Exclusive Interview - Big investors should pay attention to bleeding-edge R&D, says ARPA-E deputy
As deputy director for commercialization at the Advanced Research Projects Agency-Energy (ARPA-E), David Henshall is responsible for ensuring that agency’s energy investments yield not just technological breakthroughs, but also marketable products. Speaking exclusively to Entelligent, Henshall says that putting up the cash to commercialize bleeding-edge energy innovations can yield big rewards for investors with cool nerves and plenty of patience.
ARPA-E was inspired by DARPA, the Pentagon’s R&D wing — what are the differences between the two?
Well, we're modeled after DARPA, and there are a lot of organizational similarities. But the big difference is that DARPA has a captive customer, the Department of Defense. Within ARPA-E we're looking at advanced research technologies, but the Department of Energy doesn't buy these technologies — so the big question is how ARPA-E can make sure the tech we're investing in actually has an impact.
And that’s by bringing those innovations to market?
Yes. The tech-to-market unit was started about four years ago to help our project teams commercialize their technologies — not necessarily with the goal of having finished products by the end of a project’s funding, but to ensure they’d be on a pathway to delivering products to the marketplace by that time.
How is that working out?
There have been several products released to market — but we only fund for three years, and most of the technologies we invest in are 5 to 10 years out. You'll really see the windfalls start to come in over the next 5 years, just because of the maturation rate and the time needed.
Still, there are other metrics we look at as leading indicators. The projects we've invested in have received about $1.25 billion in follow-on funding from the private side. People wouldn't be investing like that if they didn't expect those companies to make money by deploying their technologies.
Couldn’t investors achieve the same results more directly, by providing VC capital?
One of the problems here is that a lot of the technologies we invest in don't fit into the typical VC model, which is looking for a 10x-return with a five-year exit. A lot of the software-type investments that are being made are great, and that's where a lot of capital is going, but clean-energy technologies do require more patience. Some of them are going to be 10-year investments, and won’t have that 10x return over 5 years — even though they will have great returns over time. The key is finding capital that's willing to go that route, and that has the stomach for it, and the ability to go longer-term.
How do you persuade investors to support clean-energy innovation?
Well, most of the established, investor-owned clean-tech companies do still do innovation — there are some great things being done in industry labs, and by both large and small companies — but it's usually later-stage. We need government-funded bodies to look at risky, early-stage opportunities. When the risk-return profile hasn’t yet been vetted out, that’s where the government plays an important role. If we can de-risk these technologies, then there's a great opportunity for investors to jump in and scoop up them up.
Is enough private capital being put into these kinds of projects?
You know, we'd always like to see more. The shift to clean energy is a really big problem — and although we have smart people working on it, and we do have money coming in, more resources all around would really help to accelerate the impact. At our last open solicitation for projects, in 2015, we were only able to fund a fraction of the total applications — with more money going into this, more of those ideas could have been funded.
Is there a role for institutional investors in that process?
Absolutely — getting institutional investors to demonstrate their interest in these technologies is vital, because it helps bring more people into the tent. We actually do quite a bit of outreach to institutional investors, and I look forward to speaking to any of them that want to learn more about the technologies we're investing in. Even if they don't want to jump in just yet, learning more about it, so they can be aware of it for the long-term, is important.
With wind and solar now maturing, are we going to continue to see disruptive innovations, or just incremental advances in existing technologies?
We're absolutely going to continue to see disruptive innovations. We don't do anything at ARPA-E that isn't transformational — everything we do is aimed at changing the ways that people use or store or generate energy. We don't do incremental change. That’s not to say technologies being used today don’t have opportunities for incremental change — they do, and they'll continue to evolve. But there are also big opportunities for disruption coming down the line.
Where can investors find the biggest opportunities?
A day hasn’t gone by that I haven’t spoken with an investor — we’re doing quite a bit to reach out to that community. But I’d never just give a list of technologies to an investor — rather, we listen to them, and try to understand their profile, their interests, their risk tolerance, their level of patience. Our recommendations need to be tailor-fitted to what an investor’s looking for, so that we can get a good match rather than just sending a bunch of random things over the transom.
What we're really trying to do is create options for the future. We don't just go after one specific technology — we aren’t just going after generation, we aren’t just going after grid, we’re going after the whole spectrum of energy. What’s the economy going to look like in 5 years? We don’t really know, but we do know we're going to need different options. And that’s our role — to create options for five years out, and beyond.
Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.