Solyndra could be the biggest VC loss in history

TheScream

When hip cell phone startup Amp’d Mobile went bankrupt back in 2007, the company lost its venture capital investors about $360 million. When solar maker Solyndra files for bankruptcy (they’re aiming for next week) it could lose close to three times that amount, or a big chunk of its VC backers $1.1 billion (we’ll see how much any assets go for). That could make it the largest equity loss for venture capitalists in history.

As VentureWire puts it in this article, there’s a new term out there called “the Solyndra Effect,” which describes the sickly feeling that the limited partners of the venture funds that backed Solyndra are feeling right now. The reality is that losses that large can make fund raising really difficult for VCs, particularly in an environment when some funds have struggled to raise money.

Solyndra’s VC and private capital investors include Madrone Capital, RockPort Capital, the George Kaiser Family Foundation, CMEA Capital, Redpoint Ventures, U.S. Venture Partners and Virgin Green Fund. The involvement of the George Kaiser Family Foundation, Solyndra’s biggest backer, is the reason why Republicans are calling foul, as Kaiser has supported the Obama administration.

While Solyndra could still sell its assets for some amount of money, not many solar execs and VCs I’ve talked to think the assets are worth all that much. For the case of solar manufacturer Evergreen Solar, which also filed for bankruptcy recently, its secured debtors are trying to recoup $165 million in notes from an asset fire sale and its unsecured debtors are praying that Evergreen’s assets might exceed that figure, leaving something for them. But as our GigaOM Pro Green IT curator Adam Lesser put it for Evergreen: “Good luck,” getting more than that out.

Another huge loss for VCs was when fiber optic network company Western Integrated Networks (WINfirst) raised $889 million in the broadband build-out era of the late 90?s, and then fell into bankruptcy. WINfirst was able to sell its assets for $12 million.

Solyndra's factory full of panels in April

Solyndra also has reportedly drawn down $527 million of the $535 million loan guaranteed by the Department of Energy. Loan guarantees essentially serve as a promise by the government to make good on a loan if the company can’t, and typically enable better interest rates and lower costs than would otherwise be available to a company for project financing. But Solyndra actually borrowed the loan from the Federal Financing Bank, part of the Treasury Department, so basically the government was acting as a lender to the company directly. So there’s that $527 million to pay back, too, (on top of the $1.1 billion in private funds) if there are any assets out of the Solyndra bankruptcy.

Perhaps you’re wondering how investors could keep funding a company that couldn’t draw enough interest from investors to fulfill its IPO plans back in the Summer of 2010. Beyond the somewhat unexpected change in the economics of the solar industry (panel prices dropped dramatically while Solyndra grew), once investors put money into a company, it can be a difficult decision of when to pull out and when to put in more money.

Say, a fund puts in $50 million in a round, and then Solyndra later says it needs another $50 million to be able to expand production and deliver an economy of scale to reduce manufacturing costs, and some day recoup the fund’s initial investment. Does the fund double down and try to save the initial investment or pull out early on and cut its losses? As recently as March of this year, VentureWire reports that at least three of Solyndra’s backers — Madrone Capital, RockPort Capital and the George Kaiser Family Foundation — put more money into Solyndra in a recapitalization round. When you’re stuck in a hole, sometimes its hard to know if digging is going to help get you out, or send you deeper.

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