US economy's edge: entrepreneurs

A new study shows that start-up activity in the US is twice the average of Western nations.

Sometimes it takes a young enterprise to tackle an old problem. For Kiva Systems, based near Boston's Route 128 beltway, the problem is how to pull goods off a warehouse floor quickly and orderly.

The fledgling firm makes robots that fetch items – an approach that multiplies productivity for many order-filling operations. Kiva hasn't turned its robots into riches just yet, but the company is rolling forward thanks to venture capitalists who have provided $18 million in seed money – including a big chunk just 12 weeks ago.

From Boston to Silicon Valley and in smaller places in between, one of the economy's vital rivers of growth – venture capi- tal – is flowing abundantly. The rush of start-ups is creating valuable jobs today, and it represents an enduring strength of the American economy in the long run.

"We're seeing an unprecedented level of interest ... in entrepreneurial careers," says William Bygrave, who teaches would-be business leaders at Babson College in Babson Park, Mass. Start-up activity stalled after the Internet-stock collapse of 2000, he says, "but it wasn't cataclysmic."

While today's venture funding doesn't match the heady heights of 1999 or 2000, it is strong. Some observers even warn of another dotcom-style bust, as bulging venture funds shower cash on bad ideas as well as good.

Money may be in better supply than bold business plans, but even there, the United States has an edge over its global competition.

A recent Babson study, conducted by Dr. Bygrave and several colleagues, finds that America is spawning twice the level of early-stage entrepreneurial activity as its major industrialized peers – a lead that has widened since the recession of 2001. And it finds that the pace of new-business formation in the US is both more dynamic and more stable. "That probably explains to a large extent why Europe, other than the United Kingdom, is languishing with chronically high unemployment rates," Bygrave says.

It's just one indicator of economic health, but it is an important one.

Researchers have long struggled to pin down formulas that explain economic growth. Supplies of labor and capital are key components, but a third factor – knowledge diffusion – is less understood.

All firms can be innovative. But younger firms give a special boost to worker productivity – think Wal-Mart or Ford Motor Co. when they launched.

Economies that are open to the rise of new corporations also tend to see some giants fade out – a process often dubbed "creative destruction."

"The US is doing a lot better than other nations" at allowing this ebb and flow to remake its economy over time, says Bernard Yeung, an economist at New York University's Stern School of Business.

His latest research, done with several colleagues, finds higher GDP growth to be correlated with higher churn in a nation's list of largest businesses.

That doesn't mean it would be a bad thing for troubled Ford to execute a turnaround. But it does suggest that fostering new businesses will do more for an economy than propping up old ones.

In this effort, the US can hardly rest on its laurels. Asian nations such as India are busy creating their own answers to Silicon Valley – often with talent trained in the US.

Varied efforts are under way to build on America's strengths:

•President Bush announced a national competitiveness initiative this year, aiming to enhance education, basic research, and the climate for startups.

•Large companies are trying to nurture their inner entrepreneur. IBM, for example, just held a worldwide "innovation jam" to generate fresh ideas.

•Groups of "angel" investors continue to spring up across the nation. They supply seed money, and often mentoring, at a time when venture capital is focused on young companies that are further along in their development.

Communities can do more to promote not just small businesses, but high-growth innovators, says Jon Gregory, CEO of Golden Capital Network in Chico, Calif. His group is helping Lancaster, Pa., stage an event this month to link angels and entrepreneurs. "It's a function of getting the right persons with the right expertise together with other likeminded people," he says.