Hot Spots of Innovation

Recently, we announced our 2010 Top Seven Intelligent Communities of the Year.  They were selected by an international academic team of analysts from among the Smart21 Communities we named in October.  As always, some of my personal favorites did not make the list, and I failed to appreciate fully the strengths of some that did.

But there was one trend I did notice.  It was a focus on entrepreneurship: creating and growing new businesses.  Every one of this year's Top Seven Intelligent Communities based their economic success on creating the right environment for the start-up of small, fast-growing companies and on nurturing their progress in ways large and small. 

That turns out to be a smart move.  Last year, Metro Innovation - a venture capital firm in Cincinnati, Ohio, USA - published a brochure called Ideas in Progress.  It would be hard to find a better summary of why promoting entrepreneurship is a major best practice of Intelligent Communities.  Here are just a few of the important questions they answer.  All are based on US economic statistics but I think the conclusions apply anywhere that free enterprise is allowed to flourish.

♦  Where does prosperity come from?  Over the last 20 years, 100% of net job growth in the US can be attributed to companies that are less than five years old.  When the tech bubble burst in 2001, Fortune 500 firms cut more than 900,000 jobs.  In the same year, venture-backed start-ups created 4.3 million jobs and $736 billion in annual revenues.  In 2008, venture-backed companies employed more than 12 million Americans and produced nearly $3 trillion in revenue.  That accounts for 11% of private-sector employment and 21% of US GDP. 

♦  Why is venture capital so important?  Venture capital is early-stage investment in business.  It isn't essential to start-ups - 76% of American companies are financed by the founders themselves and 23% by their friends and family.  In fact, only one start-up in one thousand receives venture capital.  But they do better.  In 2000, venture-backed companies had a failure rate of less than 1%, compared with the 46% failure rate for all start-ups.  One percent compared to forty-six percent.  That sounds like magic, but it's not.  Investors in early-stage companies are very selective: for every 100 business plans they evaluate, on average, they fund only one.  So a company that receives venture financing has been tipped by experts as a likely winner - and still, only 10-15% of them will grow enough to meet their investors' goals. 

♦  Why is Silicon Valley so successful?  It's about clusters, sure.  Business-university collaboration, of course.  But money helps.  On average, the US venture capital industry invests $25 billion every year in start-ups - and 50% of that is invested in the state of California.  This money is raised from sources all across the United States, which means that most American communities are exporting investment to the Golden State.  In 2009, McKinsey & Co. published a "Global Innovation Heat Map" showing centers of innovation around the world.  Guess what region comes out on top.

View the interactive map at McKinsey & Co.

♦  Why does innovation matter?  Nobel Prize-winning economist Robert Solow has the answer.  In a major study, he found that "ingenuity" accounted for 88% of the growth in output per man-hour between 1909 and 1949.  Eighty-eight percent.  Innovation drives the economy because it is the only way to make costs lower while improving quality and usefulness.  It is the only way, in short, to improve our standard of living over time. 

What are the leaders of Intelligent Communities to make of all this?  Simply put, local entrepreneurship is a "must have" in the Broadband Economy.  If it is not taking place within the city line, it had better be going on nearby, so that your citizens can benefit from it.   

To become reliable creators of prosperity, entrepreneurs need risk capital, whether it comes from private, public or nonprofit sources.  The money fuels growth, but even more important is the experience, objectivity and downright ruthlessness that venture investors bring to business.  If a group of seasoned, committed investors is picking winners in your community or one next door, only one out of a hundred may get the cash, but other 99 will raise their game, too.  Creating an entrepreneurial culture, developing funding sources and attracting investors is one of the biggest challenges that Intelligent Communities face.  The good news is that, from the example of this year's Top Seven, they are tackling the challenge with everything they've got.