UV4278

Rev. Apr. 16, 2014

KELLY SOLAR

Jessica Kelly was learning to deal with disappointment. In early May of 2010 her start-up
was poised to sell its designs and related patents to a large manufacturer of solar equipment. This
was to be the culmination of two years of hard work developing a new product from a series of
patents she had purchased through her fledgling company, Kelly Solar. That product, a major
improvement in the reflector lenses used in solar power generation, had just proven out in a
series of tests. But all her excitement turned to dread as she learned of a competing technology
that promised to match all the advantages of the Kelly Solar designs. It was clear the equipment
manufacturer would back only one of the technologies and the other would become worthless.

The Solar Energy Parts Business Opportunity

The “green technology” opportunity Jessica Kelly was exploring with Kelly Solar
actually had its roots in her grandfather’s “old technology” auto parts business. Jessica had spent
many summers working in her grandfather’s manufacturing facility, and when she graduated
from college, her first job was in the accounting department of that business. After a few years,
she obtained a business degree and began working for a small regional investment bank. She
loved the bank job and advanced quickly, but she stayed close to her manufacturing roots and
often dreamed about starting her own business. It all suddenly came together as she read an
article about the use of Fresnel reflector technology in solar-energy power plants.1

Kelly was familiar with Fresnel lens technology; her grandfather’s business had produced
Fresnel lenses for the automobile industry for many years, and she had recently helped finance a
small company called Lens Tech that was producing lenses for cars based on patents for a
particular kind of high-density plastic. The Fresnel reflectors used in solar energy conversion
were similar but on a much larger physical scale. As Kelly read the article on solar applications,
she immediately realized that lenses built with high-density plastic could be very useful in the

1
David R. Mills, “Advances in Solar Thermal Electricity Technology,” Solar Energy 76 (2004): 19–31.

This case was prepared by Associate Professor Marc Lipson, Professor Samuel E. Bodily, and Assistant Professor
Kenneth C. Lichtendahl Jr. It was written as a basis for class discussion rather than to illustrate effective or
ineffective handling of an administrative situation. Copyright  2010 by the University of Virginia Darden School
Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation.

This document is authorized for use only in Pablo P?rez 's Analisis Financiero course at Universidad San Francisco de Quito - USFQ, from December 2017 to June 2018.
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solar power industry. Certainly there was much additional work to be done to adapt the
technology, and Kelly would need to secure certain patents and rights from Lens Tech, but she
was convinced this application would be successful. One frantic year later, Kelly Solar had been
formed and the patents acquired; Kelly pulled together the team she needed and began research
and development in an old warehouse that, fittingly, was previously owned by her grandfather.

One thing that had attracted Kelly to this venture and facilitated the financing was the
relative simplicity of the whole enterprise. Kelly was not interested in becoming the long-term
manufacturer and distributor of the products Kelly Solar might develop. Her goal was to quickly
prove the technology and then sell it to the industry’s single dominant manufacturer. When Kelly
started the business, the future could be effectively described as having two states. In one state,
the technology would prove out and Kelly would secure a profitable sale of patents and
processes. Given the market’s size and the knowledge that her product, if successful, would be
able to offer uniquely superior lenses at no extra cost relative to existing technology, she
estimated that she could secure a payoff of $22 million. In the other state, the product would not
prove out and, disappointing as it might be, the company would close down with no residual
value.

By May of 2010, it was clear that the technology had proven successful. But the
emergence of the competing technology created a new uncertainty. Only one of the two
technologies would be backed by the manufacturer, and it was not clear which would be chosen.
What had been a sure payoff of $22 million had turned into a gamble with equal odds of
obtaining $22 million or closing down without any payoff at all.

Possible Improvements and Financing

One consolation was the possibility of making modifications that would effectively raise
that probability that Kelly Solar’s technology would be chosen. Lens Tech’s technology offered
some advantages over the competing technology related to the ability of the Kelly Solar lenses to
be unaffected by high temperatures. Kelly had not initially chosen to buy the patents related to
this characteristic because they would have provided no additional advantage over existing glass-
based products in the market. With the competing plastic product, this was no longer the case.
Kelly was sure that buying the patents and making the modifications would increase the odds of
being selected to 70%.

Unfortunately, the modifications would require an additional investment of a hefty

$3.20 million, much of that simply to buy the additional patents from Lens Tech. Kelly Solar had
effectively used up its start-up funds and would have to seek new capital to develop the
modifications. The initial investment in Kelly Solar had come from two sources. Kelly’s
grandfather had retired and sold his auto parts company and had given his granddaughter the
funds she used to start Kelly Solar. These funds covered only a small portion of the needed
research and development costs, and Kelly had secured the remaining funding from Scott
Barkley, a local businessman with a history of lending to small innovation ventures. Barkley

This document is authorized for use only in Pablo P?rez 's Analisis Financiero course at Universidad San Francisco de Quito - USFQ, from December 2017 to June 2018.
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insisted that his investment be in the form of debt financing and that he would have to approve
any dividend to Kelly, thereby guaranteeing that his claims would be paid in full before Kelly
could receive any payout.2 Kelly, on the other hand, reserved the right to determine exactly when
the company would sell the rights to any products, thereby ensuring that Kelly would obtain her
equity stake in a sale of technology. After substantial negotiation, Kelly and Barkley agreed upon
a note that promised Barkley a single lump sum payment of $15 million at the start of 2011.

Given that the Kelly Solar designs had already proven out in tests and given that there
was little development uncertainty related to the improvements, Kelly believed it would not be
difficult to find new investors and she could certainly approach Barkley again. If necessary and
with some effort, she could also obtain some additional money from her family. Of course,
securing the initial funding had been expensive—legal and accounting fees associated with due
diligence and drafting documents for the Barkley loan had totaled $400,000. Kelly expected that
any new agreement or renegotiation of the existing agreement with Barkley would incur legal
and accounting fees equal to $200,000.

Kelly realized that the next step was to inform Barkley as to recent developments and the
possible additional investment. As disappointed as Kelly might be, she anticipated that Barkley
would be even more upset. There had always been a chance that the firm would default on the
promised debt payment, and this possibility was now substantially greater. But she hoped the
conversation would go smoothly. The modifications were worth the investment. More important,
she did not want a negative experience to dampen her enthusiasm as she began the hard work of
implementing the modifications and pitching the product to its potential buyer. Whatever success
they might achieve still depended a great deal on her.

2
The agreement also specified that any additional debt would be subordinate to the debt owed to Barkley.

This document is authorized for use only in Pablo P?rez 's Analisis Financiero course at Universidad San Francisco de Quito - USFQ, from December 2017 to June 2018.