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The Department of Energy can be a model for diverse startup pipelines

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It’s hard to be a startup, given that most small businesses don’t survive past five years. It’s really hard to be a clean energy startup, because venture capital firms underinvest in risky technology challenges. And it’s hardest of all to be a clean energy startup led by an entrepreneur who happens to be a woman or a person of color (or both), because venture capital firms scarcely invest in underrepresented founders.

We know that startups create a disproportionate number of good-paying jobs and take swings on high-risk, high-reward climate solutions that incumbent firms aren’t nimble enough to pursue. But barriers to inclusive entrepreneurship prevent the United States from achieving its full potential as the world’s foremost engine of economic growth and technology innovation. We can’t expect to win many games when we bench more than half our team for no good reason. 

Fortunately, and perhaps counterintuitively, the government has a better track record than the private sector in backing entrepreneurs who don’t fit a pre-existing, Zuckerbergian notion of what a startup founder ought to look like. We recently found that the U.S. Department of Energy (DOE) already has the tools to achieve a much more diverse pipeline of clean energy entrepreneurs — and it has a moral and economic imperative to do so. 

First, the DOE needs to lay out a welcome mat for first-time entrepreneurs, rather than continuing to dig a moat that only well-connected companies know how to cross. Why require startups to shoehorn themselves into an annual litany of over 200 narrow topics for early-stage research funding, when it’s possible to let entrepreneurs propose their own ideas? This approach has worked well at the National Science Foundation, which we found has awarded small business innovation research grants to about twice as many women- and minority-owned companies as the DOE, NASA, and the National Institutes of Health — and even NSF itself 10 years ago, before it transformed into a more startup-friendly mode.

Other barrier-reducing approaches to clean energy entrepreneurship can be found throughout the DOE, just waiting to be scaled up to meet the moment. Examples include prize-based manufacturing challengesboot camps for startup-minded scientistsentrepreneurial fellowships for post-doctoral researchers and vouchers for startups to collaborate with the National Labs.

Second, the DOE needs to fund the funders. Venture capitalists are even more homogenous than startup founders these days, and this tends to perpetuate biased funding decisions and generate inferior financial returns. But when the DOE recently awarded merit-based seed funding for ten innovative clean energy investment models, one third of the winners had a woman in the top job — whereas the overall prevalence of venture capital firms led by women has barely cracked 5 percent. Furthermore, these winners made a point to invest in a more diverse slate of clean energy entrepreneurs.

Similar examples are emerging throughout the federal government, where dedicated civil servants have designed powerful new ways to raise a new generation of “tough tech” entrepreneurs. The Air Force has found a way to make seed awards to promising startups within a matter of days rather than months. The Department of Health and Human Services just launched a public/private investment fund for companies developing breakthrough technologies in global health security. And there’s a role to play for state governments as well, with the American Rescue Plan providing $500 million in technical assistance that could be used to jump-start even more first-time venture capital fund managers.

What all of these approaches have in common isn’t giving any one group an unnecessary advantage — it’s simply favoring incumbents less. We will never solve climate change, out-compete other nations as a global leader and lead, or grow a more inclusive economy by allocating resources only to well-connected startups. While the United States is still far from tapping the full measure of our entrepreneurial talent, the time is ripe for the Department of Energy and other federal research agencies to lead the way. 

Nick Montoni is the innovation policy advisor for the Climate and Energy Program at Third Way. Doug Rand is a senior fellow at the Federation of American Scientists. 

Tags Entrepreneurship National Science Foundation Private equity Startup company u.s. department of energy Venture capital

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