Introduction

Start-Ups Matter for Climate Tech, But They Face Too Many Obstacles

The Surprising Solution: Government Collaborations Are Particularly Effective for Climate-Tech Start-Ups

Improving Start-Up-Agency Collaboration

Recommendations

Conclusions

Endnotes

Introduction

Clean energy innovation is necessary to achieve multiple societal goals, including averting the worst consequences of climate change, strengthening economic competitiveness, and enhancing energy security and affordability. But innovation is not moving swiftly enough—40 of 46 energy technologies and sectors the International Energy Agency has targeted for improvement if the world is to stay well below two degrees Celsius of global temperature rise are not on track.[1] Performance improvements and cost reductions, achieved through research, development, and demonstration (RD&D)—and eventually deployment—are urgently needed.

Start-ups (i.e., recently-formed entrepreneurial small businesses) are well-suited to accelerate the clean energy innovation process. Climate-tech start-ups, as venture capitalists (VCs) have begun to call this sector, are usually more agile and flexible and better able to respond to market opportunities than their more-established competitors, with fresh ideas and focused expertise.

Despite their potential to bridge the gap between RD&D and deployment, climate-tech start-ups face fierce headwinds. To be sure, all start-ups, regardless of sector, face barriers, and only around half of them survive beyond five years.[2] In climate tech, the challenges facing start-ups are amplified. In some cases, climate-tech innovation may require decades of investment in human, technological, and financial resources before bearing fruit. In others, technology deployment might interface or compete with incumbent utilities and businesses that can be resistant to change, having already built carbon-intensive infrastructures and business models over decades.

Consequently, despite their promise from a societal and environmental perspective, climate-tech start-ups are often perceived to be unattractive from a financial perspective. In the early 2010s, VCs invested in climate-tech firms without adequately accounting for these challenges. Thus, instead of making quick returns and a big upside, many lost much of their investment.

Patenting activity of a climate-tech start-up increases by 74 percent on average every time it partners with a government agency or laboratory on clean energy innovation.

The perceived risks of climate-tech start-ups still linger. The infamous commercialization “valley of death” claims a higher proportion of climate-tech start-ups than information or medical technology start-ups, which receive the lion’s share of VC funding.[3] Yet some climate-tech start-ups make it through. Identifying approaches that help ease barriers faced by climate-tech start-ups can ultimately catalyze their role in accelerating clean energy innovation.

One solution to improve the chances of climate-tech start-up survival is particularly surprising: collaboration with federal agencies and laboratories. By collaboration, we mean mechanisms that allow agencies and government laboratories to work directly with start-ups, such as co-development and technology-licensing agreements. We do not include grants and loans. Entrepreneurs and agencies may seem like an unlikely match, but our rigorous, peer-reviewed research found them to be compatible. Indeed, collaborations between climate-tech start-ups and federal agencies yield better results than their collaborations with universities or other firms, as measured by patents received and follow-on financing.

Collaborations between climate-tech start-ups and federal agencies and laboratories work because both partners bring complementary resources to the relationship and can benefit from it. There are natural synergies between short-term competencies of start-ups for commercialization and long-term federal government technology resources. Start-ups need access to experts and mentors, and testing and experimentation facilities; federal agencies and labs can provide them. Start-ups need access to technology; agencies and labs offer licenses resulting from federal RD&D investment that has accrued for decades.

Agencies, for their part, want to see their investments in RD&D to turn into products that improve societal outcomes; start-ups can help them do that. The U.S. Department of Energy (DOE) and its 17 national laboratories are the largest and most visible partners for climate-tech start-ups. But they are not alone. Numerous other agencies also partner with climate-tech start-ups as a result of RD&D programs that simultaneously advance their missions along with clean energy innovation.[4]

Our analysis reveals that the patenting activity of a climate-tech start-up increases by 74 percent on average every time it partners with a government agency or laboratory. Each technology license made by an agency to a start-up increases the start-up’s follow-on financing by over 155 percent on average.[5] While the ultimate goal is to commercialize products that reduce greenhouse gas emissions and allow the start-up to survive, intermediate successes such as these help that happen.

The impact of these collaborations is all the more surprising, as it is not the result of a systematic approach. The number of start-ups that collaborate with federal agencies or laboratories is dismally low. Lacking prior networks or targeted opportunities, start-ups often find it difficult to engage with federal partners. Although some agencies, including DOE, have set up mechanisms for technology transfer that can potentially foster collaboration, these mechanisms are scattered across different units and do not receive as much support as they should.

We recommend that policymakers address the barriers to collaboration, such as high costs, low information, and weak coordination, to help improve start-ups’ access to federal experts, infrastructures, and patented technologies. Three interrelated strategies will enable progress:

• Scale up existing federal collaboration mechanisms, reduce costs and red tape for start-ups, and increase information about opportunities.
• Incentivize federal partners to collaborate with start-ups by developing better evaluation metrics and expanding agency resources.
• Streamline coordination between agencies, laboratories, and other federal entities.

This report first discusses why start-ups matter for climate tech and describes the obstacles they face in getting private-sector financing. We then show the evidence on how collaborations with federal partners outperform those with universities or private firms, helping start-ups win new patents and follow-on financing, and explain why this is so. The following section discusses current approaches to setting up collaborations, and identifies the major barriers that impede them. We conclude with detailed recommendations for policymakers.

Start-Ups Matter for Climate Tech, But They Face Too Many Obstacles

Technology-based start-ups (including climate-tech and beyond) have a well-established ability to spur economic growth and generate good jobs.[6] Such start-ups invest in RD&D, are export oriented, generate jobs at a faster pace than other new businesses, and pay over twice the median U.S. wage.[7]

The positive experiences of technology-based start-ups result in policymakers and communities tending to also support climate-tech start-ups. These start-ups have the potential to offset the inertia and slowness of incumbents in legacy energy systems because they can respond to global market opportunities with fresh ideas and focused expertise.[8] Consequently, climate-tech start-ups have the potential to contribute to both clean energy and economic development goals.

Some of the best-known and innovative companies in clean energy—for example, SolarCity, Algenol, and ChargePoint—began as start-ups in the 2000s and eventually scaled up. These companies have managed to compete with and disrupt incumbent businesses and utilities that have spent decades building carbon-intensive infrastructures and business models.[9]

But successes such as these are infrequent and need to be multiplied given the scale of the climate challenge. Doing so will require overcoming not only the general obstacles faced by start-ups, but also the more specific challenges of clean energy innovation.

The first of these is lack of resources. Start-ups typically have few employees, narrow technological expertise, and inadequate infrastructure to test or develop technologies. They possess limited financial resources to obtain these human and physical capabilities. VC helps tremendously, but start-ups that receive VC funding, regardless of sector, must demonstrate progress to their investors within one to two years to get new funding.[10]

The VC model, built around short-term, quick returns, was designed primarily for information technology (IT) companies. For many climate-tech start-ups, one to two years is much too short a period to demonstrate technological or commercial prospects, as they have long timescales and capital-intensive infrastructures, making them incompatible with the model that works in IT.[11] Climate-tech start-ups usually face a deeper valley of death than IT start-ups. To demonstrate technological and commercial viability and successfully cross the valley, climate-tech start-ups may need to simultaneously scale up research to a working technology prototype, ensure the supply chains needed for product development are in place, and establish a pathway to profit generation, including a clear demand for the product from consumers or utilities for both hardware and software.[12]

Some “patient” investors, such as Breakthrough Energy Ventures, recognize and accept the unique challenges of clean energy innovation. However, such investors are scattered, and overall investment in climate-tech remains inadequate, with many investors continuing to shun climate-tech start-ups as highly risky investments that are unlikely to yield quick returns.

Collaboration with external partners provides climate-tech start-ups with resources and intangible assets that help them navigate through the valley of death and get the investment they need. Collaborations can reduce some of the perceived risks inherent to clean energy innovation, improve the prospects of climate-tech start-up survival, and facilitate clean energy technology commercialization.

The Surprising Solution: Government Collaborations Are Particularly Effective for Climate-Tech Start-Ups

Choosing the Right Partner

Climate-tech start-ups can collaborate with different types of partners—governments, universities, and other firms—to access resources they lack. Collaborations with many and diverse external partners can be particularly effective and improve a company’s reputation.[13] But different partners have different norms, costs, and rules—which can lead to different outcomes.[14] Start-ups must choose their collaborations wisely, as setting them up requires effort.

Climate-tech start-ups have the most to gain from collaborations that offer resources that are highly complementary to their own, such as technical expertise, dedicated equipment for testing and experimentation, and long-term research. But because such resources are usually possessed by larger, more powerful organizations, start-ups pondering collaboration must balance the gains from accessing them against the risks to control over their own assets and knowledge. They have to be able to protect their technology, product, and interests.

Different partners have different norms, costs, and rules—which can lead to different outcomes. Start-ups must choose their collaborations wisely.

University partners bring tremendous knowledge resources to collaborations, but most university researchers and faculty tend to prioritize new knowledge, while start-ups may want to maintain secrecy. Universities can also have conflict-of-interest regulations for researchers’ academic and commercial activities that may limit their participation in commercialization of technologies.[15]

Large firms that are potential collaborators bring closer links to the market than do universities. But they are often opportunistic, may leak information to the start-ups’ competitors, and tend to benefit more from collaboration than the start-ups do.[16]

Government agencies (and laboratories) have a mandate for technology transfer and are less likely to be opportunistic than private firms. But many federal agencies and laboratories don’t have clear incentives to work with start-ups, unless they have a targeted program in place. And the downside for start-ups in collaborating with federal partners is the high costs and bureaucratic procedures that require time and effort.[17]

The Evidence for the Surprising Solution: Government Agencies Make Better Partners

Our study was designed to explore these trade-offs, finding that from a climate-tech start-up’s perspective, all collaborations are associated with better outcomes compared with no collaboration in a specific year. But every new collaboration with a government partner is better than a comparable collaboration with a private firm or university. We based this conclusion on a rigorous statistical analysis of 657 U.S. start-ups that were less than 5 years old (between 2008 and 2012).

Methods

Our statistical analysis uses a rich and detailed dataset that captures key facets of the climate-tech sector and its start-ups. Our approach is briefly described below. The full analysis is published in a peer-reviewed academic paper and is available from the authors on request.[18]

The core of the data is information about collaborations between the 657 climate-tech start-ups and their partners during our study period. We used the i3 Cleantech Group dataset that reports climate-tech start-up activity, including collaborations, by tracking news, start-up, and investor websites, and through self-reported information from the start-ups. We selected companies that were less than 5 years old between 2008 and 2012 and were developing hardware or software across 17 reported climate-tech sectors.[19]

We identified start-up partners within this frame. The partners included nearly 2,100 private-sector businesses, over 50 government agencies or laboratories (primarily federal agencies, but also some state agencies), nearly 80 universities, nearly 10 non-governmental organization (NGOs) or environmental groups, and over 40 other public partners (such as cities and schools). We focused on the outcomes from two types of collaborations, technology co-development, and licensing agreements. Our dataset contains 2,015 start-up collaborations, of which 659 were technology co-development and 41 were licensing across all partners. The start-ups, their partners, and the details on their collaborations were obtained from the i3 cleantech industry dataset and were verified by the authors.[20] We assumed that each reported collaboration in the dataset lasts for two years.

We analyzed two types of outcomes from each collaboration in each year of our analysis. The first was patenting activity of the start-up. We measured each start-up’s patent applications in each year of our analysis using the Derwent Innovations Index database. While patents are an imperfect measure of technological innovation, they do matter to start-ups as a way to demonstrate progress to their investors.[21] The second was follow-on private-sector financing. We estimated the number of financing deals start-ups brought in every year—as a measure of their performance, from the i3 dataset—coupled with information from multiple start-up investment databases. In our primary model, we used the number of financing deals rather than the total dollar investment because information on the magnitude of investment is not always publicly reported. Financing deals can be a proxy for the performance of start-ups given alternative measures such as employee or sales growth are often not available.

We also controlled for differences among the start-ups that might otherwise explain these outcomes. The control variables include prior patents, prior financing from private investors, prior grants or financing from public sources (including DOE), start-up experience as measured by the age and number of employees, technology domain (including hardware and software), and location at the metropolitan area level. We accounted as well for other types of collaborations start-ups may have (such as a start-up’s customer or procurement relationship with a partner).

Our primary analysis uses negative binomial regressions with fixed effects for year and climate-tech sector, such as wind, solar, and biofuels. In other words, we accounted for the unique characteristics of each year from 2008 to 2012, and of each sector. In addition, we carried out several robustness checks using different types of models and start-up outcomes to ensure the results were accurate. These checks include alternative outcome variables, such as the magnitude of investment and whether the start-ups were acquired or went public within six years of being founded. The findings reported here are valid and consistent across all of the models we ran.

Findings

Our topline finding is climate-tech start-ups experience an increase in patenting and financing when they partner with a government agency, even when all the previously discussed controls are included. Figure 1 displays the results, with each bar showing the percentage increase in the likelihood of patenting or follow-on financing as the result of a co-development or licensing collaboration. The blue bars represent collaborations with agencies, while the orange and gray bars represent the other partners. The lines show the standard errors in these estimates. 

Figure 1: Impact of collaboration on start-up outcomes