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How would you advise an entrepreneur whose venture is just starting out on the development of an exit strategy/harvest method? What factors should they take into account (personal, legal, financial, etc)? Does the idea of planning for exit/harvest down the road affect current attitudes toward managing the company and growing it?

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Sixta Kovacek
Sixta KovacekLv2
28 Sep 2019

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Over the past few years, the number of start-up companies attracted to either doing business themselves in the cloud, or specifically creating applications for others to use in the cloud, has grown significantly. A few but very promising enterprises have launched applications in “container” technology, which enables companies, programmers, or other enterprises to both launch and run applications solely in the cloud. There is still a lot of room in this emerging marketplace, and you are diving in. The product you’ve developed has a unique angle to tap into the local-grown/local-made/local-paid movement that’s also growing larger every day. Your initial market is your own small city, which operates independently but which is linked economically and via public safety provision to another small city sitting directly across a river separating the two. Once you’ve been able to launch your company in your city, you plan to approach the “sister city” leaders, then the county, state, and eventually go national. It’s too soon now, but your future plans entail an IPO offering to accomplish all this. Eventually, you hope to be able to re-imagine your product to go global. You have big plans, are close to being tapped out financially and you now need to plan for additional investors. Address the following considerations as they apply to your product launch. 1.Describe an agency relationship and how it may/will take shape for your small company. As the sole employee and investor in your startup, what agency conflicts might arise? 2.Six months have transpired, and you’ve been able to add two employees. In this new arrangement, what agency disputes might now develop that need to be addressed, and how might you address them? What resources do you need to use or consider? 3.Another three months have passed. You are now ready to expand to your sister city and you need more capital. You decide the wisest path is to sell some stock to outside investors, but you will maintain control over your company by holding onto the majority of the stock. In this new scenario, what type of agency conflict might occur? How can you address this in advance? 4.The IPO was a success, and you have a robust number of shareholders. With board support, you determine it is time to hire a financial manager to help your firm achieve current goals and set new ones appropriate to the firm’s growth strategy. What professional strengths and skills will an individual seeking this position need to possess? 5.Another consideration you feel you need to address at this point, now that your firm’s stock is publicly traded, is how to sustain the high ethical standards you’ve fostered thus far as you move into the firm’s future. What strategies can your management team implement to conduct your business with both personal and professional integrity? What steps can you take to ensure that ethical considerations for financial and other management decisions are embedded into the firm’s culture? 6.Congratulations - you are now at Year One, and everything is moving along faster than you anticipated. While this is great, you are at the point where you need to raise additional capital from outside lenders. With this decision, what type of agency costs might the company incur? How might a lender mitigate any agency costs? 7.Year Two rolls around. Your company has been able to expand beyond your local communities and into to localities and governments in half the counties of the state. The stakes are getting bigger and you welcome the idea of high-level input to ensure the company keeps growing and expanding. You cash out the majority of your stock and turn the company over to an elected board of directors. Neither you nor any other stockholders own a controlling interest (which is also the situation at most public companies). List six potential managerial behaviors the new board might take that could harm your company’s value, and what steps overall can put into place to avoid or mitigate these. 8.You are also aware from your prior career and from your research, that corporate governance can affect shareholder value. This greatly concerns you, as you still have lofty plans for your company’s growth and eventual global trajectory. Questions you’ve identified that need to be addressed at this stage include: a) What is corporate governance?; b) What five corporate governance provisions are internal to a firm and are under its control?; c) What characteristics of the board of directors usually lead to effective corporate governance?; d) What characteristics of the board of directors signal ineffective or problematic governance practices?; e) How can regulatory agencies and legal systems affect corporate governance? If there are differences in local versus national levels, expand upon these. 9.Lastly, one of your new board members is very concerned with “blockholders.” What is block ownership? How does it affect corporate governance? Explain the pros and cons.

Please read the article and answer these questions:


1. How did a government loan guarantee contribute to Solyndra's bankruptcy?

2. How did capital budgeting decisions contribute to Solyndra's bankruptcy?

3. How did changes in the industry contribute to Solyndra's bankruptcy?

4. Does the Solyndra bankruptcy indicate that government loan guarantees for private businesses are a bad idea?

___________

Solyndra Inc. was supposed to be a marquee example of how private and public capital, brought together, could vault innovative companies to commercial success.

Instead, the $535 million government loan guarantee so prized by the solar-panel maker may have ultimately contributed to the company's undoing, say investors with knowledge of the company's operations.

The new factory built with Department of Energy funds foisted fixed costs on a company already struggling through an industry shake-out, they say. What's more, the debt paradoxically made raising more money difficult. Once the government demanded priority in the event of failure, private investors were less likely to prop up the company.

One Solyndra investor said that, in retrospect, "the worst thing that happened to Solyndra was the loan."

The Fremont, Calif.-based company is now in Chapter 11 bankruptcy protection. It is now the target of federal inquiries, including a congressional probe and a criminal investigation by the Justice Department centering on whether the company misled the government in applying for the loans. Republicans, citing emails, say the White House pushed to get the loan approved for political reasons, which the White House denies. Solyndra didn't return calls for comment on that point but has said previously it was cooperating with the investigation.

Behind the political firestorm lies a company with a business case that never quite added up, owing to a fundamental cost problem that quickly got worse after the infusion of taxpayers' money that began in 2009, according to investors, analysts and people familiar with the company.

The company, founded in 2005, was blessed early on with influential backers. They would ultimately pump nearly $1 billion into the company.

Solyndra's largest backer was the family foundation of George Kaiser, a billionaire whose family had made a fortune from natural gas. Other venture-capital luminaries piled in, attracted with the help of Goldman Sachs Group Inc., GS 0.13% Solyndra's financial adviser. Investors included Madrone Capital Partners, which manages money for the Walton family of Wal-Mart Stores Inc. and the Virgin Green Fund, which includes investments from Richard Branson.

The start-up's lure was a clever technology. Solyndra's name, with the play on "cylinder," illustrated its product—not a flat panel but multiple long and thin tubes covered in material to absorb the sun's rays. Other panels relied on a heavy, then-expensive material called polysilicon to turn the sunlight into electricity. Solyndra's product was lighter and potentially easier and cheaper to install.

As subsidies in Europe fueled demand and oil prices soared during 2008, the solar industry seemed poised to take off. But by 2009, the industry was undergoing severe growing pains, and Solyndra was hit hard. Polysilicon prices were in the midst of an 80% dive. That made Solyndra's product less competitive with rivals that used polysilicon.

Solyndra's costs stayed relatively high because of the tricky manufacturing process. In late 2009, Solyndra's tubes cost $4 for every watt of power output to produce, according to company securities filings. The problem was the company could sell them for only $3.24 per watt. One reason for the losses: the company often had to throw out defective or test panels, according to one former production executive.

As it was losing money, competition was getting worse. China's solar panels were dropping in price. U.S. rival First Solar Inc., FSLR 1.86% was making panels at less than a quarter of Solyndra's cost then and today produces panels at about 75 cents per watt. In 2009, Solyndra lost $172.5 million on revenue of $100.5 million.

"The change in expectations was pretty dramatic," said David Miller, spokesman for Solyndra, about the pricing of its panels. He said analysis of what went wrong and what should have been done is easier in retrospect.

The company still exuded optimism. In a July 2009 press release, it said it had a "contractual backlog of more than $2 billion" in orders. The figure was based not on firm orders, however, but largely on "framework agreements" that allowed customers to walk away or renegotiate, according to a filing for an initial public offering from 2010. Its main customer, Phoenix Solar AG, renegotiated in its favor in early 2009, according to Murray Cameron, chief operating officer at the German installer.

In mid-2009, Solyndra had a choice: It could hunker down with its existing factory and try to slash costs to meet competition, drawing on additional private capital as needed, according to the people familiar with the company. Or, with a loan from Uncle Sam, it could gamble and build a brand-new, bigger factory in a bid to gain economies of scale and dominate the market.

The Obama administration was eager to help. The loan-guarantee program dated to the George W. Bush administration—it was created in a 2005 energy law—and now was swimming in funds from the economic-stimulus package.

Solyndra's founder and chief executive at the time, Chris Gronet, decided to go for the gamble. "Chris was really a hard driver," said the former executive involved in the production of the solar panels. "The faster you solve problems, the faster you build your infrastructure, the quicker you are to market. You spend money to solve problems."

There was another motivator—Solyndra's management and investors had an eye on an initial public offering.

"There was a perceived halo around the loan," said an investor with knowledge of the company. "If we get the loan, then we can definitely go public and cash out."

In December 2009, Solyndra made its initial IPO filing, with Goldman Sachs and Morgan Stanley MS -0.47% as lead underwriters.

The company brought in 3,000 workers to build the factory taxpayers had funded, but it quickly realized it had far too much capacity. The old factory alone could be outfitted to produce each year panels with power output of 110 megawatts each year. And the new factory would add another 500 megawatts. Yet sales for 2010 ultimately reached only 65 megawatts.

"The mindset of the management was if we make it, people will buy it," said the former executive. But the new factory added heavy fixed costs such as payroll, lease payments, and utility bills. At the same time, projected revenue wasn't coming in, magnifying the monthly drain of cash, the former executive said.

In June 2010, only weeks after President Barack Obama visited the company, the Solyndra board gave up the IPO plans. The following month Mr. Gronet left his CEO post and became chairman. The new CEO, Brian Harrison, shut down the old factory.

Unruly Campaign Tag : WSJ : Chase INK - Jan 2017

That didn't work either, as the tricky cylinder manufacturing equipment continued to keep costs high. Messrs. Gronet and Harrison couldn't be reached for comment.

And Solyndra realized, too late, that it was a mistake to sell its product mainly through distributors, according to one of the investors and the executive. They say Solyndra could have better pitched its product's advantages, such as a lower installation cost, by speaking directly to customers.

In March, Mr. Harrison said the company made a mistake of not focusing enough on market development. He said it was important to communicate directly to customers, rather than to just resell through distributors.

The new panels also were harder to finance because their performance was difficult to forecast accurately, said Arno Harris, chief executive of solar-project developer Recurrent Energy. He said his team considered purchasing Solyndra panels several times but decided that neither the economics nor the technical design made sense for his company.

Earlier this year, private backers advanced another $75 million in a loan to Solyndra, and, unusually, got ahead of the federal government in the event of a liquidation. This August, Solyndra needed still more money. The government was in talks to restructure its loan but eventually declined.

With no options in sight, the company pulled the plug, filing for bankruptcy and laying off about 1,100 employees—leaving investors to rue what might have been.

"We had a perfectly good factory," said one of the investors. "That would have been a better size for the market."

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