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Interview with Peter Nieh - Managing Director, Lightspeed Venture Partners

Lightspeed Venture Partners is a leading global venture capital firm that manages over $2 billion of capital commitments. Over the past two decades, their investment professionals have backed more than 150 companies, many of which have gone on to become leaders in their respective industries. The team invests in the U.S. and internationally, with investment professionals and advisors located in Silicon Valley, China, India, and Israel. Peter is a founder of Lightspeed, covering the areas of cleantech, software and the Internet. He has sixteen years of venture capital experience and seven years of operating experience.

Peter Nieh Peter Nieh
Managing Director

Lightspeed Venture Partners

In addition, Peter will be participating in an investor's panel at the 4th Thin Film Summit USA (1-2 December, San Francisco). To see the full program, including agenda, speaker list, industry status and more, fill out the form to the right and get the 8 page PDF event brochure e-mailed to you now.

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What is, in your opinion, as the Managing Director of Lightspeed Venture Partners, the biggest challenge that the thin film industry is facing right now? Peter’s Answer
I would say it's really two things. One is to produce thin film panels on a mass manufacturing basis. The promise of thin film is tremendous, however, to actually execute like a company like First Solar has, and produce products on a commercial scale is challenging. —Many folks have produced things at prototype scale only to encounter major obstacles in transferring process to commercial manufacturing equipment. To produce a 100MW of thin film panels a year – which is entry level size for a commercial solar plant – at 12% efficiency you need to process about 25,000 square feet of panels every day, 365 days a year! The second challenge is to produce panels at low cost. As a new entity, you have to at scale beat the Chinese silicon-based panel manufacturers that have driven their costs to around $1 per watt. What you see with Solyndra is very much a company that hyperbolizes this challenge as they fundamentally did not have cost-competitive technology. Their basic architecture and design was flawed.
You mentioned the bankruptcy of Solyndra there - what does it mean for the thin film industry, and the PV industry as a whole? Peter’s Answer
I think for many industry insiders, or people who have been watching the solar industry, the Solyndra downfall was expected. The people I've talked to, who I consider to be industry insiders, predicted even three or four years ago that Solyndra wasn't going to make it. And the reason is that the fundamental design of their product was too complicated, was not prone to high yields, and would not therefore be cost-competitive. I don't know exactly what their dollars-per-watt were, but my understanding was that they around three-dollars-per-watt, and it's just completely not competitive. And so, it was a surprise to many in the industry that the DOE would give such a large loan to a company when most experts did not think it would fly.
On the flip side you've got DOE loans that have been given, for example, to Solar Trust of America to develop CSP, and then later the projects are switched into PV. So, on one hand you've got the industry signalling that PV is the way to go because it's cheaper, but on the other, cases like Solyndra indicate that the technology is not fool-proof. This is a big ‘down-ism’ right now in the American market. Peter’s Answer
Well, PV continues to grow, and thin film continues to grow. So I think that that is a myth that thin film is not doing well, because the dominant vendor in the solar industry, First Solar, is a thin film vendor, and that's all they do. First Solar is the most dominant vendor in the solar industry today by almost any measure. They have the lowest cost-per-watt, the highest margins, etc. How have they excelled and grown stronger relative to their competitors in this downturn? Because they have the lowest cost-per-watt in the industry by a significant margin.

And so lots of money has been invested into other thin-film companies with the aim of creating a company that could compete with and even beat First Solar. And I believe a few will get there -- ; we are involved with a company called Stion that we are confident will get there in the near term. Many of these emerging competitors are using CIGS technology that inherently can get to higher efficiencies than the CdTe technology that First Solar uses.
And do you see the Chinese manufacturers being able to overtake First Solar in cost at some point? Peter’s Answer
No, I don’t think so, because they are all based on silicon technologies, and if you look at the cost curves for silicon, they've really bottomed out. There are a few reasons why the Chinese have low cost . One of the main drivers has been because polysilicon has come down from historical highs. In 2007 polysilicon was around $300 per kilogram and today it's something like $50 or less per kilogram, which is closer to its natural price given it costs about $25 to 35 per kilogram to manufacture depending on the vendor. So they have been able to reduce costs to a large extent because polysilicon prices have come down.

Another reason is the Chinese government has subsidized the Chinese manufacturers through low cost loans or grants that reduce the capex. That allows the manufacturers to ramp faster and get to economics of scale. Also, they've made incremental improvements in efficiency, incremental improvements in panel design, and so on and so forth, all of which have helped bring the cost down. But those 'tricks', so to speak, are getting harder and harder. For instance you can try to increase efficiency, but that requires higher cost materials like monocrystalline wafers. You can try to make your silicon wafers thinner, but that reduces your yields due to warping or breakage. Go even thinner, and you don’t get great light absorption. So when you look at all their cost-curves, the costs have come down but they've really started to bottom-out.

First Solar is an example – I don't know the exact numbers but the Chinese have probably reached around a dollar per watt, but First Solar is around 75 to 80 cents-per-watt, so there's a significant difference between the two. And I think that the Chinese and the silicon manufacturers won't be able to compete with thin film, unless there is some technology breakthrough down the road.
What lessons, in your opinion, can be taken from 2011 for Thin Film industry? What should we learn from, and what are the opportunities? Peter’s Answer
That's an interesting question. First 2011 is a reminder about the basics. – To compete you have to produce at scale a low-cost, high-quality product. It's not just about fancy technology, but it's about technology that can be then manufactured at low cost. Second, you cannot rely on high prices of silicon, government subsidies, or other transitory market dislocations. Third, the solar industry is still in its infancy, and there is still plenty of room for growth and innovation. In young industries like thin film, you need to take risks and there will be failures. But out of all that, I would be surprised if a few winners don’t emerge.
We have talked about First Solar a lot. Does the danger exist that unless other companies can reach a similar level, the industry will end up in a bottle-neck or a monopoly situation? Peter’s Answer
I don't think so, for a number of reasons. One is that the industry is growing, and I don't think that any vendor, including First Solar, can supply the needs of a whole industry just in terms of capacity. Number two is that different solar products are good for different applications. So for instance First Solar's product is well suited for the utility industry, but its relatively low efficiency makes it less suitable for the residential rooftop market, where you want to have higher energy density panels because you have more limited rooftop space. So because there is market segmentation, the different products of the various vendors will apply best to different market applications, so that will help deter monopoly.The third thing is that monopolies have the ability to control price and distribution. In the case of the solar industry there is nobody owns a choke-point to the customer. Take a start-up that wants to sell into the same customer base as First Solar, First Solar probably doesn't have the power to say 'don't buy from this vendor'. There really isn't that strong of a lock-in compared to some other industries. For instance, in the software industry, an operating system vendor could become very dominant like a monopoly because they become the platform of choice and everybody uses themThus, a dependent ecosystem emerges on top of that platform. They can then exert undue control and set price. There really aren’t such dynamics in the solar arena, so I don't think that the thought of First Solar becoming a monopoly is a reality. I am sure that there will be contenders for First Solar that will emerge over the next few years. And at some point, like in other technology-based industries, someone will come along and change the game and beat First Solar.
As an investor, what are the main characteristics that you are looking for in a company? Peter’s Answer
We look for a sound fundamental technical approach that can produce the lowest cost per watt, and we believe that the biggest lever in the thin film industry is efficiency. Comparing various different processes to create thin film, the difference in cost to produce a thin panel of a certain dimension assuming similar yields isn't that much. Given that you're spending that money to produce a panel of whatever size and spend all the money needed to put it up on the roof and connect it to the grid, you want the most electricity output by that panel. What we're looking for is a company that can produce at low cost mainly through higher efficiencies. So efficiency is key.

The second thing we're looking for is a product that has a relatively simple manufacturing process which we think results in high yields and tight performance distributions. It is very difficult for a start-up to innovate on materials and processes at the same time as coming up with custom pieces of equipment, which is what Solyndra tried to do. They had a few hundred people just working on custom equipment, because their process and design were so different from the industry.

Finally, we're looking for a team who are not just a team of technologists, but a team of people who really understand the business of solar and what it takes to manufacture in volume at low cost, skills which are sorely lacking in many solar startups. We find that many companies are started by great technologists who have really cool technology, but don’t have an approach or mindset that leads to producing watts at a low cost.
Why are thin film companies still struggling with cost-reduction? Peter’s Answer
Many made their production processes complex, so there have been difficulties in yields and machine up-time in some cases. Yield has huge ramifications on cost. Using a complex material set like CIGS and repeatedly producing product with high efficiency at high yield is really hard. It is a difficult process to repeat - people have been doing it for years in small circuits, but to produce a large panel of say 10 square feet, and produce thousands and thousands a day at high yield, is much easier said than done.
There is a chance now for the US to become a leader in the thin film industry. So how do you see the market panning out in the next five years in terms of the role that the US is going to take? Peter’s Answer
I think American ingenuity will produce winners in the thin film industry. The US time and time again has shown the ability to innovate where the path is ambiguous and risks need to be take in order to create technology disruption. First Solar is an example of that. I think we’ll see a handful of other folks emerge that compete successfully with First Solar, and then even leapfrog them. Those companies will have a really nice market ahead of them because the barriers to entry in thin film are very high. I don’t think there are going to be a lot of successes, but the few that do pull it off will do quite well.
Is there anything you would like to add? Peter’s Answer
Solyndra has been dominating the headlines. I don't want to dwell on it, but I feel I need to comment on it as the Solyndra failure is used by folks like the media to slam the thin film industry, claim why the solar industry is going to be owned by the Chinese, etc. All the sudden there is a big surprise that one of the icons of thin film failed and all the negative press about the whole industry.

The Solyndra product was based on thin film built on a cylindrical glass surface. Putting down thin film on a flat surface is hard enough, and they were doing that on a curved surface. And then when you think about it, when you have a cylindrical surface, only half of it at best can be facing the sun. The other back half of the cylinder away from the sun isn’t getting any direct sunlight. So it's a very difficult thing to create a thin film solar cell on a cylindrical surface, and after all that hard work, you're only getting half of your product receiving any form of direct sunlight! How's that going to work? But yet, around $1.5 billion was invested.

There was sort of a perfect storm here. Polysilicon was at an all time high so silicon panels looked really expensive, and it appeared that an expensive product like Solyndra’s could be viable. Then right on the heels of that bubble was the financial crisis that started in 2008. The DOE had been very slow to get loan guarantees out, and there was a lot of political pressure on the DOE to get a loan out and create jobs, so Solyndra was picked to get a big loan.

But then competitors’ costs dropped as polysilicon prices fell, supply increased as a ton of capacity had been built in the upturn, while demand dropped relative to supply with the poor macroeconomy and declining government subsidies, resulting in declining panel prices. Solyndra with its inherently poor cost position was undressed and beholden to a DOE loan with lots of strings attached. So, there is a real rational story here of what happened, and it should not be generalized to bash the rest of the industry. Solyndra pretty much wasn’t going to make it under any reasonable world view.

It happens often in this industry, when people say it is not going to work and then when it doesn't, it's no big surprise, especially as more companies try to leverage a lot of caution. But I think when the DOE's there, that's when it gets a little scary, if you like, because they're supposed to be doing their due-diligence, their money is my money. Peter’s Answer
Solyndra should not have been a surprise and the government should never have put a half a billion dollars in something like Solyndra. But I hope that the DOE and OMB don’t just pull CYA moves and the government doesn’t now shut the door on supporting promising new ventures in thin film and solar. If you want to make the U.S. competitive, you need to take some risk with disruptive new technologies. But you need to take the right risks and put in the appropriate amount of money in given the risks at any point in time. That’s not what happened in the Solyndra case.

Peter will be elaborating on the themes above at the 4th Thin Film Solar Summit USA (1-2 December, San Francisco). To see the full agenda and speakers that will be joining him at the event, download the event brochure by clicking here or filling out the form above.

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