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NewBiz: Does Innovation Fuel Start-Ups?
Sun Jul 25, 2004 07:27 AM ET
By Samuel Fromartz
type=businessNews&storyID=5764299&src=rss/businessNews§ion=news>

WASHINGTON (Reuters) - If you believe the hype, start-ups are an
innovative breed that go against the grain of conventional business.
But are they?

A new study says the vast majority are not, leading one to wonder
whether innovation is what it takes to start companies, or if they're
really fueled by something else.

The findings, released this week in the Global Entrepreneurship
Monitor, are part of an annual assessment of entrepreneurship as it
relates to economic growth in more than 40 countries.

Developed by Babson College, the London Business School and the Ewing
Marion Kauffman Foundation of Kansas City, the survey contains lots of
interesting facts -- Who knew Uganda ranked No. 1 in entrepreneurship?
-- but those on innovation stand out.

The findings reveal that the largest number of start-ups pursued
less-than-innovative ideas in highly competitive industries.

In the highly competitive U.S. market, 27 percent were pursuing an idea
that was "not new to any customer."

Start-ups considered most innovative -- pursuing an idea "new to all"
in a market with "no competitors" -- amounted to only 4 percent of the
total.

Bill Bygrave, co-author of the study and a professor of
entrepreneurship at Babson College, Wellesley, Massachusetts, called
those innovators "superstars" but added that they were the rare
exception.

"The grass-roots entrepreneurs are companies that take something
someone has done before and do it better, or cheaper, or offer better
service," he said. "That's the core of the economy."

It's also because the landscape of entrepreneurship includes everyone
from a fast-food franchise owner to a high-tech innovator.

The advantage of the former -- no new product, many competitors -- is
that the ubiquity of the idea shows it can work. The company will not
face the task of having to convince customers to buy it.

The downside, of course, is that the customer may not choose to buy it
from this particular company, since so many others offer a similar
product or service.

One solution -- innovation -- is risky and costly, but small,
incremental innovations can be highly profitable.

Bygrave said one of his students 17 years ago set up a company
specializing in student travel and, after many ups and downs, recently
sold it for $40 million.

"He was not highly innovative but he was a quick adapter," Bygrave said.

This low level of innovation is not a drag on the economy, for
innovation is just one way of producing growth. As the survey points
out, competition among established players drives efficiency and
productivity.

BACKERS NOT BANKERS

In line with these findings, venture capital tends to be a poor marker
for start-up activity, because so much of the money backing new
companies goes to less than earth-shattering ideas.

The survey found informal capital -- raised from families, friends and
private investors - - amounted to $108 billion in the United States.
Venture capital amounted to $21 billion.

The survey noted that this informal capital went to the full spectrum
of entrepreneurs, whereas venture capital invested in just 2,514
companies in 2002.

"Without venture capital, there would still be innovation -- but it
would occur at a slower pace," Bygrave said. "Venture capital is an
accelerator."

"But without informal capital, entrepreneurship would wither and die
out," he added.

That's especially true now, as venture capitalists avoid early stage
companies. The total amount invested by venture capitalists to seed new
companies in 2002 was $304 million, the lowest since 1980.

"If that continued for another two or three years, I would be very
worried," Bygrave said, "for that has long-term implications for
national competitiveness."

Given this reality, Bygrave tells students to just do it -- get started
in business, rather than spend a lot of time creating the ultimate
concept that will very likely fail to win the attention of venture
capitalists.

All of which points to the conclusion one might glean from this study:
Highly innovative ideas are rare, whereas modest ideas backed by
friendly capital might very well be the root of a successful business,
if not the economy. (Samuel Fromartz writes about entrepreneurs and
emerging companies from Washington, D.C., and welcomes stories about
young companies. He can be reached at www.fromartz.com. Any opinions
here are his own.)

por Oriol Lloret Albert