Managing Transformational Start-Up Risks: Evidence from ARPA-E Program

Abstract

The climate change debate and economic recovery strategies in various industries demand transformational projects in clean technology. Transformation in this context refers to a nearly tenfold improvement in a key technical performance indicator that is typically conditioned upon making high risk scientific breakthroughs. These projects face multiple sources of uncertainty in high risk situations, and require specialized knowhow and longer periods for revenue growth than their counterparts in other industries. The risk profile of such projects makes them unattractive investments to conventional financiers like banks and venture capital funds. We use data from 36 clean technology projects funded by the U.S. Advanced Research Projects Agency-Energy, to examine how operations design can hedge risk and enhance project valuation during early start-up stages. For start-up managers who are attempting to develop transformational technologies, our findings clarify the valuation criteria in high risk, high reward circumstances and offer strategies for securing and assigning resources. We find that firms with an operations design to reduce business risk receive more project funding. On the other hand, the choice of market segments for deployment remains uncertain for such start-ups, and design choices related to market competitiveness show a negative correlation to the level of funding.

Keywords: Innovation Management, Risk Management, Operational Hedging, Resource-based View, Operations Design, Clean Technology, Technology Entrepreneurship, Government Funding, ARPA-E