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Summary:

Sometimes tech trends end up disrupting huge industries, like when the idea of Skype and free web calls, collided with the phone companies. However, sometimes tech ideas have all the makings of these kind of disruptions but ultimately end up flaming out. Here’s why:

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Sometimes tech trends end up disrupting huge industries, like when the idea of Skype and free web calls, collided with the phone companies. However, sometimes tech ideas have all the makings of these kind of disruptions — complete with collective billions of dollars of venture capital funding, dozens of startup competitors, and enthusiastic analyst predictions — but ultimately end up flaming out because of things like timing, macroeconomic conditions, or fatal business model flaws.

Thin film solar trend

Greentech’s got the makings of one of those occasions when the herd veered left and the market went right. The thin film solar startups that were born in the mid-2000′s, and which used the materials copper, indium, gallium and selenium (CIGS) to convert sunlight into electricity, are now facing a tough market. Solyndra, which went bankrupt this month and took down an over $500 million government loan, is only the most high-profile of these companies, and others include HelioVolt, Nanosolar, MiaSole, SoloPower, and Stion.

The creation of companies that use CIGS became a popular pursuit in the mid-2000′s when the price of silicon, which is used as the cornerstone of traditional solar panels, was fetching hundreds of dollars per kilogram. The idea behind CIGS was that as the cost of silicon rose, these companies would make thin film panels without using silicon, and

Workers inspecting panels in Solyndra's factory in April

would be able to make them more cheaply than traditional solar panels. Dozens of top-tier venture firms backed these companies at valuations of billions of dollars.

However, instead of rising, silicon prices have plummeted, reaching the $50 range in June of this year. HelioVolt founder and chief strategy officer BJ Stanbery told us in an interview today that he believes that the industry is going through a “long anticipated consolidation,” and that startups need to find the right partners to survive (HelioVolt announced an equity investment from Korean conglomerate SK Group). Greentech Media reported this weekend that MiaSole is going through a “management adjustment.”

The CIGS startups aren’t just on the wrong end of the silicon price bet, they’re facing a commoditizing solar market that has more supply than demand, the lowest prices in history, a continued weak economy, reduced subsidies in important European solar markets, and fierce Chinese competition. Large companies would struggle in this environment, not to mention a group of startups that mostly haven’t scaled up into large-scale manufacturing yet. Some of these companies will likely get bought, or could find important international partners, but others won’t be as lucky.

When good tech ideas go bad, CLECs

The thin film CIGS solar bet is just the latest tech trend to convince investors and entrepreneurs to enter and then to fall victim to a major flaw and struggle to deliver. Another one that occurred in the late 90′s — for all you telecom vets — was CLECs, or competitive local exchange carriers. GigaOM’s Om Malik wrote about the CLEC tech trend extensively in his book Broadbandits: Inside the $750 billion telecom heist (which you can read for free online courtesy of Google Books, LOL). Essentially the Telecommunications Act of 1996 forced the telecom market to let in upstart companies, coined as CLECS, that wanted to compete with phone companies to offer DSL from the neighborhood level.

But the phone companies that owned the space could charge the CLECs for access, which at the time was called co-location. However at the end of the day, the upfront capital costs eventually made the business model basically unfeasible for most CLEC companies. Dozens of investors like Battery Ventures and Spectrum Equity Partners put investments on the order of $100 million into various CLEC companies like Winstar. These companies burned through cash on these access fees, and in 2001, companies like Winstar started to fall.

In April 2001, Winstar went bankrupt, and articles like this one in the Wall Street Journal touted Winstar: The Debacle for Our Era:

The damage, in fact, was so well distributed among successful, highly sophisticated investors that Winstar is beginning to look a lot like one of those emblematic disasters that comes to define an era on Wall Street much as the battle for RJR Nabisco came to represent the excesses of the corporate takeover frenzy of the 1980s, or the Long Term Capital Management debacle epitomized the risks of high-tech financial instruments in the 1990s.

MVNOs and P2P

Call it the curse of the confusing acronym technology — CLECS, CIGS — and add another one that I covered several years ago: MVNOs, or mobile virtual network operator. MVNOs like ESPN Mobile, Amp’d Mobile, Helio, and others launched in the mid 2000′s with idea to take a brand and turn it into a cell phone company, and rent space on wireless companies’ networks. These companies launched branded cell phones, targeting niche customers that they thought were loyal customers and would pay high monthly bills for branded data, games, and social networks (this was before iPhone and Android and no one yet used wireless data). The startups paid the phone companies network access (like the CLECs did).

Amp’d Mobile raised $360 million from investors like Columbia Capital, Highland Capital Partners, Redpoint Ventures, Intel Capital, MTV Networks, Tudor Investments and Universal Music Group. Helio raised hundreds of millions in funds from SK Telecom and Earthlink.

The upfront capital costs of launching branded cell phone companies and paying the wireless companies access was a huge problem. Add to that missteps by startups like Amp’d Mobile which ended up attracting many customers that didn’t want to pay their bills. Amp’d Mobile, like Winstar and Solyndra, went spectacularly bankrupt. SK Telecom estimated that its losses from Helio were expected to reach between $330 million and $360 million in 2007.

And finally from my colleague and video expert Janko Roettgers: P2P content delivery. Roettgers tells me that the promise of P2P video content deliver was based on the assumption that bandwidth would remain hugely expensive, and also that smaller publishers could compete on an equal playing field for attention and ad dollars if only they had cheap enough bandwidth. Companies like BitTorrent went through funding rounds and a whole bunch of startups launched in this area, too.

However, bandwidth prices went down instead of up, but more importantly Google, Hulu and Netflix sucked up all the attention and content, which suggests bandwidth never really was the biggest problem to begin with. BitTorrent had to pay back its funders to bring down the value and expectations after it turned out that no one wanted to pay for P2P bandwidth and most of the startups in this space have disappeared or are slowly fading away by now. The P2P industry association DCIA even completely switched focus to cloud computing after it realized that there is no money in P2P, says Roettgers.

Anyone have a favorite tech idea that went bust?

Image courtesy of Flashpacking Life, roland.

  1. The problem with Solyndra wasn’t CIGS per se, it was the mistaken notion that somehow the price of a non-rare commodity would remain high. This was a foolish bet from the beginning. You write: “The CIGS startups aren’t just on the wrong end of the silicon price bet, they’re facing a commoditizing solar market that has more supply than demand, the lowest prices in history…”

    Solar has the “lowest prices in history” every single year. It’s done this for decades. Anyone betting otherwise was making a fool’s bet and quite frankly deserves what they got. That doesn’t mean that CIGS has no future nor lacks use cases. In fact, thin films are very promising for things like building cladding, solar windows that generate power, etc. etc. What they aren’t promising for is betting against the price of polysilicon, making oddly shaped “panels” that don’t perform anywhere near better enough to justify their much higher cost, etc.

    Solyndra was going to fail under most circumstances. As was Helio, another fool’s errand. Neither had a good business plan or an especially good idea. What they had was good PR.

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  2. It is not the price of Bandwidth that is causing issues in the streaming video business, it is the cost of doing business with the CDNs that is causing the issue. I just call it BANDWIDTH ECONOMICS.

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  3. Hulu is owned by Hollywood, YouTube is owned by Google. Both have very “deep pockets” to pay for bandwidth + CDN.

    http://www.jumptv.com/international/
    - Jump TV is owned by NeuLion, NeuLion is a “Public Company.” Read their Financials then y’all might start to believe me.

    The “public Internet” was build for streaming voice, not video. CDNs are challenging to build & maintain & they are necessary to deliver streaming video. This cost was not projected accurately into the cost of a streaming video business. Case in point, Netflix.

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  4. I think one will find that the biggest problem with most startups is going to market too soon. For a real company that needs a plant, this means building the plant before perfecting the technology. If one reads carefully the prospectus prepared for Solyndra’s IPO last December, in the 22 pages of Risk Factors are many that relate to technological risks. Not getting the product right prior to starting to build the factory raises costs and increases substantially the time to market. You have to get beyond the science project phase before you launch. How so much money got spent without a finished product is the hard thing to understand. The tragedy is the impact this has on other companies that are following the right path but need capital, as the US VC industry, in unison, turns away from an industry. This technology and others will make their way to Asia as those economies have to satisfy their growing use of energy in any way possible.

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  5. @Markj,

    You are absolutely right re the foolish bet on silicon remaining high.

    One would imagine that “sophisticated” VCs wouldn’t make this kind of bet, but bet they did big time. The story is not a technological failure per se but one as old as hubris itself, a human failing. VCs are paid huge management fees resulting in huge salaries — without ever having first return money to their investors.

    Once you’re paid, say over $ 1 million plus in salary, for a senior partner, whether you perform or not, that leads to a corresponding arrogance. And if you make a bad bet, so what? You’ll still get paid big time. And there’s always that liquidation preference in the preferred stock.

    Of course, the LPs, the entrepreneurs and the employees all get screwed big time. And it doesn’t help when government wears a T-shirt that says, “I’m dumb and easy.”

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