SPECIAL REPORT-Synged by Solyndra

Mon Oct 24, 2011 12:01pm BST

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By Nichola Groom and Sarah McBride

LOS ANGELES/SAN FRANCISCO Oct 21 (Reuters) - David Prend is one of the most respected investors in green technology – but even he picks some losers.

Like the Department of Energy, Prend thought Solyndra, an innovative solar company, was a good bet. His venture capital firm, RockPort Capital, began investing in the company three years before the federal government gave the start-up a loan guarantee. RockPort eventually put more than $63.5 million into Solyndra.

As revealed in emails released by the White House, Prend, who sat on the company’s board, also touted the company to President Barack Obama’s staff as a stellar example of green job creation and urged the president to visit its California plant.

But the Solyndra bet went bad – for Prend, the DOE, and other investors such as Henry Kravis and Richard Branson. That’s not so unusual in the field of green tech. A closer look at Prend’s portfolio, which consists entirely of clean energy firms, reveals the high-risk nature of this young sector. The RockPort funds have also had investments sour on solar panel company Soliant, electric car maker Think, and battery maker Ener1, among others.

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     In alternative energy, no one expects every gamble to pay
off due to the staggering capital costs and long lead times
associated with manufacturing new technologies. The federal
government’s inconsistent commitment to promoting alternative
energy has only complicated the picture. 	
    Prend declined to be interviewed, but he did answer a few
questions via email. “It is our experience that these down
cycles become up cycles, and we have almost 40 plus companies in
our portfolio that we believe are well poised to produce strong
returns for our investors,” he said.	
    THE GURU OF GREEN	
    Brought up in California, with a passion for science, Prend
majored in engineering at the University of California at
Berkeley and later earned a Master's of Business Administration
from Harvard. He worked as an engineer at Bechtel and Amoco
before making the leap to finance. He ran Salomon Brothers'
energy investment banking practice for years before co-founding
RockPort in 1998. 	
    At the time, venture funds focused exclusively on green
technology were rare, and Prend’s pioneering role in this
emerging field eventually led to his appointment as an adviser
to the Department of Energy's National Renewable Energy
Laboratory and a seat on the board of the National Venture
Capital Association. 	
    Prend’s funds have invested in a range of green tech
ventures, from efficient diesel-engine maker Achates to an
insulation company called Aspen Aerogels. Because the funds are
still active, their final returns aren’t yet known. 	
    Prend “clearly is an advocate and a champion for his
companies," said Terry McGuire, co-founder of Polaris Venture
Partners, who sits with Prend on the board of energy storage
startup SustainX.  Prend often takes a board seat at these new
ventures and offers guidance on everything from customer
relations to cost structures.  	
    "He's a very cerebral kind of guy," said Mark Heesen,
president of the National Venture Capital Association. "But
you'd better listen when he talks, because it's usually
something important." 	
    But this advocacy brought unwelcome notice when emails
supplied to the congressional committee investigating  the
Solyndra bankruptcy revealed that Prend had pressed the
president to visit the company and it was further discovered
that RockPort had helped Solyndra compete for a lucrative U.S.
Navy deal. 	
    LONG TUBES, HIGH HOPES	
    Prend made his first $16 million investment in Solyndra
[ID:nN1E75P01Q] in 2006, just as alternative energy was
beginning a big run-up. By then storied venture-capital funds
such as Kleiner Perkins Caufield & Byers were entering the field
where Prend had already been a player for years. Electric-car
company Tesla won funding in 2006 from some big-name backers,
including Google’s Sergey Brin and Larry Page. 	
    Solyndra caught the eye of VC funds with a new technology
for turning solar rays into electricity using long round tubes
rather than flat panels in order to absorb more sunlight. 	
    There were two reasons these were expected to be cheaper
than traditional photovoltaic panels: first, the tubes, shaped
like  fluorescent light bulbs, could be made in a highly
automated factory, which would offset the cheap-labor advantage
of Chinese plants. Second, Solyndra’s recipe for converting
sunlight to electricity didn’t require expensive silicon,
relying instead on a mixture of copper, indium, gallium and
selenide, or CIGS.	
    Prend bought it. He invested another $6 million in 2007,
around the same time a number of other private investors,
including Henry Kravis’s KKR, Madrone Capital Partners, which
invests on behalf of Wal-Mart heirs, and Argonaut Private
Equity, a fund attached to Obama fundraiser George Kaiser, put
in cash. Solyndra raised $215.9 million that year. In October
that year, President George W. Bush’s Department of Energy
announced its final rules for a green-tech loan-guarantee
program, listing Solyndra as one of just 16 companies already
approved to apply for the loans. Others on the eligibility list
included Tesla and solar company BrightSource Energy.	
    At first things seemed to be going well. In 2008, Solyndra
started shipping its tubular panels and announced it had $1.2
billion in orders. RockPort put more than $30 million into the
company over 2008 and 2009. The next year, Solyndra’s $535
million DOE loan came through, and the company quickly filed for
an initial public offering.	
    But behind the scenes, the situation was deteriorating. The
global economic crisis deflated the sky-high valuations of
clean-tech startups. Solyndra, for instance, fell from a
valuation of $1.4 billion in July of 2008 to $791 million in
little more than a year, according to Thomson Reuters data. Even
established players such as publicly traded solar panel maker
First Solar suffered big declines; its stock dropped 43 percent
in this same time frame.  	
    Sales lagged, too. Customers held off buying anything they
didn’t absolutely need, including solar energy. And those who
did invest often chose cheaper products from China, where the
government was aggressively subsidizing solar companies. Silicon
prices were falling fast, which meant Solyndra’s silicon-free
technology lost its cost advantage.  	
    By last year Solyndra was running low on cash. In June, 2010
it withdrew its IPO filing, saying it was borrowing $175 million
from investors instead; in November it closed down its first
plant; and in early 2011 it sought another loan from its
backers, including RockPort. It received a loan of $75
million, and at the same time renegotiated the terms of its loan
guarantee with DOE. But that wasn’t enough to turn things
around. In September, the company filed for Chapter 11
bankruptcy and laid off hundreds of employees. 	
    GOVERNMENT’S ROLE 	
    Now Solyndra has become both a symbol of wasteful government
pork and a good reason, in some lawmakers’ view, to  challenge
federal support for green energy. Congress has been sending
mixed signals, creating green tech programs without clearly
spelling out the future of its commitment.  A program extending
cash grants for commercial and industrial solar installations
was almost allowed to expire in 2010 – then renewed at the last
minute, but only for one year.	
    Prend was diligent about staying abreast of government
policy. In February, 2009, he and several other board members of
the National Venture Capital Association met with Carol Browner,
then the top energy and environmental adviser at the White
House, and White House staffer Greg Nelson. Prend says the
meeting was to discuss venture capital investing in clean tech,
energy legislation, and the cap and trade bill to limit carbon
emissions.	
    “The DOE Loan Guarantee program may have been mentioned in
our meeting but it was not discussed at any length,” he said in
an email to Reuters. His meetings at the White House were
related to his position with the NVCA rather than Solyndra.
Later, Prend followed up with an email to Nelson, suggesting
that President Obama visit Solyndra on an upcoming trip to
California. Prend said his communication with Nelson was "about
the prospect of bringing attention to companies that were
growing and hiring. Solyndra was, at the time, one of those
companies." 	
      "None of my meetings in Washington DC were on behalf of
any of my firm's portfolio companies, nor did I request any
government loan approval for these companies at any time," he
said.  He declined to comment on Solyndra’s participation in a
pilot solar project for the U.S Navy’s Defense Venture Capital
Initiative. (RockPort principal Kevin Kopczynski was a
consultant to that program.) 	
    SAME PROBLEMS, DIFFERENT COMPANIES	
    Currently, two of Prend’s three green-tech funds,  RockPort
II and III, are showing negative returns, according to a person
familiar with the firm. But that is fairly normal for funds in
their stage of development, investors say. In venture capital
generally, the early years are when bankruptcies tend to hit,
while it’s too soon to see big payoffs from the companies
destined to succeed. 	
    Moreover, many of the same forces that hurt Solyndra have
been hitting other companies in RockPort’s portfolio. 	
Electric carmaker Think Global AS filed for bankruptcy in its
native Norway in June, 2011, after massive startup costs
outpaced its available cash. Competitors with deeper pockets,
including Tesla, Nissan, and Chevrolet, were ramping up faster,
and Think Global investors declined to re-up. RockPort had
invested at least $21 million in Think over the years. 	
    Shares in Ener1, a U.S. car-battery maker that supplied
Think, are down 95 percent this year, and the company is the
target of several investor lawsuits. The battery business, like
solar, is reeling amid low-cost competition from Asia, and Ener1
failed to clinch several high-profile supply deals. RockPort
exchanged an undisclosed amount of its stake in Think for shares
in Ener1 late last year. 	
    Competition from China also hit Soliant Energy, which
manufactured special high-concentration solar panels for use on
small areas such as home rooftops. The company’s assets were
sold to Emcore Corp (EMKR.O) for a paltry $450,000, reports
said, after it raised millions in venture funding, including
$9.4 million from RockPort, data from Thomson Reuters shows.	
    Even some of RockPort’s early successes, such as solar cell
maker Evergreen Solar, have been unable to compete with
home-grown Asian rivals. RockPort put $2.3 million into
Evergreen in a 2003 private placement, according to data from
Thomson Reuters. The company shifted its production to China
earlier this year to take advantage of the country's competitive
advantages, but wound up filing for Chapter 11 protection three
weeks before Solyndra imploded.	
    "It is the nature of venture capital that some companies
succeed and some do not,” Prend said in his email, adding that
RockPort got out of Evergreen years ago and was “more than
pleased with our return.”	
    One of RockPort’s successful exits is Eka Systems, which was
acquired by Cooper Industries for an undisclosed sum last year
and is part of the a red-hot sector known as smartgrid, which is
aimed at managing energy use.  According to data from Thomson
Reuters, RockPort had invested an estimated $6.5 million in the
venture.  	
    BIG GAMBLES	
    Venture-capital funds typically hold mostly middling
companies, along with a couple of outright duds and one or two
that perform dazzlingly well, shoring up returns. With clean
tech, it may take longer than usual to identify the winners,
because many of these ventures require hundreds of millions of
dollars and years of work before a single dollar of revenue
comes in. 	
    Brightsource, for example, a venture-backed solar company
founded in 2004, just broke ground on its first major power
plant -- a $2.2 billion project in the Mojave Desert -- last
year. It won't be up and running until 2013. 	
    But when an entire sector is languishing, a fund focused
exclusively on that sector will have a problem covering its
losses. Unlike RockPort Capital, other investors in Solyndra 
run diversified funds. Redpoint Capital, for example, can offset
it Solyndra losses with a big payoff on Homeaway, Inc. The
online vacation-house rental business, in which Redpoint
invested early on, went public in June at $27 and is now trading
in the $30s. 	
    Prend, however, remains dedicated to clean tech. Whether he
can still make a success of his two funds that held Solyndra,
RockPort II and RockPort III, is open to debate. One company
that might boost the firm is Enphase Energy, which manufactures
a solar-inverter to convert the direct-current electricity from
solar panels into the alternating current in common use. Enphase
registered in June for an IPO, but may not go to market until
the climate improves.	
    Prend declined to discuss returns or specific companies, but
he struck an optimistic tone in his email. Clean tech “is bigger
than we ever thought it would be, and there are many macro
factors that will cause it to continue to grow,” he said, citing
the electrification of transportation, green buildings, and the
role of the Internet in energy conservation. “The opportunities
are varied, global and gigantic.” 
 (Additional reporting by Cezary Podkul and Roberta Rampton;
Editing by Peter Henderson in San Francisco and Lee Aitken and
Chris Kaufman in New York)	
 ((sarah.mcbride@thomsonreuters.com))
Keywords: USA PREND/ 
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