I am a technology entrepreneur, these days back based in San Francisco, focused on new startup development.
I grew up in Munich, Germany and came to Silicon Valley to receive a PhD in computer science from Stanford University. I created a series of three Internet software companies around 2000, each of which became the flagship leader in their respective markets, valued solidly in the nine digits, and thriving profitable businesses today.
In 2002, I decided to go for something audaciously deep tech — making solar power ten times less expensive. I started Nanosolar and led it for eight years until 2010, developing an ultra-low-cost solar cell and building two substantive high-tech fabs.
In 2010, I started a battery manufacturer in China and gained some first-hand insight into how things work entrepreneurially on the ground over there.
I keep trying to figure out the “high-beta economy” — an activity that tends to be as humbling as refreshing. I surely think that there’s a lot more randomness than usually acknowledged by the stories we read and tell. I am looking forward to occasionally share some perspective on that and other things I find worth noting.
After working at Xerox PARC over several summers on what’s today called “big data”, I started in the doctorate program in computer science at Stanford University just around the time when the “World Wide Web” started to emerge out of a soup of prototypes and protocols. Curiously, back then, “interactive TV” was really the hot commercial new thing in Silicon Valley, and the web thing was regarded somewhat like a better bicycle in the automotive industry.
I built the first group annotation system that worked right into the Mosaic browser and became familiar with every line of code that Marc Andreessen was writing over at NCSA.
Of course, in hindsight, the business story of the century that emanated right there from our small group at Stanford was Google. Larry Page and I were among the five of the first batch of PhD advisees of Professor Terry Winograd. Things move along with a slow yet concentrated calm in the setting of a PhD program, and especially at a place like Stanford, and sitting in an office that used to be that of the founders of Cisco one can form a belief that the truly big stuff already happened. That’s never true though!
The security of a $1,600/month paycheck from the Stanford PhD program and the U.S. immigrant visa it affords (as well as some great Stanford infrastructure) was a wonderful platform to allow me to follow my entrepreneurial bent. This tends to happen with people around you, ie. other Stanford people as co-founders. I started the first company in our group and figured out all this venture funding thing without which Google could have never existed. Just kidding. I ended up being involved in starting a series of three Internet companies, each ultimately acquired for good value by the leading public company in their respective segment. That’s success from one perspective yet failure from another.
eGroups was one of the first true social networks, before “social network” was a term. I was the founding CEO with the early team consisting of Carl Page (Larry Page’s brother), Scott Hassan (now of Willow Garage), Ramu Yalamanchi (later founder of Hi5 Networks), and Alan Braverman (later founder of Yammer.com).
For about two years, I had the pleasure of working with Sequoia’s Michael Moritz at Sequoia Capital. (This sure beat getting an MBA!) The very best investors are in an entirely different league than everyone else. They do things differently. Mike, for instance, didn’t even bother to engage an investor counsel to complete the financing. Just used the company’s and saved a lot of time and expense.
eGroups was a consumer service that grew users at a rate faster than any other Internet application back then except for AOL’s ICQ chat service. We grew into the largest email hub on the Internet behind AOL in 1999/2000. Yahoo acquired eGroups in 2000 when it had grown to approximately 50 million users. [c|net article: Yahoo buys eGroups in $450 million stock deal] Many of the key engineers ended up moving over to Google and built Google Groups there. Sending a billion email messages fast is not easy to develop and deploy and required rewriting a lot of fundamental software.
At eGroups, I remember sensing some Facebook like perspective and we started a lot of things to move traffic from email to more interconnected Web views. But this was a time when people barely had a digital photo ready at hand, and we were busy with hiring engineers (which was supposed to build equity value), scaling email messaging infrastructure, and navigating through an investment bubble. We tried hard building a real business with real revenue but monetizing user generated content wasn’t readily done within the advertising frameworks from back then; and we were competing against others who just cared about building user traffic. These days, Facebook is a humbling reminder to me of how much bigger and more meaningful the same general category can become if started just a few years later. Still, it was good to exit with $450m in value before the 2000/2001 freeze.
Stanford professor Yoav Shoham pinged me one day to join him in on creating a company that’s eBay for enterprises. I became the co-founding CTO and developed the initial plans and designs with Yoav. When both eGroups and TradingDynamics received initial funding during the same week, I chose to focus on eGroups (see above). Still, 15 months later, TradingDynamics got acquired for the value of the GDP of an African country. [c|net article: Ariba completes $720 million TradingDynamics buy] More high beta followed. Down to zero value for some years. Then ten years later, TradingDynamics is now routinely used for all component sourcing in large corporations such as IBM.
FindLaw is the most popular legal website. Co-founded with two Harvard/Stanford law graduates, Tim Stanley and Stacy Stern. I focused on the site’s technology. Our first funding came in the form of a customer paying in advance for a year’s of service. Acquired in 2001 by Thomson Reuters. [Articles: West Group acquires FindLaw; early NY Times article about FindLaw] It takes some very dedicated founders and being early on an investment wave to bootstrap a business — but can be a lot of fun and lead to some very solid value.
Tank Hill Projects
In 2000, I teamed up with Mark Pincus (now of Zynga), to create an incubator for launching companies developed by us. But after raising $10m and hiring 50 people (including a Ukrainian development team), we concluded wrong time, wrong place, wrong approach and chose to return the money to the investors. Few investors see their money back without asking, so this actually set a good example for people trusting us to not keep sitting on their money if we don’t find a good use for it.
Nanosolar was my entrepreneurial foray into the world of energy, semiconductors, and manufacturing. I ended up mobilizing just around $500 milliion in capital to deliver a masterpiece in solar technology innovation. We built two state-of-the-art fabs based on our completely new manufacturing processes and tooling.
It took a torturous amount of persistence and quantum-state bending will power to get all that amount of innovation working. The kind of mountain moving that only youth and some degree of naivety can power. The technology was a truly foundational advance and we enjoyed having superb team, resources, and strategic customers / backers including the world’s largest electric utility.
Then when we were ready to see the business truly take off, we found ourselves effectively also competing against the Chinese government, which is not a preferred situation. One large customer put it directly in a 2008 meeting: “The manufacturer who just left my office is backed by the Chinese government. I need a steep discount from you because you are not” — a comment that suggested wiping out much of our gross margin. (The industry background on this is that a solar panel’s 20-year warranty is so instrumental that if a government is strategically committed to an industry and known to effectively guarantee the survival of its selected manufacturers, that’s a business advantage that no amount of innovation can compete with.) Soon price points dropped to a third of what they used to be. Great news for buyers; bad news for the health of the industry and future innovation.
It started all in 2002. With my initial entrepreneurial success in Internet companies giving me the freedom to do what I think is most worthwhile, I decided that it would be meaningful if I’d be able to bring to bear a Silicon Valley type approach to solving difficult technological challenges in the area of sustainable / green energy. I picked the (then) rather uncharted frontier of solar power. Product and factory cost were holding back solar in a major way from its obvious potential. The question was how to make a big leap of a difference on cost and capital efficiency.
Various inventors had been pursuing novel semiconductor process technologies but few did much to turn this into real products. There was a lot of pioneering science out there but little really intense, focused commercial development. We set out to change that and go after the most promising route in a commercially meaningful and intense way. It did in fact turn out to be difficult, if ultimately in unexpected ways.
Pursuing the endeavor involved basically two grand bets — whether it’s possible to achieve technological breakthrough in a completely new area using a certain style of approaching things; and whether it’s possible to finance such an effort with the hundreds of millions of dollars it requires.
The technological grand experiment — being able to master incredible innovation in green energy technology — basically worked out fine. Smart engineers put behind the right goals and equipped with good funding can truly move mountains and, with intense work, prove all sorts of nay-sayers wrong (and there’s plenty of them at any time). It is always difficult for people at the outside to fairly judge what someone is making under the hood of commercial secrecy — blog and press coverage fluctuated somewhat randomly from exuberant to fatalistic. But the benchmarking we did with CEOs of other leading manufacturers were much clearer feedback: Whenever we showed one of them what we have under the hood (and we did not mind doing that), their jaws would usually drop to the floor by the end of the tour. The European ones tended to say that our team had accomplished in 6 years what their heavily subsidized groups did not get anywhere close to achieving in 20 years. That was the crux of the matter: Huge acceleration and leaps are in fact possible in greentech with a startup style of research and development, and untapped opportunities abound left and right in science based innovations pursued with a startup mindset.
The other grand experiment was whether it’d work to expand the realm and horizon of high-beta investors into greentech — and associated with this: 7-year development cycles, seriously international business, global manufacturing, the risk of blow-ups that kill people and necessitate large-area evacuations, and a lot of other big-boys stuff. Solar technology had been completely uninvestible in Silicon Valley and elsewhere. In 2002, no fund had ever invested in a solar company. Kleiner Perkins was contemplating greentech but not committed to it yet. Their feedback to us back then was: ”What is the value proposition of solar power?” (after a pitch on printed solar versus other technologies). A Nobel laureate venture partner at a leading other firm suggested “We don’t do that in Silicon Valley — try go and speak with GE.” Planning to do manufacturing was not something anyone could remember having heard of lately. (“Last time anyone manufactured here must have been more than a decade ago.”) Venture investors had clear screening criterias which excluded anything energy, anything green, and in particular anything manufacturing. Today many investors are gone and effectively back to these criteria, possibly for good reasons. (Still overall, not the result that optimizes the common good in the best way — see also Why Facebook is killing Silicon Valley.)
Still in 2002 I felt we ought to be able to bring Silicon Valley type technological and company-building capabilities to this important industry. Given our non-China location, it was clear that our value would be in innovation and we would have to go very much for a plan of developing the ultimate solar electricity panel with maximum conceivable cost and capital efficiency. Nothing else would have been investible here (and I did try). We figured out what kind of a plan this would need to be technically–a plan that changed very little over ten years. (And once on that track, it was rather difficult to soften this towards a not-quite-as-radical-low-cost but faster-to-market approach.)
When one is targeting an entire factor of a cost reduction on a manufactured product with many components, it does not suffice to just deliver a massive innovation on one component — because improving one 15% component by infinity basically just makes that 15% difference overall. So this quickly becomes an all-out effort to develop completely new processes and designs for every component all the way, with hundreds of engineers at the company and its suppliers. We were fortunate to be in the historically unique position to do just that. (Here’ the detailed technical white paper. The really fun — technical — stuff I’m afraid I can’t discuss here. I can only say there’s been amazing innovation at every level.) With enough capital and years of persistence, the right team can keep hammering out the details and deliver some pretty incredible innovation on some very audacious goals. And that’s what we did.
I got Nanosolar going with the help of a few Internet angel-investor friends of mine, including Sunil Paul, Mark Pincus (who I had co-run a company with), Reid Hoffman (who I first met when both of us worked at PARC in the late 80s) as well as Sergey Brin and Larry Page (who I went to school with). The latter put in a marginal amount but back then they were not even liquid with their Google stock and it was a first investment for them. The quality of these initial supporters ultimately led to the fact that we became the first company to obtain funding from venture capital investors. (Benchmark Capital and USVP ended up being Nanosolar’s initial venture investor. USVP exited at a profit of a small multiple in 2005 when I shifted the company’s printable solar cell development from a very instable to a commercially stable semiconductor, a move that they did not subscribe to.) Btw, many of the early investors did actually very well with their investment — they all had a chance in 2008 to take some of their investment off the table at a 125x increase in share price, that is, if someone sold only 20% of their shares at that 125x, this still delivered a 25x overall return even if one completely discounts the remaining 80% holding. Some of the later strategic investors bought supply optionality which was important to them beyond the value of their investment. (Plus Goldman Sachs did the due diligence for them.)
Without being particularly interested in it and certainly not actively pursuing it, we received a lot of media interest. We were always amused when people thought that we had an entire team of public relations people on staff at Nanosolar. In fact we had none. We were way too frugal for that. (Investors often called us the most frugal company with the most capital they’ve ever seen.) This approach worked for many years except later when media sentiment turned on everything including the entire industry. Initially media interest centered around Internet entrepreneurs/investors attacking a completely new industry.
The New York Times, June 19, 2003 $6.5 Million Being Invested in a Venture on Solar Cells The NY Times first reports about the formation of Nanosolar: “Nanosolar is seen as a harbinger because of the strong pedigree of the venture capital firms and the track record of its chief executive and co-founder, R. Martin Roscheisen”
Fast Company, Nov 30, 2004 Green Power “The time may finally have come for these champions of on-the-verge technologies.”; “Roscheisen funded the company’s early research himself, and with angel investment from friends such as the founders of Google, but eventually he decided to raise $6.5 million in venture capital.”
Business Week, June 20, 2006 Green Growth Areas for Entrepreneurs “When technology entrepreneur Martin Roscheisen was looking for the next big thing in 2001, the Internet wasn’t part of his plans. Instead, he looked to the field of solar photovoltaics (PV), specifically at work being done by a small research company named Unisun Corp. Roscheisen recruited one of Unisun’s main researchers, and sought funding in California’s Silicon Valley. The pitch: thin-film solar cells that could be produced for less, more efficiently, and on a significantly larger scale than standard solar paneling.”
Some of the coverage above implied hopeful expectations about how quickly this potential impact would materialize. In these early years, this was in part due to the writers not understanding that putting atoms on top of each other is very different than an IT product where one assembles some components; in part due to my not taking particular care of making that clear. In a sense, I was more concerned about making payroll — already twice we had gotten to within hours of bouncing checks — so enthusiastic press coverage was surely welcome if it builds some more general support for this new area.
The crux about Nanosolar was to make solar production more capital efficient in particular. It’s difficult to see a viable business or industry if it costs a dollar in capital expenditure to generate a dollar in revenue. Capital efficiency continues to be the Achilles heel of the solar industry, and Nanosolar planned to get (and did get) a factor ahead of everyone in this area.
Even though a far more capital efficient technology, our capital requirements were still stiff. It’s developing a completely new semiconductor process and tooling to produce it. So we constantly had to make sure we had sufficient capital. Nothing worse than a fabulous engineering effort that runs out of money. And fortunately we had gotten the timing just right. The energy macro was taking off. Kleiner Perkins had made a decisive public commitment, and even we did not end up working with them, their signaling is read by a lot of investors. Around 2005 I remember being at an increasing number of dinners with pension funds and other large “LP” investors asking me which venture fund I know who invest in greentech. Predictably, soon basically every VC firm on the planet had at least one partner dedicated to greentech. It was the luck of a rising tide in which Nanosolar ended up having an unfair advantage due to being early. (This also led to a lot of envy by others as well. Of course, the envious ones tend to forget that someone else prepared the road for them in the first place.)
With our early start, we were able to scoop up an immense pool of talent. Our hiring was extremely selective, focused on raw talent and curiosity and drive more than experience. We’ve always found that issues and challenges change way too fast during the course of development, that it’s best addressed by all-around smart people whose curiosity has a burning intensity capable of making things work that others wouldn’t even try. I had seen this earlier in the Internet space in the late 90s where lots of companies got started but few had typically more than two or three truly great engineers — and then Google came along and had a complete pool of truly great ones. One of the things I was most proud of at Nanosolar is that we clearly had this pool of dozens and dozens of engineers each of which of star quality. Even the consultants we had working for us (under NDA and other IP protection) included individuals such as Gronet and Basol, who later founded Solyndra and Solopower respectively. (Btw, as for other companies abusing taxpayer funds, at least I am on the public record and also here for warning of the latter to happen. I mean this was a company whose solar product had half of the semiconductor material not in line of sight with the sun.)
The quality of our effort and early lead also exhibited in the quality of the partners we were able to engage with. The world’s largest utility ended up backing us effectively with their balance sheet — they signed a $B worth of legally binding purchases — and the CEO of the largest developer of large solar power plants in the world spent personally hundreds of hours assisting us with product definition and roll-out. It was truly wonderful.
Raising capital was never as easy as some may think given the fact that we raised half a billion in development funds. For what we were trying to do, it basically required coming up with entirely new ways of raising capital. That took a lot of creativity and effort which many others failed at. It’s one thing to raise capital if there exist funds focused on your company’s industry/stage/product; it’s another thing if there don’t. We never worked with any investment bank; pretty clear they would have failed. These were pioneering forms of raising capital. Our 2006 and 2008 financings were each the largest of any private tech company on the planet in each of these years. ”Up” rounds every single time even though we often did not have much to show for yet. The experiential upside of not being able to just drive up and down Menlo Park for fund raising was an assortment of memorable meetings — such as a Sunday afternoon tea in Kuwait with Mr. Oil (OPEC’s Secretary General), a lunch at the city of London’s very much most elite members’ lunchclub (where my lunch partner discussed Russian capital “that desires to become legitimized” at our table which was within spitting distance of each of those of the Chairmen of Goldman Intl and Exxon); etc.
Above: Largest venture financings in 2008 is dominated by solar companies, with Nanosolar at #1.
Above: All-time (1970 thru 2009) largest venture financings as of 2009. Three greentech companies, including Nanosolar. Just two years later, this list would look completely different with ‘social media’ companies all over.
I was Nanosolar’s Chairman & Chief Executive Officer from the company’s inception in 2002 through commenced “normal production” in 2010. With our industry flagship status, I got invited to every world leader and political hob-nobbing conference on the planet; I never hesitated a second to decline them all. I was always highly suspicious of startup CEOs going to certain conferences; I would not ever invest in any such companies. Instead I myself enjoyed spending my time in the details of managing the technology development, architecting the product and process with the team. What I really enjoy most is to be able to show up at work and have really smart, really motivated engineers there, cranking on something magic.
In lockstep with a very experienced manufacturing executive, Werner Dumanski, we managed to go from the “against-all-odds” nanoscience research to manufacturing process development, production tooling development, product development including some rather challenging work on product reliability and certification.
Werner had previously run all of IBM’s $4B storage-disk operations, with 14,000 employees in his organization. It’s an example of what’s great about Silicon Valley. IBM at one point noted that one of their storage-disk factories in Germany did a far better job than its team in San Jose which had invented the very technology. Puzzled about that, they asked the leader of that group to report to work in San Jose the next Monday. That was Werner. Soon the U.S. operation was in shape: high yield and lean. And Werner ended up managing all of manufacturing at IBM. Now in Silicon Valley, he joined us at Nanosolar, initially with a staff of zero and a $1B smaller budget. Werner had all the attributes of a “level-5 leader” and I backed him fully all the way to the extent of my own ouster instead (which did not avoid his in the end though).
A unique aspect to managing technology manufacturing is the challenge of building a very tight team of a very diverse group of employees. In a software company, there’s always some sort of cultural gulf between engineering and sales one needs to attend to. But in a manufacturing company, one is additionally as dependent on the Princeton PhD in the lab as the technician on the factory floor. Then for low cost, the whole thing needs to be done lean, that is, without all the overhead and layers of management that high-margin tech companies tend to have. Werner had some very unique knowledge and experience with this. It’s a whole package of lifelong lessons (that was not always easy to convey to board members who spend a few hours a quarter at the company and have no operating experience in any business, let alone commodity manufacturing).
We built and ramped two complete state-of-the-art factories: a cell production factory (a semiconductor fab) and a panel assembly factory (which works more like a car-production factory). Up to this day, Nanosolar is the only entity on the planet capable of simply printing the semiconductor of a solar cell in a commercially meaningful way. It’s quite a piece of magic really. At present low levels of capacity, the advantage of that is still somewhat latent. But the distinctly superior capital efficiency that goes along with that is commercially more meaningful than ever before, in particular because since the 2008 credit crisis capital efficiency has become only more precious.
At Nanosolar we had a very strong culture focused on talent more than number of years of experience, and results more than process. We had almost no attrition over the years and long-term commitment played out in various kinds of ways including that many employees had stock vesting as far as 8 years out. (We may have overstepped a bit on that. Silicon Valley tradition is half that length.) We also had the policy of showing people the (building’s) exit when someone asked about ‘exit’.
During 2009, I enjoyed working with Bill Campbell, the secret coach in Silicon Valley. For any CEO, it is a privilege to have the same advisor as Steve Jobs was counting on for so many years. Bill was very impressed by our management and helped us reinforce our unique culture. When leaning towards something but finding it possibly a bit out there, it is very valuable to have an advisor be able to point to a relevant internal decisions at Apple or Google of similar thinking. One of Bill’s pieces of advice I may not have given sufficient attention: “It’s just that your venture investors would never have hired Steve Jobs if they had a chance to.”
In June 2006, we announced that we had managed to close funding in an amount not done before by a solar company and were planning to use it to build a factory basically an order of magnitude larger than past solar factories. The capital raise was novel in size as well as approach in that it pioneered skipping the Valley’s late-stage VCs in favor of global hedge funds and family offices. The size of the planned factory was novel but representative of the not-your-grandfather’s-solar customer demand and growth shaping up in the end market. By not giving a timeline of how many years it would take to build a large factory based on new materials, some ended up believing that that’d happen overnight or within a year.
Globe and Mail, November 12, 2006 Nanosolar set for expected clean-tech boom Shawn McCarthy in Canada’s national newspaper: “Veteran entrepreneur Martin Roscheisen — who studied engineering with Google founders Sergey Brin and Larry Page at Stanford University — founded Nanosolar with their backing four years ago and now has big production plans.”
The Economist, Nov 18, 2006 Green dreams Editorial leader to the Nov 18th print edition
The Motley Fool, Dec 18, 2006 A Rising Sun? “…might even allow Nanosolar to become the dominant player in the industry”
In Sept 2008, the media got hold of the fact that six months earlier we had closed a strategic financing of $300 million. We had not planned to announce this at all actually — these types of news always only help competitors.
In hindsight, the peak of exuberance in media reporting can presumably be marked when Popular Science named Nanosolar’s panel the #1 product innovation of the year — relegating into the #2 spot the new Apple iPhone. Not a single marketing person was working on our behalf while Apple truly has an army of public relations staff. While I could probably spend the rest of my life in a highly lucrative career in marketing by claiming that I did it — upending Steve Jobs — I’m afraid I can’t really claim I did anything for that. (The one time I had a chance to meet Steve Jobs we joked about that.) Clearly, there was something else going on, way out of our control. That said, the amount of innovation involved in our solar cell was truly something that Steve Jobs respected as meeting and exceeding that of his own company.
In September 2009, we hit a major milestone: We inaugurated our fully automated high-volume panel-assembly factory located close to our customers in Germany (image with state governor, Democratic candidate for chancellor):
Inauguration video featuring key management that made it all happen:
The two fabs (cell and panel factories) were finally operating and product coming out for first substantial installations. This looked like this:
Despite production having commenced, we continued learning more about certain less well known idiosyncracies of the semiconductor we were using than we ever cared to learn about. I ended up having to order a full stop to production three more times. It turns out there’s issues that tend to get investigated by research institutions and issues that don’t tend to get researched a lot.
Going for a novel semiconductor material and a completely new process implies an expected share of surprises of course. Still one would think that at a point in time where more than $2B had been invested in companies working on similar technology, on certain very basic attributes, not all of the world’s experts can be wrong. But we experienced several cases of that. Random high beta at way too late a stage. In hindsight, the lesson is the obvious insight not to confuse lack of data with affirmation. Certain topics are just not investigated very much by research groups, and unfortunately these include some of the commercially very relevant issues.
Time wise, since our inception, Nanosolar had usually tracked 2-3 quarters behind our competitor Miasole, including later in production volume ramp. Some journalists criticized Nanosolar for that, not always with a fair understanding. While the product is essentially the same, the inside of the product is distinctly not. From the beginning, Nanosolar was shooting for far more aggressive inside targets: three times better semiconductor materials utilization than Miasole; one third the cost of their cell foil; a factor higher tooling productivity; etc. Benefits of such magnitude don’t just come out of nowhere for free. When Miasole “just” developed new tooling design, Nanosolar had to that plus develop completely new materials processes. When Miasole could rely on a known process, Nanosolar had to invent a completely new one. This put Nanosolar by design on a very different timeframe. All investors knew about it and had bought into it. Given expectations of a commoditizing industry, investing into a company that would achieve a more fundamental cost advantage is a good idea even if it takes longer to get there. Still it’s difficult to communicate this at times, and it became somewhat of an obsession of the press to track this. And it’s virtually impossible to accelerate on a moment’s notice when a board member sees a competitor filing to go public and suddenly feels we ought to as well.
As Nanosolar grew into a business with a heavy international and operational activities, one key mistake I made was to not sufficiently evolve the company’s board of directors. The individuals from the early-stage venture firms tend to be people with a good skill set at scouting out promising Bay-area startups. But as a company grows and the executive team matures through senior additions (and as the venture investors percentage of contributed capital shrinks to a small fraction — just 5% in our case), it is important to have a board of directors with deeper business operating, management, international, and industry experience. A real operating business and the world at large out there is just very different an animal than what a typical venture investor tends to get exposed to within the Silicon Valley horizon. By not ever really being in front of customers and suppliers and in touch with the industry at large, it’s actually quite difficult for a venture investor to scale with the company and maintain a good instinct about what’s going on. (I have actually found hedge-fund investors to be very much more in tune with the industry — that’s because they tend to know/visit/track the key other companies, etc.) Then board meetings tend to be a subtle thing and if someone has his instinct in odd places, it makes things difficult. The issue is simply also that during inevitably arising operating challenges, when steadiness is often the best prescription, a VC director with no operating experience tends to get weak in his knees overly quickly and often causes more damage than good. Then it is good to have other board members around to balance the group and point the board discussion onto what matters most. Unfortunately, a lot of damage can be caused by not having an effective board of directors.
In early 2010, one of my VC board members, who had had a latent presence for many prior years, came alive about his favorite topic of going public. He thought a competitor of ours would be valued at $3B after an IPO and we’d be behind. My opinion — that they would not be valued anywhere that highly and in fact most likely not even manage to complete the IPO and soon be bankrupt anyway and that at Nanosolar we have the capital to just keep making progress on our plan — exhibited a disconnect with that board member. Then of course we surely had plenty of operational issues that the team kept working through persistently at generally good progress. Some members on the board started zooming into our seasoned operations head and looking for silver bullets that could nail it all. Unfortunately, often there is no silver bullet and the only way to go is to keep shooting lead bullets as unglamorous as this might be. I backed our operations team and did not support firing and hiring VPs. I happened to be right in the end yet still lost my job. That’s of course the other action one can take in the find-the-silver-bullet mentality: Fire the CEO.
My ouster led to an incredible talent of a “professional” CEO being installed who proceeded to destroy a $B in shareholder equity. He lasted less than two years, during which time he managed to reduce the company’s price per share by a factor of 30. He instituted a 9-to-5 culture, with VPs precisely leaving minutes after the CEO, and many engineers at home at 5:30pm for the first time their spouses could remember. He staffed up the HR department to the size of the product reliabilty department while cutting down the latter to the size of one. (Given 20-year product warranties required, product reliability had always been a huge emphasis of ours but perhaps the new CEO got sick hearing from the guys.) The website now featured an EVP HR in the #2 spot right behind the CEO. Still the expanded HR didn’t keep more than 100 engineers leaving the company, with all of their specific knowledge acquired in many cases over 6-8 years. In particular, this included a lot of the key process engineers and tool designers, the core asset of the company. Engineers were stunned about the new management appearing to be in the belief that the tools the company had were ones that one sort of could just buy off-the-shelf somewhere, perhaps at Cosco. Meetings were held with suppliers where years worth of tightly guarded trade secret designs were just handed over. Several senior engineers quit in disgust over that. Still, the new management managed to report decent-sounding progress to the board and shareholders. The motto was that milestones were now being met. The problem was just this: the milestones were uninteresting and not suitable to create any equity value. By not having installed a better board, the company was now in the situation were bad management was supervised by a bad board. Very painful to observe.
As with any changes in CEO, the new team is in the position to tell all kinds of stories while the old is kept quiet through various legal agreements. Usually this is further exacerbated by the incoming execs being more highly trained in corporate politics and the art of “looking good” than the founding ones. I have been quite stunned by the amount of misrepresentation and straight lies some create while seeking to build their authority.
The reality is that over the past two years the new management made essentially zero real yield progress and only the most pitifully uninteresting milestones were met. Of course, with their political skills, they still figured out how to present yield progress on paper: effectively by redefining metrics and making the prior state appear much worse than it was. Any founding CEO knows that playing with metrics is only fooling oneself; but as a corporate-politician CEO it’s a well-honed tactic and way to display progress.
When I left in 2010, Nanosolar was in the enviable position of having close to $200 million in the bank and no debt. That’s a lucky position to be in, one that one has to thoroughly appreciate in this economic environment. As a founding CEO, one would stretch every dollar of that to make sure that no further financing is required. But with the hired CEO, the company’s long-held frugality went out of the window. Where using Skype worked just fine before, I now heard that a $100K video communication system had to be installed. $3-4m’s were spent on recruiting execs. Lots of retreats were held in enjoyable places. Lots of money got poured into stainless steel from new first-time suppliers.
Less than two years later, the money was all gone yet the company nowhere near profitable. While a scandal by itself, the response to it is even more so. When cash is getting low, as a founding CEO, one works really fast. Nanosolar would have tanked many times already if the founding team had not said ‘no way’. But as a hired CEO, one apparently also thinks of polishing one’s resume, retirement, and/or striking a deal on an inside-job financing (“let’s have the existing investors do an inside round at an arbitrarily low valuation; and you guys then refresh my CEO stake afterwards”).
Of course, the circumstances were different in 2012 than they were in 2008. But again, it’s a matter of skills and creativity to come up with a solution and create value. These days, just because U.S. based high-beta investors have learned that greentech is real business, this does not mean that there is not plenty of capital in Asia ready to invest in it at very good terms. Gotta get on a plane for that though. Nanosolar in particular is highly admired for its innovation in many parts of Asia. So for one, omitting any Asia based capital source in a fund raise, as Nanosolar’s hired team did in 2011, is not a very smart idea to say the least.
Fortunately (in a relative sense), with this new team having steered the company so blatantly inept towards the edge of bankruptcy, constructive change was possible to happen: the hired CEO and basically the entire board got replaced in a financing led by European family offices (at terms which I appreciated and approved as a shareholder). In the end, the company may well now have ended up with the right kind of an investor fit–solid long-term orientation and industry knowledge–and the opportunity to come out with good value at the end of the tunnel (provided they soon install the right leadership.)
As for the theme of operating experience for board members, this is not a new one of course. Curiously, there is now a new venture firm in Silicon Valley which has quickly become top-ranked and which is built on just that premise: that general partners have operational experience and that founding CEOs ultimately deliver more equity value than hired CEOs. That’s a great development. Whether or not operating experience matters for a VC to pick the right company at the initial point of investment is itself debatable and plenty contrarian data exists. What’s clear though is that as companies grow to become real businesses, venture board members with no operating experience have a chance of their instincts being in rather odd places, and at that point it surely matters a lot. In any case, here’s two of my favorite articles written by the firm’s co-founder Ben Horowitz which I could not articulate in any better way:
Four things some VCs do that I don’t like (which is Ben’s note to Benchmark Capital specifically I’d say, the firm he was working with; it’s not something that necessarily applies to every other venture investor)
The future of greentech in Silicon Valley? It’s clear that we do not have the ecosystem in this region and this country to make this highly successful at this point. Regrettably. Because it’s such an important and large industry. And because the alternative vision is that of America being the place of $35K green-collar workers installing semiconductor products built by 6-digit-salaried engineers in China. I now tend to believe the way to make it work is through the right collaborative loop between Silicon Valley and China. But this requires very different political support than there currently is. In particular, it requires a mindset that thinks of China as a customer more than America as “#1″.
Solar specifically will only keep growing even though there is not much to point to anywhere right now that can be considered good business success. In 2008, I was being ridiculed for my goal of shipping solar panels at a price point of $1/W, ie. at a required manufacturing cost of 65 cents per Watt. The wisdom of the industry was that this was strictly unachievable. Some people thought I’m doing the industry some sort of disservice by gunning for that level and not seeking to ship a lot of volume before it’s clear how to do that. Well, only a few years later, the price points are now at 70 cents per Watt and some manufacturing below that. Entire solar power farms are now being built for as little as $1.5/Watt, and this includes the land and the fence around it and everything. That’s a third of what a nuclear power plant costs to build today. It’s amazing progress overall and it was a privilege to have been part of the industry during this major change from solar as niche to solar as mainstream. Unfortunately it’s not a healthy situation for the industry at this point. In particular, few if anyone has the resources to invest in the kind of innovation that will carry things forward further down the road. Personally I continue to be involved in solar in various forms — key words: solar REIT, storage. But no more greentech without China backing for me.
In mid 2010, I booked a one-way flight to China to learn more about things work over there. Motto: Embrace, don’t compete. I ended up spending much of 2010 and 2011 in various parts of China, getting involved with the government in creating a “green energy tech park” in the hometown of President Hu and teaming up with a Chinese entrepreneur to start a new grid storage business. For the latter, we received funding from one of the top Chinese investors. (And that one, within 24 hrs of signing the initial term sheet, got us in front of a regional secretary who gave us land, loan, facility, and an initial customer.)
Much like Silicon Valley has an ecosystem for successful Internet startups, I experienced China having an ecosystem for successful greentech companies. Ecosystems are about many elements but they tend to be finely tuned and subtle yet the whole can reach amazing effectiveness. One general aspect to the China ecosystem is competent government officials, carefully filtered over the years in their effectiveness of knowing how to get things done. (The untold story behind the Solyndra disaster in the U.S. is that it’s 24-year-olds who worked through these government decisions…) Usually engineers by training, in China, many of the very brightest graduates go into government each year. I have had conversations with senior government officials about greentech manufacturing that few Silicon Valley investors are capable of holding. That’s no surprise in a sense: they live and breathe that stuff over there. Furthermore, the government officials have serious budgets and spending capability.
Then there exists a decisive commitment to green energy in China. I found the overwhelming motivation for this in a deeply engrained fear of resource scarcity (rooted in the national trauma of the bitter years), more than a “green” motivation. (Basically, when the Saudis find another oil field, American politicians think “great, we’ll be able to buy more oil from there” — while the Chinese officials think “so what, it’s their oil not ours; we still need to figure out how to get our own energy to take care of our people”.) The commitment to green energy is implemented very clearly at every level of governance. For example, at one point, one senior regional party secretary sat down with me and took an hour with me to go through his 5-year plan, underlining every word where he saw I’d be able to help him with on green energy. Underlines everywhere. This was a senior officer who knew very desperately: No green milestones met, no further promotion. And while in a secondary city, he had a $1B budget to do things with.
Another aspect is of course the presence of a well-oiled, deep, and flexible supply chain. Even as wages increase to Western levels in China, the existence of this will make China continue to be the preferred location for making things.
Meeting with senior gov officials. Agreement on the creation of a 1000-acres “green energy park”. By receiving land from the local government, one can then turn around and obtain a sizable loan from a state bank that is secured against the assessed value of that land. Local government, assessors, and banks work very efficiently with each other and the process is very streamlined. The legal documentation for sizable loans is perhaps 1/100th in size of what it would be in the U.S.
Furthermore, the local government takes responsibility for delivering building and utility infrastructure to one’s spec. At Nanosolar, I once had to pay $10m of our precious equity dollars for basic utility upgrades in our California factory. In our European factory, we managed to cover 50% of such expenses through EU subsidies. In China, one gets that for free, and the government even takes over a lot of the project management.
Left: Our Shanghai area battery factory in a secondary city with approx 7 million residents. Workers’ dormitory included. Fish pond too.
Right: On the morning of meeting with one of China’s top-top officials in Beijing. The entire leadership from our factory’s city went on a 14-hr train ride in support of this meeting in the capital. No display of fireworks on that occasion — but a neat convoy of 16 government limousines — all high-end Audis — with those very special license plates that make any Chinese gasp in awe and call home. (A by-stander did.)
Meeting with a regional Party Secretary near Inner Mongolia. Surveying a 30-sqm site for building a large solar power plant.
Government officials are very decisive in China. At one point during our survey, I noticed some people living in huts on the acreage they showed us. That led to some shouting in Chinese in a meeting the same day after which a translator confronted me, saying “If you desire, the Secretary will now give orders to resettle the people you saw. It’s your call.” Well, after further inquiry, I figured out that these are 40,000 people in a village and given the early stage of the project, I looked for a graceful way not to be responsible for evicting 40,000 people. But I have no doubt that they were serious about doing so.
The government nexus has its challenging aspects too in China. Unlike in Silicon Valley, state supported investments tend to require a “real downside” on the part of the entrepreneur in the event of failure (beyond anything practiced or legal in the United States). Perhaps because failure is not an option, one can find relatively many businesses in zombie existence as well. Then while legal documentation is refreshingly light in China, the flip side of that is a constant dialogue necessary with the government to make sure one is still within the spirit of the understanding. It takes a highly skilled FTE to do that.
Not being a politician, my world view is based on a model of global collaborative value-add more than national boundaries. I see China as a ready customer for innovation produced elsewhere and enabling the roll-out of that innovation at scale. Chinese are highly receptive to foreign innovation and ready to help bring it to scale. The analogy is that without Cisco or Google, startup innovation in these respective industries would be much less investible and look much thinner. In greentech, there’s no Cisco or Google which can provide some level of fail-soft for innovation. But there’s China.
Given the geographic distance and the disparities of culture and language, it is certainly easy for misconceptions to get in between the collaborative opportunities that exist, and they do to a larger extent than necessary. Curiously, a whole number of “idiosyncracies” in China tend to remind me of things I’m familiar with from European culture — the disconnect between American and Chinese culture is probably bigger than that between European and Chinese. For one, the typical Chinese manufacturer is very accustomed to collaboratively working with European tool suppliers, and they have done so for a few decades before Nixon visited China. If the U.S. does not stay relevant to China, China will just strengthen bilateral relationships that already exists very strongly with other countries — something not all that visible in the U.S.
Along the lines of bridging misconceptions, a few words on environmental regulation and intellectual property protection based on my own experience:
While some may view environmental regulation as tough in California, I found it distinctly tougher in China. Past reputation is not necessarily existing practice — my recent direct experience is that oversight is very strict. With a ‘real downside’ for those who make a mistake on that, very unlike in the U.S. The key difference is between following rules and “shit happening”. The former one makes sure about anywhere but the latter can still happen. In our factories in California and Berlin, we never really had to sweat over environmental compliance because the rules are clear and lack of negligence is the standard applied. But in China the ‘real downside’ on accidents happening is very clear and can lead to dramatic pain. Combine this with the fact that Chinese law does not recognize corporations as a purely abstract person but always requires a human legal representative as an anchor for every corporate entity, and you have a different level of consequences.
As for IP, many fault China on that. Many of these same people have not cared to file a single patent ever in China. So first of all, if you want your intellectual property to be worth something in China, you have to file for patent protection over there. That’s true for any place on earth; patent protection only applies in the regions you filed for it. It surely costs a lot to cover the world, and I have made mistakes on that in the past as well. It’s part of what’s broken with the patent system. But that’s unrelated to China. Secondly, my (not-so-joking) joke is that there’s one place on earth that’s worse than China in terms of intellectual property protection — and that’s Silicon Valley. In Silicon Valley, you have engineers leaving a company and an investor right there ready to fund them to create a competing startup right next door. VCs do so routinely. They pick up ideas in board meetings of one company and the next week have funded a company based on that. I’m actually not complaining about that; I’m just saying don’t unfairly single out China. (As far as I’m concerned, the whole patent system is a net negative on innovation, and we would do better without it.) Then also, when violations happen, fixing them is rather effective in China. If you have a government relationship in particular, one can enforce rights very efficiently. If there’s someone stealing your tradesecrets and starting a competitor in the same province, with the right phone call, one can visit the guys in jail the next day. In the U.S., if there’s a violation, it’s the lawyers making money for the next four years and then you settle and have a grown-up competitor.
While I’m back based in San Francisco now, I love the pace and energy in China and continue to be on the board of one China based company and involved in various China activities, in particular also in the Internet space.
Some creations endure centuries. I’ve always had great admiration for things that truly last. Usually, there’s craftmanship involved that builds up over long periods of time.
In my own family history, one of my greatgrandfathers built great furniture:
Door built by my (great)*grandfather in 1772, Bavarian National Museum, Munich.
A hundred years later, this craftsmanship developed to this point:
The King’s bedroom in the “Disney castle”, Neuschwanstein, Germany, built by my greatgrandfather.
Another hundred years later, this line of work went out of business — no-one willing to pay for such work any more was the word. (Then again, just a few decades later, we’ve got Russian oligarchs needing seemingly just that kind of expertise for equipping their yachts.)