WASHINGTON – Cash-strapped startups that aim to create the next big energy innovation have found a savior in the form of U.S. government agency Advanced Research Projects Agency-Energy (ARPA-E), but plenty more languish on the sidelines without either government funds or private investors. Now both entrepreneurs and investors are calling for additional federal help in filling the so-called "Valley of Death" in funding possible innovations.
Last year, venture capital firms invested a record $7.8 billion in so-called "cleantech," an industry that encompasses everything from renewable energy to energy storage and recycling. Yet only a small band of such firms are willing to jump in early when entrepreneurs need funding to prove that their technologies are workable, said Michael Borrus, a general partner at X/Seed Capital Management.
"If you want to do the next social networking startup, there are gobs and gobs of people in Silicon Valley who will throw money at you," Borrus said. "But if you want to do something really hard, like extract lithium from geothermal energy production, it's a much smaller subset of that [investor] community."
Borrus spoke as one of several venture capital representatives during a session of ARPA-E's Energy Innovation Summit held on Feb. 28 in Washington, D.C. He and fellow panel members listened as entrepreneurs rose and lined up in front of a microphone to share stories about the difficulty of finding private money.
Closing funding gaps
The Department of Energy's ARPA-E has helped fill one of the funding gaps for entrepreneurs by giving out hundreds of millions of dollars for high-risk, high-reward research done in the early stages by startups. But at least two other funding gaps remain on the road to getting a company's would-be innovation commercialized, said Will Coleman, a partner at the venture capital firm Mohr Davidow and moderator for the panel session.
Some venture capital firms, such as those of Borrus and Coleman, invest small amounts of money in a large number of startups with the expectation of "hitting a few home runs" while seeing some fail, said Daniel Gross, a partner at Hudson Clean Energy Partners, LP and a panel member. Other firms such as Hudson Clean Energy only move in when the risks have fallen much more near full commercialization.
"We do not have an efficient market today for taking companies across those gaps," said Luka Erceg, president and CEO of Simbol Materials and a third member of the panel.
Erceg told of his company's challenges in getting its own start, despite getting attention early on in as a highly promising cleantech startup. Simbol aims to produce battery chemicals such as lithium, manganese and zinc based on clean, zero-waste production methods.
The startup has received public funding from the California Energy Commission and the U.S. Department of Energy (DOE), as well some private money from Mohr Davidow and others. But Erceg found it troubling that many private investors had practically "outsourced funding decisions to the DOE" by only jumping on startups that have already received federal funding.
Such behavior makes sense for venture capital firms that want to sniff out big returns while keeping risks low. Startups that get money from ARPA-E and other government agencies stand out as more lucrative possibilities, said the venture capitalists who sat on the panel.
What's government's role in innovation?
Still, Erceg sees a chance for the U.S. government to play an even bigger role in moving possible innovations along. He spoke with InnovationNewsDaily after the panel session.
"I think that there is an opportunity today for the government to play an instrumental role in helping new technologies de-risk, and it's not just through ARPA-E," Erceg explained. "It has to be something that exists outside just the Department of Energy or Department of Defense — it has to be something that allows you to work with a variety of agencies."
The U.S. government may have begun to anticipate such wishes. Seth Greene, special advisor for innovation at the U.S. Small Business Administration, told another panel session about a "one-stop portal" that would allow entrepreneurs to search for funding across all government agencies. That step won't solve the funding gap problems — but it might be a start.