When good tech ideas go bad

lemmings

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.

loading

Comments have been disabled for this post