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

34 Pages Posted: 16 Aug 2012 Last revised: 1 Jul 2014

Sinan Erzurumlu

Babson College

Jane Davies

Boston University - Questrom School of Business

Nitin Joglekar

Boston University - Department of Operations and Technology Management

Date Written: August 15, 2012

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

Suggested Citation

Erzurumlu, Sinan and Davies, Jane and Joglekar, Nitin, Managing Transformational Start-Up Risks: Evidence from ARPA-E Program (August 15, 2012). Boston U. School of Management Research Paper No. 2012-24. Available at SSRN: https://ssrn.com/abstract=2130288 or http://dx.doi.org/10.2139/ssrn.2130288

Sinan Erzurumlu

Babson College ( email )

231 Forest St.
Babson Park, MA 02457-0310
United States

Jane Davies

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Nitin Joglekar (Contact Author)

Boston University - Department of Operations and Technology Management ( email )

United States

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