Michelle Ma

September 3, 2022

https://www.protocol.com/climate/arpa-e-moonshot-climate-startups

Inside the vast ecosystem of the Department of Energy sits an unassuming agency that’s quietly shaping the transformative technology needed to confront the climate crisis.

Relatively unknown outside of climate tech circles, the wonkily named Advanced Research Projects Agency–Energy (or ARPA-E for short) has built a reputation among founders for game-changing funding that’s helped startups through their earliest stages.

While a number of technologies to reduce carbon emissions are mature — think wind turbines, electric vehicles and the like — there are still countless innovations needed to get the world to net zero. Venture capital can play a role in helping nascent technologies such as carbon dioxide removal mature. But ARPA-E fills a unique niche for startups with promising moonshot ideas that just require a little more TLC to realize their potential.

Though the office only employs a few dozen people and its $500 million budget is barely a blip in the Department of Energy’s nearly $82 billion pot, the agency has an outsize impact on fixing our most intractable climate problems. Since its inception, ARPA-E has provided over $3 billion in funding to more than 1,300 projects. Of those projects, 190 have together received more than $10 billion in private sector follow-on funding, and 25 have even had exits totaling over $21 billion. ARPA-E projects have also generated almost 900 patents and more than 5,700 peer-reviewed journal articles, reflecting the breadth of the agency’s impact.

“Their hit rate is better than the VC community,” said Christina Lampe-Önnerud, CEO and founder of Cadenza Innovation, a startup working on a cheaper, safer lithium-ion battery. Cadenza has received both an ARPA-E award and limited private funding for its battery technology.

In Lampe-Önnerud’s view, what makes ARPA-E a success is that the private market will focus on the obstacles in the way of an idea succeeding, whereas ARPA-E will take an unlikely opportunity and ask, “Well, what if it actually works?”

Formed in 2009, the agency was modeled after the Department of Defense’s larger and more well-known DARPA (Defense Advanced Research Projects Agency). That program has helped fund projects that gave rise to the internet, GPS and drones. Like DARPA, ARPA-E is focused not on funding incremental technologies but ones it deems transformative. Where ARPA-E differs, though, is in what radical technologies it backs: The agency’s mission is to seek out ones that cut emissions, increase energy efficiency or reduce reliance on foreign fossil fuels. Those projects are also almost exclusively high risk and high reward.

That model is exactly what the U.S. innovation system was missing, according to William Bonvillian, a lecturer in MIT’s Science, Technology and Society department. He points to the “valley of death” critique referenced by Lewis Branscomb and Philip Auerswald in 2002. That valley is where some promising technologies fail to go from technical ideas to commercially successful products. Letting disruptive emissions-cutting technologies linger there poses a serious risk to the climate, given the need to get to net zero by mid-century. Yet Bonvillian said ARPA-E “steps right into that gap,” bridging that valley and helping projects move neatly from idea to prototype.

The moonshot makers

ARPA-E’s secret to success is its organizational structure, which is modeled off the DARPA playbook.

At the center of the structure are the agency’s program directors. Some hail from national labs and others have formed startups of their own, but all have R&D leadership experience and deep subject-level expertise in their area of focus. Each is “very empowered” to decide for themselves what problems are most critical to prioritize and which proposed solutions are most promising, said Jennifer Gerbi, current acting director for ARPA-E.

“We look for people who can think problem first and impact as opposed to tech first, who are visionary thought leaders but also at the same time have a deep technical knowledge of this field,” Gerbi told Protocol.

Program directors typically have a focus area and put together a portfolio of projects, with some that Bonvillian said are “crazier than others.” He also noted that directors are encouraged to assemble a collection of projects with varying levels of risk as a way of hedging bets, similar to diversifying a stock portfolio. Critically, directors are term-limited, meaning they typically only have only three to five years to make something work at ARPA-E. That incentivizes people to really make the most of their investments while they’re there and means there are always fresh minds cycling in to challenge the status quo.

Not your typical federal grant

ARPA-E’s approach is a big departure from the way traditional federal R&D funding is doled out. Agencies like the National Science Foundation award grants based on a strict peer-review process with experts ranking different proposals. The highest-scoring proposals take the cake, and grantees must then stick strictly to the areas of research outlined in their proposals. While that approach ensures public money is spent by the book, the box-checking method for awarding research dollars can constrain what gets funded. The approach also offers little leeway for grant winners to change gears in their approach mid-grant.

Awardees who win ARPA-E grants, in comparison, have much more flexibility to pivot and explore new research areas if they run up against a dead end or find a tantalizing new possibility. Gerbi said the rule of thirds applies to ARPA-E projects in that, typically, around a third are successful, a third are terminated and a third end up pivoting to a different technical approach that the agency approves and for which the award is renegotiated.

Josh McEnaney, CTO, president and co-founder of Nitricity, a startup working to reduce emissions tied to nitrogen fertilizer production, said ARPA-E funding hits a sweet spot for startups. Its seed funding, some of which Nitricity has received, offers “more flexibility” than federal grants. But unlike venture capital investments, it doesn’t dilute founders’ equity.

More than money

While ARPA-E funding can help a startup explore new avenues, it’s what the agency offers beyond that that can be transformational.

Program directors do more than choose a portfolio of projects. They offer other forms of support to founders from pure technical guidance on data management to drafting a pitch deck to recommending events to attend, Gerbi said.

In Nitricity’s case, the startup’s program director was “very hands-on,” McEnaney said. “They want to get deep into the technology with you, go through slides of data and help you forge your path to the next best thing for your technology.”

The agency also fosters dialogue between its grantees. Companies in the program are encouraged to speak to each other and share ideas, which Gerbi said can lead to greater group innovation.

The agency also provides support through a dedicated tech-to-market team whose sole mandate is to help projects get closer to commercialization. This team is typically made up of people who’ve had experience scaling up research and are able to help identify market opportunities and connect with potential collaborators and funders. It’s a model so successful that Bonvillian said DARPA has since copied it.

“If you are a star performer, they will actively help you,” Lampe-Önnerud said.

The reputational boost that ARPA-E provides, which Bonvillian described as a “halo effect,” is a game changer for the projects the agency funds. “If you get an award, everyone knows, ‘Wow, this one was picked up by ARPA-E,” he said.

Because the agency’s selection process is notoriously difficult, having that imprint can make it easier for projects to find private sector follow-on funding. That can be crucial for early-stage climate startups, many of which are centered on R&D-intensive hardware that’s expensive to build. That was the case for Frost Methane Labs, whose remote devices identify, monitor and destroy methane in sites like coal mines and manure ponds.

Venture capital investors are typically less willing to sponsor hardware, or if they do, “the check sizes aren’t the same,” since the amount of investment required to reach the first step of commercial success is much larger than for software companies, Frost Methane CEO and founder Olya Irzak said. Hardware also takes longer to build and prototype than, say, code, which can be quickly rewritten. That, along with the condensed timeline that VCs expect for a return on investment, isn’t always well-suited to the kinds of moonshot technologies backed by ARPA-E.

Securing ARPA-E seed funding was crucial in helping Frost Methane cover engineering costs. Just as important, Irzak said the funding has definitely made the startup more attractive to VCs.

Time will tell the true scale of the agency’s impact. ARPA-E has only existed for a little over a decade, and hard technologies within the energy sector typically take about 15 years to scale up to real implementation, Bonvillian said.

“Has it changed the world yet?” he said. “No, but it certainly made a whole series of valuable contributions that can continue to be built on.”