was  the “most challenging quarter since we went public in 2005.”

The soft demand led to a price war, and some of the Chinese manufacturers, such as Suntech, Trina Solar and Yingli Green Energy, opted to build more factories and were able to borrow huge amounts of money from government-run banks to do so. Larger factories provide an economy of scale that makes it possible to drive down production costs. The government help and the resulting cheaper solar panels from China have caused rancor among European and American companies who contended that China was helping its manufacturers in violation of international trade rules.

By the end of 2010, manufacturers had cut the prices of their solar panels by around 50 percent. That year also proved to be a great year for the industry, thanks to strong incentives for installing solar power projects from countries such as Germany and Italy.

The pressure to cut costs has continued, though. Cuts to solar incentives in Europe – and the amount of time it took for Italy and other countries to decide on the extent of the cuts – earlier this year began to cause solar panels to pile up in warehouses. That in turn prompted manufacturers to slash prices even further.

Solyndra’s struggles

The changing dynamics of the solar market are one reason that it was tough for Solyndra to survive. The company’s technology not only uses materials that aren’t commonly used in solar panels today — including copper, indium, gallium and selenium — it also produces solar panels with a design that is very different from conventional ones. Each Solyndra solar panel consists of rows of solar cell-lined tubes (the tubular design was meant to enable the solar cells to capture light reflected from the roof). Conventional solar panels are made with silicon and have a flat surface.

Being unique is important for a startup; you have to offer something better and different from anyone else. But it typically also means the research and production costs will be higher because you have to design your own factory equipment instead of buying ready-made ones. Novel manufacturing processes also generally involve more trouble shooting to make them work for mass production.

Solyndra was hoping the large factory project would help it lower production costs and the prices of its solar panels. The company also designed and sold racks for mounting its solar panels and promised the entire design will cut installation costs. It needed to raise more money in addition to securing the federal loan guarantee (which translated into a loan from the Treasury-run Federal Financing Bank) to scale up production and operate the new factory. It completed building the factory and began adding equipment last year, but it wasn’t going to scale up production until this year.

The company sought to raise more money through an IPO but canceled it in June last year, citing poor market conditions. It managed to line up private funding since and told us earlier this year that it was aiming to close another round. The company also closed an older factory, laid off workers late last year and scaled back its manufacturing plan late last year because the competition to produce solar equipment cheaply was intensifying.

But at the end, it couldn’t lower its production costs fast enough. It also couldn’t raise the money needed when it couldn’t show it could compete with larger rivals. “Regulatory and policy uncertainties in recent months created significant near-term excess supply and price erosion.  Raising incremental capital in this environment was not possible.  This was an unexpected outcome and is most unfortunate,” said Solyndra’s CEO, Brian Harrison, in a statement.

The company plans to file for Chapter 11, a type of bankruptcy that allows it to reorganize. Its options include licensing its technology and selling the business,the company said. The company has already suspended production. Solyndra’s unusual designs may or may not live on, but the lessons of its rise and fall sure will.

Lessons for VCs, DOE

One of the big lessons out of this is for venture capitalists. Solyndra raised about $1 billion in equity from investors including Redpoint Ventures, RockPort Capital, Argonaut, CMEA Capital, U.S. Venture Partners, the Walton family fund Madrone Capital, Abu Dubai’s MASDAR and Richard Branson’s Virgin Green Fund. That financing makes Solyndra one of the most well-funded tech companies out of Silicon Valley. VCs we’ve talked with that passed on investing in the deal back in the early days of the company said the manufacturing costs were just too high compared to competitors. But Solyndra was able to convince some very big names (Richard Branson’s fund, the Walton family fund) and well-established firms (CMEA, RockPort) to bet that it could get those costs down.

Another lesson is for the DOE. By its nature, the loan guarantee program picks winners and losers, offering some companies an edge in the market with its guarantees, while companies that don’t receive the loans are at a disadvantage. That could work OK if the DOE was really good at picking winners. But when the first company out of the lot crashes and burns so roughly, clearly the selection process hasn’t been all that great.

At the National Clean Energy Summit in Las Vegas this week, DOE Secretary Steven Chu noted in his keynote that he was interested in policies like a clean energy standard that specifically doesn’t pick winners and losers. House Energy and Commerce Committee Chairman Fred Upton (R-MI) and Oversight and Investigations Subcommittee Chairman Cliff Stearns (R-FL), which have been spearheading an investigation into Solyndra put out a statement today that said:

As the highly celebrated first stimulus loan guarantee awarded by the DOE, the $535 million loan for Solyndra was suspect from day one. Our investigation to protect American taxpayers has revealed that in the rush to get stimulus cash out the door, despite repeated claims by the Administration to the contrary, some bets were bad from the beginning. And yet, despite the red flags and vocal concerns this Administration continued to tout Solyndra as a stimulus success story, going so far as to have the President visit the plant last summer.

Images courtesy of Ucilia Wang, GigaOm