Sun Jul 25, 7:27 AM ET
By Samuel Fromartz
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.)
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