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Can Energy Startups Be Saved?

If small companies are to survive in the highly competitive energy business, they’ll have to work with the large companies they once hoped to replace.
April 25, 2012

The Department of Energy’s loan program, the centerpiece of the U.S. government’s effort to help scale up and commercialize new energy technologies, is in shambles. Its reputation has been destroyed by the failure of Solyndra, a Silicon Valley–­based solar company that declared bankruptcy last September after receiving a $535 million loan guarantee in 2009. Another early recipient of a DOE loan, Beacon Power, which received a $43 million loan in August of 2010, also went bankrupt late last year. And a number of other energy startups that have received large federal loans appear to be in financial trouble.

This February, Abound Solar, a Colorado company that has received a $400 million loan guarantee, said it was shutting down its initial production and laying off 180 workers. As a result of these difficulties and the subsequent political finger-­pointing, even many advocates of the program have given up on it as a meaningful way to encourage the commercialization of energy technologies. Few startups these days are penciling in DOE loans as part of their business plans.

The reasons for the program’s woes are numerous. The bureaucratic and logistical complexities of quickly and intelligently doling out $35 billion to “innovative and advanced clean energy technologies” were, at least in retrospect, predictable. But in many ways, the difficulties of the DOE loan program reflect a larger and more fundamental problem: given that energy is a highly competitive commodity business dominated by entrenched corporations and infrastructure, commercializing new energy technologies requires much more than a large infusion of money. Scaling up innovations in energy production also requires exceptional acumen in business, engineering, and understanding markets.

Indeed, Solyndra makes a near-perfect case study. It spent too much money too fast. In addition to the $535 million from the DOE, the company raised over $1.2 billion from private investors, including some of venture capital’s most prominent firms. What Solyndra lacked, though, was market savvy and manufacturing flexibility. Although the company had quickly traversed what Silicon Valley’s entrepreneurs like to call “the valley of death”—the risky financial period between receiving initial venture funding and beginning to earn revenues—it badly faltered in turning its operations into a viable, long-term business. If there is a prevailing lesson from the Solyndra debacle, it has to do with the danger of trying to do too much too quickly—and doing it alone.

Things Reviewed

  • Report of the Independent Consultant’s Review with Respect to the Department 
of Energy Loan and Loan Guarantee Portfolio

  • “Venture Capital Investment in the Clean Energy Sector”

    Shikhar Ghosh and Ramana Nanda`
    Harvard Business School Entrepreneurial Management Working Paper No. 11-020 (August 1, 2010)

  • Report of R. Todd Neilson, Chief Restructuring Officer, Solyndra

    March 21, 2012

The era when a company such as Solyndra could cobble together more than a billion dollars in financing through a combination of government loans and venture funding is clearly over. Today’s energy startups face the increasingly difficult challenge of raising the vast sums needed to scale up their technologies even as they recognize that attempting to commercialize those technologies by themselves is risky. Finding ways to overcome that problem is especially important because a new generation of clean-energy companies, many initially funded during the boom in clean-tech investments from 2005 through 2008, are ready to begin scaling up. With venture capitalists losing their appetite for high-risk clean-energy projects, can these startups survive?

For a growing number of energy startups, the solution is to find opportunities to work with large, incumbent energy and manufacturing companies in order to secure capital and gain market and engineering expertise. In part, this strategy is an acknowledgment that the venture capital model is ill suited to creating energy companies on its own.

Most venture capital funds look to invest no more than $20 million to $30 million in a company, and in order to make a profit they need an “exit”—typically either an acquisition or a public offering—well within 10 years. What’s more, conventional venture capital strategy assumes that roughly 20 percent of companies will produce extremely high financial returns, to compensate for the failures. It’s a very specific investment model, says Ramana Nanda, an assistant professor at Harvard Business School, and the “sweet spot” lies in sectors such as software and social media, where startups typically require little capital and rarely take long to succeed or fail. In contrast, creating a successful energy company requires immense amounts of capital and can take decades. As Nanda puts it: “The venture model, as it stands today, just doesn’t work for most energy production technologies.”


In theory, at least, more collaboration between small companies and large corporations makes obvious sense. Established energy and manufacturing firms have the engineering experience, market savvy, and access to capital that startups need. At the same time, the big firms often lack startups’ entrepreneurial spirit and the creativity to invent truly innovative technologies.

The success of many biotech companies over the last two decades suggests how such collaborations can work. Like clean-energy companies, biotech startups face a lengthy and expensive commercialization process for their products. But many have avoided that process by making themselves attractive targets for large pharmaceutical companies. The acquisition of startups by drug companies desperate to gain innovative new technologies has fueled much of the biotech industry’s growth. These deals by large pharmaceutical firms, which recognized that their own research was inadequate and their drug pipelines were collapsing, gave venture capitalists a highly profitable way to cash out of their investments in biotech startups long before the fledgling companies had to deal with the expense and difficulty of scaling up or commercializing their technologies. In turn, these lucrative “exits” for venture investors provided strong incentives to invest in the next round of early-stage companies. “It is a virtuous cycle,” Nanda says.

The value of many clean-energy technologies lies in whether they can deliver power more cheaply. Finding out whether that’s the case often takes years of testing in costly large-scale demonstration plants.

Likewise, energy startups can introduce innovations that, say, make solar cells more efficient or cheaper to produce. And those advances could be valuable to large manufacturers looking to improve their own operations or expand into new businesses. But the virtuous cycle in biotech took years to develop. What’s more, Nanda is quick to add, the analogy between the biotech industry in the mid-1980s and the fledgling clean-energy sector today “is not perfect.”

Perhaps the most notable difference is that energy, unlike new drugs, is a commodity: the products of its technologies generally compete on price. The value of many clean-energy technologies, such as new types of batteries or solar cells, lies in whether they can deliver power more cheaply. Finding out whether that’s the case often takes years of testing in costly large-scale demonstration plants. What’s more, energy is generally a mature industry with limited prospects for growth. So while pharmaceutical companies might pay extravagantly to acquire a startup in hopes of eventually offering a blockbuster new drug, energy companies have no such incentive to sink that kind of money into new technologies.

Indeed, many large corporations remain skeptical about the value of the technology that small companies bring to any deal. While obtaining venture investments from a big company or being acquired by one are viable strategies for energy startups, says William Banholzer, Dow Chemical’s executive vice president and chief technology officer, they have to present a convincing “value proposition” to the larger company, and that can be difficult. “Energy is a commodity, and commodities are low-margin businesses,” Banholzer says. “Startups often have unrealistic expectations of what we will pay. They don’t understand how much work it takes to commercialize this stuff. We’re talking time frames that are typically decades—not months, not years.” And, says Banholzer, there is always “a next-best alternative” that determines the market value of an energy technology. “You’re not as special as you think,” he says.

Even so, a number of manufacturers, including Dow, invest in energy startups as a way to broaden their portfolios of emerging technologies. GE, for one, has taken minority stakes in a number of startups over the last five years. The investments, says Mark Little, a senior vice president and chief technology officer at GE, are meant both to make money and to provide “a window on interesting technologies,” allowing GE to explore the viability and potential impact of a wide range of projects. GE spends $4.6 billion per year on its own R&D, but Little says that gaining knowledge of outside technologies is still valuable. The objective of the investments, however, is generally not to acquire the startups. “It could happen, but it’s not our intent,” he says.

Such messages can be humbling, especially for venture capitalists who hope to disrupt the energy business and have counted on the kinds of lucrative acquisitions common in the biotech and Internet industries. But there are signs that some energy startups are focusing more sharply on their core innovations and becoming more patient with their ambitions, making themselves far more desirable partners for large companies.


At a quick glance, Stion has several things in common with Solyndra. Both were founded in the mid-2000s and were backed by some of Silicon Valley’s most prominent investors. And as Solyndra attempted to do, Stion is manufacturing a novel photovoltaic design based on copper indium gallium selenide (CIGS), hoping the nascent technology can outperform other solar materials. But while Solyndra rushed to scale up its technology, Stion has taken a far more conservative route. Its first sizable manufacturing facility began operation last September, just as Solyndra was shutting its doors.

Perhaps most critical, whereas Solyndra went it alone, Stion has deals with two Asian manufacturers. TSMC, the world’s largest semiconductor foundry, and Avaco, a South Korean maker of equipment for manufacturing flat-panel displays, have invested in the company. Not only will the Asian manufacturing partners supply Stion with capital and products, but they will help the startup with engineering and manufacturing know-how. In turn, those companies gain access to Stion’s innovations in materials and solar-cell design.

Such deals fall far short of the blockbuster acquisitions that a venture investor might hope for. But for startups, these partnerships provide the capital and expertise to begin making commercial products. “The [energy startups] that are breaking out are the ones able to craft meaningful partnerships with larger companies,” says Jim Matheson, a general partner at Flagship Ventures. Matheson is a director of Mascoma, a company that struggled for years to find the funding for a commercial-­scale plant that would make cellulosic biofuels based on its novel process for turning biomass into ethanol. Late last year it signed an agreement with Valero Energy; the large oil refiner and ethanol producer will provide the majority of the financing for a $232 million cellulosic-ethanol facility in Kinross, Michigan, and will help operate the plant.

Energy startups that have a “fundamentally transformative” technology and a solid record of demonstrating it are “the ones that the big companies are paying attention to,” Matheson says. “The flashy, hand-waving ‘This thing is going to change the world’ doesn’t compel industrial companies as much as proven performance. They’re really pesky about facts. They want to see details and technical economics and process diagrams.”

Such realizations are contributing to an evolving model for venture-backed energy startups. “We knew how to invest in Internet startups; we know how to invest in biotechs. But in energy, we’re all still finding our way,” says Hemant Taneja, a managing director at General Catalyst, whose investments include Mascoma and Stion. “What’s important for [energy] startups—and what a lot had not done—is to pick your spots. What is the well-defined, riskiest part of the puzzle you’re solving? You need to focus on that core innovation—and leave your partners to do the rest.”

In some ways, that means giving up on Silicon Valley’s once highly publicized desire to reinvent the energy industry and disrupt the well-established position of incumbent companies. But that ambition was never realistic. As venture investors and startups recognize how much time and money it takes to establish truly innovative clean-energy technologies, they’re embracing the value of working closely with the large companies that will dominate the industry for the foreseeable future.

David Rotman is Technology Review’s editor.

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