FEDERAL ENERGY R&D

Startups supported by ARPA-E were more innovative than others but an investment gap may remain

Startups funded by the US Advanced Research Projects Agency – Energy filed patents at twice the rate of similar cleantech firms. The high-risk high-reward funding model has succeeded in advancing energy technology, but more is needed to help these innovative firms cross the valley of death and bring new cleantech products to market.

Messages for policy

  • Federal R&D funding for cleantech startups should be expanded, as it can boost the rate of innovation. This is sorely needed given the underinvestment from the private sector.

  • Observational studies cannot prove the effectiveness of any funding agency, but current evidence suggests maintaining or growing ARPA-E, given the large potential benefits from cleantech innovation.

  • If ARPA-E is able to predict future patenting outcomes and fund companies with the greatest potential to produce new technologies, this could be a valuable contribution of ARPA-E in itself.

  • ARPA-E alone cannot fully bridge the valley of death. Additional interventions, such as demonstration and procurement programmes, are still needed to help commercialize new clean energy technologies.

BASED ON Goldstein, A et al. Nature Energy https://doi.org/10.1038/s41560-020-00683-8 (2020).

The policy problem

Innovation in clean energy and cleantech more broadly is underfunded by the private sector. Although the potential benefits of public spending are high, the most effective ways for governments to stimulate innovation and improve the cost and performance of clean technologies remain uncertain. The US Advanced Research Projects Agency – Energy (ARPA-E) operates a high-risk high-reward funding style that has been associated elsewhere with well-known successes in defence. Since 2009, ARPA-E has provided research teams in universities, industry and national labs with roughly US$3 billion total in research and development (R&D) funding as well as access to expert technical guidance and business mentorship. These interventions may be especially impactful for startups, which are more agile than large firms and often faster to develop new technologies but are also cash-constrained and more likely to go under. ARPA-E’s funding model is being considered internationally for scale-up in the context of the energy transition. As such, evidence of ARPA-E’s impact is needed to inform governments’ clean energy spending.

The findings

We find that startups that received funding from ARPA-E in its first year of operation filed twice the number of patents in subsequent years compared to other similar firms without ARPA-E funding. This was true even when accounting for the age of the firm, its cleantech sub-sector (for example, energy efficiency or energy storage), and its pre-2010 patenting and venture capital (VC) financing. ARPA-E is therefore either directly enhancing the ability of awardees to innovate and/or selecting highly innovative firms to receive non-dilutive cash and other forms of support. ARPA-E startups also had better business outcomes, including VC fundraising, survival and being acquired or going public, compared to firms that applied for ARPA-E funding in 2010 and were ‘encouraged’ by ARPA-E but not ultimately funded. However, ARPA-E startups did not have better business outcomes than the larger pool of US cleantech startups that did not apply for ARPA-E funds (Fig. 1).

The study

We combined data from Cleantech Group’s i3 platform and US Department of Energy (DOE) spending records to identify US cleantech firms that were startups (5 years or less after founding) in 2010. We compared US patent filings and business outcomes of the 25 startups funded by ARPA-E in 2010 to the average similar US cleantech startup, and also compared them specifically to firms funded by another DOE programme and those rejected by ARPA-E in the same year. In our statistical analyses, we performed a matching procedure to ensure that our sample is balanced along four important dimensions: age, technology sub-sector, prior patenting activity and prior VC financing. The observed advantage in patenting cannot be interpreted as a definitive causal impact of ARPA-E funding, because it is also possible that ARPA-E was able to select firms with a high propensity to patent beyond the observable control variables.

Fig. 1: Comparison of post-2010 annual patenting and VC funding rates for cleantech startups.
figure1

a,b, Average predicted outcomes are plotted for cleantech startups that were either: funded by ARPA-E in 2010, rejected by ARPA-E in 2010, funded by DOE’s Office of Energy Efficiency and Renewable Energy (EERE) in 2010 or none of the above (‘Other cleantech’). Rates are controlled for sub-sector, company age and pre-2010 levels of patenting and VC funding, within a balanced sub-sample of cleantech firms founded 2005–2010. Outcome data are cut off in 2014 for patents (a) and 2017 for funding (b) due to a lag in observations. Error bars show 95% confidence intervals. Reproduced with permission from Goldstein, A., Doblinger, C., Baker, E. & Anadón, L. D. Nat. Energy https://doi.org/10.1038/s41560-020-00683-8 (2020); Springer Nature Ltd.

Change history

  • 25 September 2020

    An amendment to this paper has been published and can be accessed via a link at the top of the paper.

References

Further Reading

  1. Gaddy, B. E., Sivaram, V., Jones, T. B. & Wayman, L. Venture capital and cleantech: The wrong model for energy innovation. Energy Policy 102, 385–395 (2017). This work documents the high risk and low private returns of venture capital investments in cleantech from 2006 to 2011.

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  2. Goldstein, A. P. & Narayanamurti, V. Simultaneous pursuit of discovery and invention in the US Department of Energy. Res. Policy 47, 1505–1512 (2018). This work shows that ARPA-E funding produced more patents than similar projects funded by other offices in the DOE, with no loss in the production of scientific publications.

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  3. Howell, S. T. Financing Innovation: Evidence from R&D Grants. Am. Econ. Rev. 107, 1136–1164 (2017). This study of the DOE Small Business Innovation Research program found a positive effect on patenting and venture capital investment for small businesses, based on rankings of funded and unfunded applicants.

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  4. An Assessment of ARPA-E (National Academies of Sciences Engineering and Medicine, 2017). A committee review of ARPA-E found that it appears to be making progress, although more time is needed to assess long-term outcomes including emissions reductions.

  5. Pless, J., Hepburn, C. & Farrell, N. Bringing rigour to energy innovation policy evaluation. Nat. Energy 5, 284–290 (2020). This Perspective explains the empirical challenges plaguing evaluations of energy innovation programmes, including insufficient data and lack of a valid counterfactual.

    Article  Google Scholar 

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Acknowledgements

Funding for the original work was provided by the EU Framework Programme for Research and Innovation H2020 under the Grant Agreement no. 730403 (INNOPATHS), the Belfer Center’s Science, Technology, and Public Policy Program, as well as a grant from J. Armstrong and E. Armstrong.

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Correspondence to Anna Goldstein.

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Goldstein, A., Doblinger, C., Baker, E. et al. Startups supported by ARPA-E were more innovative than others but an investment gap may remain. Nat Energy 5, 741–742 (2020). https://doi.org/10.1038/s41560-020-00691-8

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