“If you think education is expensive, try ignorance.”

It may be just a bumper sticker aphorism, but lately it’s got me thinking. Peter Thiel, early Facebook investor and Paypal cofounder, announced recently that he’s offering $100,000 to 24 young people to drop out of school and pursue an entrepreneurial idea in Silicon Valley. Thiel says the emphasis on having a degree has created “a bubble” in education, and he believes ideas can develop in a start-up environment much faster than on a university campus.

“We need more innovation,” he told the Financial Times recently. “There’s a tremendous cost to having the most talented people in society take on enormous debt, then take well-paying but dead-end jobs to service those loans for the next 15 to 20 years of their lives.”

Thiel is right: we need more innovation. But I question whether encouraging our youth to forgo school and go straight into the workforce is a way to improve this situation.

Sure, a college education isn’t cheap—four years at MIT comes with a price tag of over $200,000—but as with most market-based offerings, that price reflects value. The debt that the students take on to get that degree is an investment in themselves, much like a good company makes investments to grow its business.

Education improves your chances of success in life. Research shows that college graduates make more money than non-graduates. Over an adult’s working life, high school graduates can expect, on average, to earn $1.2 million; those with a bachelor’s degree, $2.1 million; and people with a master’s degree, $2.5 million, according to data from the U.S. Census Bureau.

Education also enhances your ability to innovate and start a business. College teaches people how to think, how to attack a problem, and how to write. It gives students a good foundation in basic science and technology. Students can’t learn these things at a start-up because startups are not built for this kind of training. To have the spirit and energy to start a company is one thing, but you have to have certain fundamental skills. Without them, you are a lemonade stand entrepreneur. What we need are innovation-based entrepreneurs.

There are certainly high profile examples of people who dropped out of college to start a company and became runaway successes: Bill Gates, Mark Zuckerberg, Steve Jobs, and Larry Ellison. So, yes, for some, it makes sense in highly specific cases—by the way, notice that they are all in the software/web industry—to leave school and accelerate the time in which they start their businesses. But that does not mean this is generally the case. Beyond the software industry—biotech, medical devices, clean energy, telecommunications, and microprocessors, for example—it’s harder to find examples of dropouts who became successful entrepreneurs.

And what about all the other people who dropped out of school and didn’t make it? What was their Plan B? I’m not talking about an alternative that means giving up the hope of being an entrepreneur and punching a clock at a big company. I mean: what was their next idea? How did they adjust their existing product to a new market? How did they achieve scale? Entrepreneurship is a great training ground for some things, but it’s a horrific training ground for other things. Education improves your chances of making it.

Some contend that entrepreneurship can’t be taught, and that institutes of higher learning are of no use to aspiring business owners. I strongly disagree. Every day, in this magical square-mile here at MIT, the skills of entrepreneurship are conveyed not just in the classroom, but also through extracurricular activities, mentoring, networking, and experimentation. Students are infected with the spirit and the possibilities through the vibrant eco-chamber that has developed both by design and organically.

Students who pass through here start companies at a prolific rate. According to MIT Sloan School of Management professor Ed Roberts’ detailed study, MIT students and alums launch approximately 900 new ventures each year, and over half of all MIT-related companies are established within 10 years of the time the founder graduates. These numbers indicate that something very powerful is happening here and that people are learning how to be entrepreneurs in this institute of higher learning.

Encouraging students to drop out of school by setting up a competition and offering a substantial monetary incentive in the name of accelerating innovation is a terrible idea. While I applaud the call to action and spirit of experimentation, I believe this program is highly counter-productive. We ought to encourage students to think imaginatively, learn how to be innovative, and even start companies while they are in school. Vanessa Green MBA ’11 and the team of OnChip, which is commercializing new power electronics technology developed at MIT, offer a compelling example of how this is possible.

We should think long term about investing in our young people. Rather than accepting a binary choice between the “ivory tower” or the “real world,” those of us in higher education should design hybrid action/learning eco-chambers to promote innovation. We ought to develop courses that provide students with both a solid foundation in science and mathematics and the leadership skills necessary to translate this knowledge into new ventures. We should create extracurricular programs that give students a platform for pursuing experimentation opportunities, developing trusted mentoring relationships, and networking. This will compress the learning curve and help our students achieve the capabilities, confidence, and contacts that over the long term are necessary to become successful innovation-based entrepreneurs.

[Editor's note: This article also appears on the MIT Sloan Experts blog.]

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During my recent trip to Korea, an American expat told me about his friend, a successful young Korean entrepreneur who employed a half-dozen people in an education business. He fell deeply in love with a Korean woman and wanted to get married, but her parents refused to approve of the marriage until he got a “real job.” He agonized over this hard decision before he finally chose to pursue love, laying off his six employees and taking a groundskeeping job on the government payroll. When he told the woman’s parents about his new government job, the father said, “Welcome to the family, my new son.”

Politicians are pushing entrepreneurship on a global level with a lot of monetary investment, but their efforts will only be effective and efficient if a region’s underlying cultural mores, values, and pressures support risk-taking and entrepreneurship. This account of the Korean entrepreneur might seem a bit extreme, but it is representative of the underlying pressure on Korea’s best students and young people to get “stable jobs.”

Work in a big public company or the government, the mantra goes. Samsung, LG, and Hyundai don’t fire people.

The big public companies can afford to not fire people in the short term because of their size and recurring revenue streams. Entrepreneurs, on the other hand, have no such security blanket. They learn to earn their stripes every day. Several generations have now been brought up in the German/Japanese/Korean conservative corporate mold, which is devastating to the growth of entrepreneurship—and to society. Entrepreneurs, much more so than large companies and governments, drive economies to innovate and to create the jobs needed to absorb a growing number of people into the workforce.

Finland is a good example of entrepreneur-driven economic growth. With the decline of the country’s flagship employer, Nokia, small groups of entrepreneurs are sustaining the economy through new innovations, such as mobile application software. The “Angry Birds” video game app is the most visible of the Finnish products getting global investment and attention. Rovio, the company that makes Angry Birds, is creating sustainable new jobs in Finland and establishing a cluster of excellence in mobile apps—resulting in even more sustainable jobs. Inevitably, there will be further disruptive innovations to replace “Angry Birds” and its cohorts, but a pro-entrepreneurship culture will embrace the risk-taking necessary to adapt and succeed.

Korea is not the only area where culture constrains entrepreneurship: Spain (especially Andalucia), for instance, has similar challenges, as do many other societies. In a companion post to this piece on the MIT Entrepreneurship Center website, I lay out counterpoints to the bias against entrepreneurship, along with some potential solutions for overcoming critical cultural obstacles to innovation. Please read that article for the full details, but just to give you a taste here, my counterarguments include:

1) Entrepreneurs Create Jobs

2) Entrepreneurship = Controlling Your Own Destiny = Stability

3) Entrepreneurship = Personal Growth = Personal Satisfaction

4) Entrepreneurship is Cool

Systemic issues like culture are hard to address because of their vexingly imprecise nature—it is far easier to develop and fund a new program. However, failing to address the root causes of an anti-entrepreneurship culture will lead to unimpressive results and disillusionment with entrepreneurship itself. This would be most unfortunate, because we need entrepreneurship now more than ever.

[Bill explains why it is not risky to be an entrepreneur in this companion article.]

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In the 1880s, Thomas Edison was locked in a battle with the legendary inventor Nikola Tesla and the entrepreneur George Westinghouse.

Edison argued that alternating current was “impractical” and highly dangerous. He supported the demonstration of electrocution of numerous animals to show the press and the public the danger of alternating current. He even went so far as to commission the development of the electric chair as part of the campaign. Alternating current was also dangerous economically to Edison and his new company, General Electric, as they were set up to exploit direct current and they lost one of their core advantages if the world went to alternating current. It was the classic innovator’s dilemma.

Well, after a fact-based analysis, alternating current was chosen to be piloted for Niagara Falls in the 1890s, and it clearly worked and all the hysteria was swept away. History has shown it to be clearly superior to direct current for most applications. Later in life, Edison came to regret that he had made this clearly off-base calculation, as well as his tactics.

Fast forward to today. Last week on the front page of The New York Times an article titled “Gas Wells Recycle Water, but Toxic Risks Persist” (the title is different in the online version) was yet another example of the publicity campaign to warn people about the dangers of natural gas production if we are not careful. Is this a balanced fact-based dialogue on how to address the problems of a probable energy source that can so dramatically help our country on each of the three fundamental criteria that we should be making energy decisions today—economic security, environmental, and economic? Or rather are we falling into the same mistake that happened in the 1880s with alternating vs. direct current?

Much like the safety considerations of alternating current which were real and needed to be addressed, the concerns with water are legitimate and must be addressed. It is essential to our country that these issues are discussed in a rational manner to avoid a situation where FUD (Fear, Uncertainty, and Doubt) rules as opposed to a constructive, fact-based dialogue.

From what I understand speaking with people who are much more expert than I in this, the challenges for dealing with water and natural gas fall into three categories:

1. Misperception: The fact that people continue to think that natural gas drilling affects the aquifer, is a misperception. Once the facts are understood, this is not a serious consideration.

2. Process: The purification and disposal of water from the fracking (hydraulic fracturing) process—which is where the real issues are—relate to whether the companies and governments are … Next Page »

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In my role at the head of the MIT Entrepreneurship Center, I have the great opportunity, at times, to travel the world and learn about entrepreneurship on a global scale, and to gain knowledge and perspective to help us be more effective in our mission at home. This past week was such an experience.

There is an underlying assumption that to have an innovation-based entrepreneurial ecosystem, there has to be an “MIT-like” anchor university in the ecosystem (Technion in Israel, Stanford in Silicon Valley, IIT in India). The presence of such an institution that attracts, trains, and continually feeds skilled and talented workers into the ecosystem makes perfect sense.

What if I told you of a place where there is a growing and vibrant IT entrepreneurial community, and yet it is in a country that lacks a single university in the top 500 in the world? This is exactly what I found in Romania these past few days.

As I met dynamic entrepreneurs and heard stories of their friends, a pattern emerged. Most have never studied computer science at a university; they said they did have time to do so, and that it was better to get real experience (some did not even graduate from high school). Romania is a poor country, but it is also an industrious and diverse society (both of which are important). Since people don’t have much and life is hard, they have to be creative to get by and get ahead. Necessity is the mother of invention and, in this case, entrepreneurship.

There is also optimism in the air, partly a result of Romania joining the EU four years ago. That is helpful, but let’s focus instead on the “adjita” (an Italian-American word for stomach agitation) driving things in this situation. The Romanians are learning programming without formal institutions to train them, which seems perfectly natural to them. They note that Bill Gates, Steve Jobs, and Mark Zuckerberg didn’t graduate from college, either (Not a great analogy, but that’s how they see it). In my recent travels I have also found thriving, robust entrepreneurship in Scotland and Finland as well. Interestingly, if you ask people in any of these three countries if they are good at entrepreneurship, their answer is “Oh, no.” This very scrappiness is what makes these regional groups have a higher propensity for entrepreneurship than their counterparts in, say, Germany, Russia, England, France, or Spain.

Should this surprise us?

Not really, because here in the United States, the studies of MIT professor Ed Roberts show that immigrants are more likely to start companies than more comfortable, long-term American residents. It’s just as “Evita” narrator Che Guevarra described Eva Peron, who rose from the lowest levels of Argentine society to the very pinnacle of power: “Eva Peron had every disadvantage you need if you’re going to succeed. No money, no cash, no father, no bright light.”

So the moral of the Romanian tale is to reinforce a point made in an earlier article, that while other factors like the presence of a world class research institute close to MIT’s caliber is extremely valuable, never underestimate the importance of culture in creation of an entrepreneurial ecosystem. In descriptions of such a culture, you should not see the words like “comfortable —you should see words synonymous with scrappy. Just remember Evita.

[Note: Special thanks to my colleague Howard Anderson at the MIT Sloan School of Management, with whom I discussed this topic and who also first pointed out the Che Guevara quote].

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Each year, we at the MIT Entrepreneurship Center at the Sloan School of Management travel to Silicon Valley for a three-day immersion program with our MBA students who have a very entrepreneurial spirit and interest. While we make visits during other parts of the year, this is different in that it is a 24×7 analysis of what is going on in Silicon Valley. We visit dozens of companies, hear guest speakers from the venture capital sector as well as entrepreneurs, attend receptions with other universities in the area (Stanford and Berkeley), connect with alumni in the region, and visit multiple incubators.

While all of this is fantastic, the most fun is the discussions that we all have with each other in the cars, at meals, and at night. These discussions are an analysis of what was heard by the hundred-plus students and staff on this trip. They often carry on and develop over multiple days, and we all get to retest our hypotheses through the many interactions we have each day. We start in the morning together and then spread out over the Valley to multiple companies in groups of usually 4-8 to visit companies and often hang out in common areas in Palo Alto, San Francisco, Menlo Park, or another Silicon Valley spot. We then come back together at night and share our findings.

Within three days, we get a sense of what the new buzz words are and then we gain an understanding of the underlying core concepts—and then, we quickly start to see their limitations and tire of them. Last year it was “pivot” and “lean startup” and this year it was “social graph” and “repotting.” But more importantly, we get a real visceral sense of what the latest trends are that we could not have gotten from anyplace else or a quick drive by. In this vein, here are some of my personal observations:

1. Quora: Wow! Man is this company hot! It is a far from a foregone conclusion that they will be the next huge thing but I would not bet against it. A very quirky company in many regards but they have harnessed a potential major force that we have known about for a while—crowdsourcing—and seem to have found a high quality way to execute it unlike anyone else before them. They have taken the next step to hybridize a key element of Facebook and Wikipedia and are executing on it very well so far. If they can establish themselves as the standard, there are definitely networking effects that could make them the next eBay, Facebook, or YouTube. I had heard their name before but did not realize what a powerhouse this company has the potential to be. They also have Academy Award–winning software developers leading the way. Oh by the way, it is not just me that thinks they are hot, the people in the know loved them too.

2. Facebook Approach vs. Google Approach. While these companies might seem to be similar in many ways, there is a fundamental and profound cultural difference in their approaches. This was pointed out by one very astute entrepreneur and then we tested it for the rest of the trip and it rang true. Google’s approach to problems is a technology-centric solution, i.e., we can solve this with a smart algorithm or some sort of powerful technology breakthrough. Facebook on the other hand has a product-centric solutions approach. This is not to say that Facebook does not have some incredible technologists, they do (and vice versa – Google has some great product people), but rather … Next Page »

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My Xconomy “Man of the Year” for 2010 would not be Mark Zuckerberg (that should have been a year or two ago if you are on the leading edge like Xconomy), but rather Andrew Mason, founder of Groupon. The speed and magnitude that this business innovation achieved through this company was stunning and still boggles my mind.

Looking forward to 2011 with a crystal ball, I believe that there are two areas that are going to happen and maybe this will be the year. There will be profound transformations in the area of water (see this article that I wrote earlier in Xconomy), and another sleeping giant is shale gas. The discovery of $4 trillion of shale gas that is much cleaner than coal and located strategically in the Northeast close to the demand, and also in areas of highest political leverage (i.e., in the swing states), could fundamentally change the energy picture here in the U.S. This dramatic change in the status quo will create great innovation and entrepreneurial opportunities—a modern day Energy Gold Rush but on a much shorter time scale than solar and with more substantial immediate results. It will not be the perfect ultimate solution, but it could be a huge step in the right direction.

[Editor's Note: This is part of a series of posts from Xconomists and other technology and life sciences leaders from around the U.S. who are weighing in with the top surprises they've seen in their respective fields in the past year, or the major things to watch for in 2011.]

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I am very pleased to see Xconomy moving into the Michigan area to help with the reinventing of the economy there. A lot of people are clearly feeling real pain from the economy, and the injection of “innovation adrenaline” can not only be incrementally beneficial economically, it can make a profound change in the spirit of the region and give it new hope for renewal. That’s what Massachusetts needed after the collapse of the textile industry and then the subsequent collapse of the mini-computer industry. The five most important things that can be done in Michigan to reinvigorate the economy are as follows:

1. Focus on Entrepreneurs: As Thomas Friedman said so well in his recent Op-Ed piece in the New York Times, what we need are start-ups, not bailouts. As he points out, Robert Litan’s work at the Kauffman Foundation shows that from 1980 to 2005, 40 million jobs were created by companies less than 5 years old, and zero net new jobs were created by companies older than that.

2. Infect the Area with the Virus of Entrepreneurship: More competitions, speakers, case studies, and celebrations should be held or presented to elevate the prestige of the entrepreneur. The culture needs to be changed so that entrepreneurs are hailed as heroes and role models for the young and talented. A PR campaign is valuable to alter the mindset, and we will know we have succeeded when Michigan’s successful entrepreneurs are treated like the Red Wings when they won the Stanley Cup.

3. Celebrate Entrepreneurs Even If They Fail: It is clear from research that entrepreneurship and innovation is a process of experimentation that involves doing something that has not been done before. Failure in such experimentation should be a seen a source of learning and as increasing the odds for ultimate success. When it comes to innovation, the willingness to fail gives us the ability to succeed.

4. Provide Practical Educational Opportunities: While entrepreneurship is a mindset and spirit, it is also a set of skills. These basic fundamentals skills can be taught and should be widely taught in practical, short, two- or three-day intense workshops. These work well for both aspiring and recently minted first time entrepreneurs. Time compressing the learning curve allows the renaissance to happen sooner and helps to increase the probability of creating serial entrepreneurs who have disproportional positive impact (witness Boston, Silicon Valley, or Israel).

5. Increase the Velocity of Information and Knowledge Transfer: Networking is fundamental to the development of entrepreneurial ecosystems, and today we can complement the physical networking with powerful, rapid, and direct digital networking. Entrepreneurship can be a lonely endeavor, and building a community not only provides important psychological support, it also makes it easier to convey invaluable contacts and knowledge that can mean the difference between success and failure.

This last point is where Xconomy will be of invaluable assistance: by providing the content and platform for connections that will help accelerate the rebirth of Michigan.

Congratulations on opening your fourth city and it is very appropriate that you have chosen Michigan.

[Editor's note: To help launch Xconomy Detroit, we've queried our network of Xconomists and other innovation leaders around the country for their list of the most important things that entrepreneurs and innovators in Michigan can do to reinvigorate their regional economy.]

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[Updated and corrected, May 9, 2011--see below] We just came back from spending a week with 95 MIT students in Silicon Valley drinking from the West Coast Fire Hose of Entrepreneurship. Our theme was “East meets West: The Unification Study Tour.” For us, the theme worked well. But some of those out west, as well as some back in the east and in the press, preferred to pursue a competitive approach, which I find not only unattractive and destructive but also incorrect.

Most people love a competition with winners and losers where we can track them as they race along. We certainly love our rivalries: Red Sox vs. Yankees, Celtics vs. Lakers, and Patriots vs. Colts (oops—scratch that last one now). Some rappers had their own version of East Coast vs. West Coast. But these sorts of rivalries are not exactly how it works—especially with regard to innovation.

In 1980, Bob Metcalfe (esteemed MIT graduate & co-inventor of the Ethernet) came up with his now-famous Metcalfe’s Law. The essence of his insight is that the value of the network to each user is exponentially related to the number of nodes on the network. So rather than there being a zero-sum game with “competing” innovation ecosystems, in many aspects the opposite is in fact the case, especially in the new digital “flat world.” That is, the success of one area should enhance the success of another.

At MIT, we train our students to be great entrepreneurs globally, not just in Massachusetts. In fact, according to the widely cited report on the economic impact of entrepreneurship at MIT, written by MIT Sloan School of Management professor Ed Roberts and Charles Eesley, MIT alumni start 850-950 companies annually. Of those companies, an estimated 26-28 percent will be started in Massachusetts this year. In addition, an estimated 26-28 percent will be started in California. The punchline of this story is that these are not two competing ecosystems, but really one large, connected-at-the-source entrepreneurial ecosystem.

[Editor's note, May 9, 2011--Due to author error, the original version of the above paragraph stated that MIT alumni start 200-400 companies annually. The figure was changed to 850-950 companies, accurately reflecting the figures in the report by Roberts and Eesley.]

Rather than spend our time and efforts arguing about winners and losers, or us vs. them, we at the MIT Entrepreneurship Center are focused on leveraging Metcalfe’s law through our second principle of operation: “collaboration.” We will spend our time and efforts to build connective tissue between East and West…and other areas, too. There are very interesting things happening outside Route 128 and Silicon Valley that we could all learn from and gain from by working together. So next time someone starts talking about Silicon Valley vs. Route 128 or Boston, ask them to “stop the noize!” We can all gain by a mindset of working together. Let’s spread the love around and innovation will flourish…and then we all win. Leave the score keeping to the sports page.

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November 20, 2009, Moscow, Russia—I write this from the Moscow airport on my way home to Massachusetts after teaming with MIT colleagues Howard Anderson and Peter Kurzina to teach a week-long boot camp on entrepreneurship for the first class of MBAs at the new Skolkovo Business School. Skolkovo* is a private business school strongly supported by Prime Minister Vladimir Putin and, hence, the top Russian business leaders. It not only has lots of money (the school is currently housed in a 5-star hotel), it has access to the highest echelons of business leaders (we had billionaires come speak to the class) in the country.

Nonetheless, we knew we had our work cut out for us when we came upon a quote from Putin that said, “Anyone who opens a new business in Russia should be given a medal for courage.” Mmmm. I came to Moscow not knowing what to expect, and I leave with many surprising observations, which I summarize below.

1. Russians don’t generally smile. If you expect a lot of smiling faces and “have a nice day” lines, you have come to the wrong place. While they might warm up once you get to know them, on first encounter they make New Yorkers seem like Mr. Rogers welcoming you to his neighborhood.

2. When you arrive at the airport, make sure you have a driver pick you up. As I got off the plane and failed to find my driver, I was pounced on by no less the two dozen taxi cab riders who looked very suspicious. Fending them off is a full-time job.

3. Russians feel compelled to argue. Our first day of class, we were under siege. We fought back, and when it was my turn after my colleagues had been treated unfairly, I moved one of the offenders (Nicholas) from the back of the room to the front and started right in saying that I was not as nice as Howard and Peter and they better look at me as the bad cop, to which one student immediately responded, “we will see.” Midway through the lecture, with the students arguing about most every point possible even if they did not have the background to knowledgeably do so, I announced that, “No matter what, you all just like to argue.” To which Anton in the front row immediately responded, “No we don’t!”

4. After 24 hours, Russia was not high on my list of favorites. Despite the nice hotel, the above developments, coupled with daily snow and a lack of sun, had me wondering why we came here. To cap it off, the New England Patriots had lost to the Colts in a big football game back in the States because I was not able to telepathically keep coach Bill Belichick from making a stupid 4th down “go for it” call. He would never have made that call if I was sitting in front of a TV watching the game. Oh yeah, Howard and I had both lost our credit cards, too. My decision to miss Saturday and Sunday pickup basketball for this was looking like a bad one.

5. Then the tide changed. First of all, we accepted that every point was going to be argued and we pushed back and adjusted our style to fit their needs better. If they were going apply full court pressure, we were now ready to respond. There also appeared to be a silent détente reached between us and the class. The cease fire allowed for more dialogue and we were beginning to understand each other much better. Howard was also discovering the joys of authentic Russian vodka in our nightly sessions. Behind the unsmiling faces of the students, a sense of humor and friendliness started to show through the cracks. A few were buying into what we were saying and small victories were starting to be won. It was a five star hotel after all.

6. Engineers and scientists are everywhere. As we got to know the class and a parade of outside speakers came in to supplement the program, we realized that engineers and scientists were as common in Russia as Red Sox fans are in Boston. There ain’t much else. One of our guests was former physicist Vlad Terziev, who is the founder and CEO of Vesch, a huge … Next Page »

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Last week, I was honored to give a keynote speech in Dublin, Ireland, at an international symposium marking the launch of the nation’s ambitious new R&D program in energy by its NSF equivalent, the Science Foundation of Ireland (SFI). The Symposium on Science and Engineering Underpinning Sustainable Energies and Energy-Efficiency was an excellent opportunity to reflect on what I think is one of the key elements to successful regional economic prosperity—the development of a vibrant innovation ecosystem.

With my colleague, Ken Morse (Managing Director of the MIT Entrepreneurship Center and an Xconomist), we have been involved first hand in the successful and unsuccessful development of over a dozen such ecosystems, and we have seen what has worked and what has not worked—with often-surprising results. Ireland provided an exciting clean slate platform to apply the framework for success and get feedback for refining the frameworks (based on the initial feedback, our ideas are clearly resonating). For if we are to succeed in optimal fashion in energy innovation, it is essential that we develop regional innovation clusters. Towards this end, we should make use of historical lessons to accelerate our success—and the good news in this regard is that there are some relatively simple leverage points that can be deployed which will have significant impact.

Like many Americans, especially in Boston, I have roots in Ireland. Distant as they are, Ireland has always held some magic for me. That magic was further catalyzed 19 years ago, when I visited with an American basketball team and we traveled that beautiful country playing games and then drinking Guinness from Cork to Galway to Dublin to Donegal to Belfast and a number of places in between. I don’t remember the scores of any of the games, but no one on our trip can forget the legendary memories we took back, which were later written up in a Sports Illustrated article that I keep framed on my wall at home. [Editor's note: that article was written by his teammate, backup shooting guard Bob "Danger" Buderi, founder of Xconomy.] The parade through Donegal with the mayor and the town’s children was one of the most priceless moments of our lives.

The people and the land exceeded the expectations we had—and yet all of this was in the context of an economic situation that we could not fathom at the time. There was little economic vitality, and we met a number of people who had been without work for over a decade and had little hope left on that front.

Last week, I returned to see the “Irish Economic Miracle” first hand. It is truly amazing and a shining inspiration for others throughout the world. I know, because I have been asked about it in places such as the United Arab Emirates, Denmark, Pakistan, Sweden, and Saudi Arabia. Leaders in those countries thirst to have a similar scenario in their lands and want to know how Ireland was so successful.

Well, now the question I posed at the aforementioned speech in Ireland is, “How do you keep it up and keep the economic renaissance moving forward as the global economy undergoes a metamorphosis of galactic proportions?”

The answer, and it doesn’t just hold true for Ireland, is energy innovation. There is no bigger challenge than to help transform our energy position—no bigger responsibility and no bigger opportunity.

So what I offer now is my perspective, based on our deep experience, on how regions can seize this opportunity, and more specifically how organizations like Science Foundation of Ireland can become leaders and full participants in the transformation of the world’s largest industry.

First, by providing leading-edge science, engineering, and mathematics research, SFI and other similar government agencies will help to produce the innovation needed, thereby putting their nations front and center as a role model for others.

But to understand how to most effectively achieve this, I believe it is essential to take a systems view to provide a broader context for the role of research and invention—hopefully in order to alter the traditional mindset so organizations such as SFI can be more effective going forward.

For example, using SFI as our test case, I would like to start with the first line of the organization’s objectives: “Science Foundation Ireland supports science, engineering and mathematics research with consequences in Ireland.” I will focus on three key words in this statement “research with consequences.” Trying to connect with my distant Irish roots, I could not help but have this translated to Gaelic—”taighde le torthai”—which means “research bearing fruits.”

It is these fruits that I will focus on, because to the degree that SFI can ensure that the research breakthroughs developed in Ireland are put to effective use, the organization will gain relevance.

So it is “torthai,” or consequences, that we seek. That being the case, a closer definition of consequences is merited.

At MIT, we love equations. They are simple and crystal clear. So, in that vein, let me take a minute to drill down on what consequences really are and how they relate to the research done at SFI.

Consequences are what we refer to as innovation. Innovation is something that generates value. For example, innovation helps companies make more money; it can materially reduce greenhouse gases; and it can materially enhance energy security for countries through greater independence.

As Ed Roberts, a professor at MIT’s Sloan School of Management and chair of the MIT Entrepreneurship Center, so aptly described it in a simple equation: … Next Page »

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Energy innovation and investing are exploding right now. Technological breakthroughs are seen as perhaps the greatest hope to solving our dire energy challenge. However, what is often overlooked is the link between finding or creating new sources of energy and the effects on food and water.

Indeed, if you think of energy as a coin, the flip side is water and food. The scary thing is that food and water are both lower on Maslow’s hierarchy of human needs—i.e., they are more fundamental to human survival. Yet, the current rush to create new sources of energy—including “clean” energy—may have potentially disastrous tradeoffs on our food and water supplies. Going forward, trading off energy creation for water—meaning creating new sources of energy that depend on heavy use of water, as many do—will be less and less acceptable. That’s why the most exciting opportunities in energy entrepreneurship and investment lie in strategies that create more water or energy without adversely affecting the other.

The Linkage of Energy and Water

At a fundamental level, we can think of the greatest and greenest energy producer in the world—the leaf—and observe through the process of photosynthesis that energy, water, and food are an interrelated system. But let’s also look at some other examples:

• Biomass—This is the most obvious source of tension between food, water, and energy today. Corn as a feedstock for ethanol has been a contributor to the dramatic rise in prices of this commodity and hence food (although the exact amount of its effect can be debated). The development of cellulosic ethanol will go a long way toward alleviating this tension by eliminating the dependence on corn or other foodstuffs for ethanol production. But there are also other, more subtle elements to the equation that add new sources of tension. Ethanol production from plants requires substantial amounts of water—and it must be clean, fresh water, which is the most precious kind. Biomass has been the poster child for the tension between alternative energy and water/food but it is far from alone.

• Nuclear—Traditionally, nuclear power plants have been built near large sources of water to promote cost-effective cooling.

• Enhanced Oil Recovery—After initial production starts to slow down, oil wells traditionally have been flooded with water to boost pressure and improve oil recovery. This made excellent economic sense in the past, and will be even more economically attractive with the new price levels for oil.

• New Heavy Oil Recovery—Heavy oil is viscous, harder to recover, and less economically attractive than the normal light sweet crude oil that is the standard today because of its costs of extraction and refinement. Driven by attractive new price levels and national security concerns, Canada is developing a large amount of this huge potential energy source in what is known as the “Tar Sands.” The increasingly preferred method to extract heavy oil a process called SAGD (steam assisted gravity drainage), which uses prodigious amounts of water.

These are only a few examples, but they illustrate the tight relationship between energy, food, and, especially, water today—a relationship that often forces painful tradeoffs when we try to produce more energy. But there are no laws of nature I am aware of that make this tradeoff necessary in perpetuity.

The Next Wave for Energy Innovation and the Future Focus for Productive Long-Term Energy Investing

I am often asked by investors and entrepreneurs, “What do you like with regard to the energy space?” My answer is twofold:

1. Water and,

2. Any company that decouples energy and food/water. The company should produce or save energy without adversely affecting the water and/or food supply.

Water has been overlooked as an area for entrepreneurship and investment for good reason: it is a very challenging arena. Water is similar to energy in its diversity and the magnitude of challenges it presents (see What’s Wrong with Energy Investing Part II)—and it has even more conservative ultimate users and buyers. Nonetheless, water’s time in the limelight has come, and many companies built around clean water technology that couldn’t get a second look a year ago now are drawing tremendous interest. Often these companies have been around for over a decade because that is how long it has taken such ventures in the past to get traction. In addition, new companies like NanoPur, a venture involving the use of novel carbon nanotube technology to improve the energy efficiency and cost effectiveness of desalination (and a finalist for the recent MIT Clean Energy Entrepreneurship Prize backed by NSTAR and the U.S. Department of Energy), are springing up with much higher frequency. The new economics of water make companies that increase the supply of clean water a compelling value proposition that will only increase over time. While there may be alternative energy sources and fuels, there really is no substitute for clean water.

The second point I raised above is really a necessary condition for building sustainable energy companies in the future. Only a year or so ago, venture capitalists routinely asked each new potential investment company about its India and China strategies. Similarly, for energy companies, the question will be, “What effect will the venture have on food and water?” Those companies that can decouple the tradeoffs between the two will be interesting, and those that do not, will not be attractive investments. Even existing, well-managed energy companies are now closely examining this issue, which will only increase in importance. An example of a potentially exciting new company in this regard is another finalist from the aforementioned MIT Energy Prize competition: Sequesco. This team of three PhDs plans to develop genetically modified non-photosynthetic bacteria (an approach different than photosynthesis-based algae production) to more efficiently convert harmful CO2 into biomass fuel. This is a double play (i.e., it decreases CO2 emissions and increases energy supplies) without negative ramifications on water or food—at least that we know of yet.

In summary, trading off water for energy is a devastatingly bad idea, for as wise old Benjamin Franklin said, “When the well is dry, we learn the value of water.” In the first stage of energy innovation, we began to deplete the well. But in the second stage, beginning now, we must move on from this folly and find more intelligent solutions.

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I had the good fortune to receive a substantial amount of feedback on my first post on this subject a few weeks ago. The feedback was productive and helped to clarify key points and in general reinforced my conviction laid out in the Part I entry. In that article, I advanced the idea that while “we should and must invest in renewables and alternative energy for the future,” to do so to the exclusion of hydrocarbons means “we are majoring in minors.”

My point was simply that a more balanced approach to our energy investments should be pursued that focuses as well on the hydrocarbon reality we face for the foreseeable future. While we develop alternatives for the longer term, I argued, we must simultaneously invest in making hydrocarbons a cleaner, more efficient form of energy—as well as energy efficiency initiatives. “Just to put this in perspective,” I wrote, “…If we could find a way to reduce CO2 emissions from automobiles by 1 percent it would be, from a quantitative and practical point of view, thousands of times more positively impactful than increasing solar energy production by a hundred times.”

The post generated a lot of comments, but the numbers behind my argument are quite compelling in the end, so I can’t say that my view has changed. My second installment on this subject will be regarding a topic that is much harder to qualify. But I believe it is another fundamental, yet often-overlooked factor that has to be dealt with more realistically if energy investing is to succeed: our critical shortage of energy entrepreneurs. Clearly, money for energy innovation is no longer an issue, but the entrepreneurs to effectively put that capital to work will prove to be a system constraint.

People in many industries will whine and complain about how their industry is so unique and more difficult than others, and so one has to sort through this groaning to find the truth. After some close analysis, though, I have concluded that for energy, unfortunately, it is definitely true. Energy entrepreneurship is much harder than entrepreneurship in other sectors, and I believe most investors have yet to come to grips with this fact.

To explain my case, I will break the discussion down into some key points (which follow below). These are general points about energy ventures and so may not apply specifically to individual cases—but in aggregate I believe them to be true. They present a real challenge for the energy sector today and into the near future.

All Entrepreneurs Are Not Alike, or Energy Entrepreneurs Are A Rare Breed Indeed

When new industries arise (e.g., computer hardware, software, telecom, internet, wireless, medical, biotech), they have their own unique characteristics. Obviously, the technical talent required differs greatly in these industries, but so do the entrepreneurial skills required. Entrepreneurs are the change agents who commercialize the disruptive invention, and the inventor (a technologist or some sort of visionary) needs them to create a meaningful new venture. The entrepreneur is the great integrator and the propeller of the new venture.

An entrepreneur who is successful in software usually is particularly skilled at identifying market opportunities and then executing a market-pull, customer-intimate, product strategy in a rapid fashion—getting innovations to market quickly and then iterating to improve the products. These skills are clearly transferable to Web 2.0 venture creation but are not as relevant, and, in fact, may be counterproductive, in a biotech entrepreneurial venture. Biotech entrepreneurs need to have a much more methodical approach over a longer period of time than Web entrepreneurs, and they must possess a distinct ability to manage a company and a project through significant regulatory obstacles. Similarly, as I will explain further, Energy Entrepreneurship is much different than any brand of entrepreneurship we have seen to date. In fact, I would argue that being an entrepreneur in the energy arena is unquestionably the hardest form of entrepreneurship by at least one order of magnitude.

While it’s easy for me to say that energy entrepreneurship is harder than entrepreneurship in other sectors, it’s a bit presumptuous of me to estimate how much tougher it is. I do so, however, to make the point that there is a big gap between it and other fields that people are underestimating right now. Let’s look at all the attributes or dimensions of expertise that an Energy Entrepreneur needs:

1. Multi-dimensional knowledge of science and engineering disciplines. While the entrepreneur is most often not the technologist or inventor, he (note: I use “he” and “his” in the gender neutral sense) does need to understand the core scientific drivers of the market as well as the technology or science drivers behind his various product offerings. For many new Energy Ventures that could well mean possessing an understanding of aspects of chemistry, biology, engineering, biotechnology, environmental science, computer science, and production systems, to name just a few. Does that make energy entrepreneurship unique amongst technology sectors? To the magnitude that such expertise is required, yes.

2. Longer time frame. While there are exciting exceptions like EnerNOC (NASDAQ: ENOC), the time frame required for an energy company to get traction is much longer than with companies in most other sectors. Ann Winblad, the software venture capitalist, said at the recent MIT Technology Review Emerging Technologies Conference that her companies took a long time to bear fruit—an average of 6.2 years. While for Ann that may seem long, most energy companies, even poster success stories like EverGreen Solar, can only dream of such short time horizons. While the current enthusiasm for energy companies is compressing the time before they bear fruit, the historical starting point (for good reasons) is significantly greater than 10 years. Indeed, if the time required for energy companies to bear fruit could be reduced to an average of 10 years, it would be a substantial improvement (Which raises a question as to how venture capitalists with 10-15-year funds can handle energy investing, but we must keep moving and stick to the main topic…). The persistence and patience that Ann said is so difficult to find for typical software startups is a fraction of what is required for energy companies. Biotech companies are similar in this regard, but in general, energy is far outside the bounds of other sectors.

3. Bigger scope and scale from a financial standpoint. Just from a financial standpoint, a typical energy new venture requires large amounts of capital. Investors have to make significant initial bets and then be ready to follow them up with even bigger bets. While energy is not unique (biotech, telecom, and now wireless—see Helio—come to mind as similar stories), it does add another dimension of required sophistication.

4. Ability to deal with public perception and often-intense emotion. Energy is inextricably tied to controversial natural resources, public safety, and environmental issues—not to mention questions about economic impact. Part and parcel with this come public politics and emotion. Some of it is clearly justified, and some of it is not. But, as ex-football coach Bill Parcells said, “it is what it is,” and the energy entrepreneur needs to be adept at dealing with it. (See the comments on my first post for evidence of this tendency.)

5. Adroitness in governmental affairs. Energy is not just emotional—it is politically charged with a significant policy dimension. If one chases down the full value chain of energy-related products, he or she will almost always find that they are directly affected by governmental actions. This action can be regulation (such as utility rate setting in the U.S.), subsidies (e.g, U.S. or Brazil ethanol production or Germany’s solar industry) or price setting (think OPEC). This is generally something entrepreneurs (and venture capitalists) hate. It’s not unique to the energy sector: the medical and biotech arenas have similar considerations. Strong capability and comfort in dealing with government affairs relating to policy and economic issues is absolutely critical to the successful energy entrepreneur.

Any one of these factors alone adds complexity to the already challenging task an entrepreneur faces, but the challenge becomes particularly daunting when the compounding effect is considered.

Numerous Routes for Attackers in Other Fields, Not in Energy

In addition to these traits, there is another important and challenging market condition that exists in energy that is fundamentally different from other high tech industries today. It is the imperative to effectively deal with (e.g., by partnering, collaborating, or at least neutralizing) the very people you are trying to disrupt. To a much greater degree than in other sectors the existing hierarchy in energy cannot be ignored.

Entrepreneurs thrive as “attackers” armed with disruptive technologies, business models, or other ideas that they bring to bear against the “defenders”—specifically the entrenched, resource-endowed hierarchy that is being threatened. Since the demise of IBM’s monopoly (Isn’t it hard to fathom that less than 25 years ago the biggest concern IBM had was anti-trust suits because it dominated the computer market so completely?), there have been multiple options for technology-based entrepreneur-attackers to create new products and to get to market. There has not been a dependence on a real or de facto monopoly on the defender side. It has been relatively easy to bypass the defender completely, or use defenders against each other to get the disruptive innovation to market.

For example, when Lotus came up with its breakthrough 1-2-3 spreadsheet, it did NOT have to work with IBM to have it fit into IBM’s closed mainframe architecture. It could operate on the open personal computer platform. Today, when Web 2.0 companies arise, there are no monopolies controlling the infrastructure that they need to deliver their offerings to customers.

Contrast this to the entrepreneur who wants to harness wind energy in the Dakotas and finds that there is no grid available to deliver the energy to the customer. To solve this problem would require dealing with numerous de facto monopolies (including utility companies but also state, local, and federal governments) that ultimately make the problem essentially intractable.

Energy entrepreneurs, especially those in energy production, don’t enjoy the luxury of having numerous possible routes to market—because it is almost always the case (even though they try to avoid it if they can and a few succeed) that they must deal with the existing hierarchy, which controls the infrastructure.

This is a difficult challenge in general because existing successful hierarchies are very content in homeostasis and resist significant changes (as Clayton Christensen details in The Innovator’s Dilemma). In energy, it is even significantly more challenging because those controlling the infrastructure are notoriously (and appropriately) conservative beyond what would be seen in other industries. While renewable and energy efficiency entrepreneurs might complain about utilities (sometimes with justification), they don’t have an option but to deal with them. Building a parallel grid is not a viable option. They must find extremely creative ways of working with the controllers of the infrastructure. Likewise, to be a player in the massive oil and gas industry, entrepreneurs usually need to find a way to work with those who control that infrastructure. The costs of the infrastructure are just so high in energy that having multiple options is much less likely than in other industries. It is not simply a barrier that was created because someone “built a brand”—there are huge costs required to build the infrastructure which cannot be overcome with a marketing program.

In Summary, Thoughts and Action on the Solution

As Albert Einstein said, “seek simplicity and distrust it.” The model I am proposing is not relevant for all energy startups, but it is for the majority of impactful new ventures that should and need to be created. The energy entrepreneur has to be able to manage significant technical resources to address the multidimensional science, engineering, and systems challenges which alone would exceed the entrepreneurial requirements for any other industry. If that were all, it would be enough—but it is not.

Like the most elite high-tech entrepreneurs, the Renaissance Energy Entrepreneur must have these multi-disciplinary science and technology skills like an elite high-tech entrepreneur, represented in the “Seed Innovators” circle in the model to the right. These include understanding and building innovative business models to optimize monetization, as well as a keen awareness of the standard successful new venture creation process. This must be managed over a long period of time while simultaneously addressing the other two circles shown in the diagram—the “Government” (policy and public relations) circle and the “Big Players” circle (representing the need to diplomatically and effectively “massage the existing controllers of the infrastructure”). This combination is what makes this an exponentially more difficult task. The Energy Entrepreneur today who can do this is very rare indeed and in huge demand.

First, we need to openly recognize the challenge in front of us and not believe there are simple solutions. I recently heard a very smart venture capitalist say that he plans to “take successful entrepreneurs from other industries who want to give back now and put them in energy.” In general, I find this approach sorely lacking. For a sports analogy (which is a bit of a stretch I know, but it makes my point), transferring Michael Jordan’s extremely prodigious mental and physical athletic talents from basketball to baseball didn’t really work—nor will it generally work in energy entrepreneurship. The idea of transferring entrepreneurs from other industries and putting them in energy may be our only option in the short term, but they risk getting whiplash as they seek to master steep learning curves in multiple dimensions.

At MIT, starting in our “Energy Ventures” class, we seek to build this new renaissance energy entrepreneurship capability by having multi-disciplined teams working off the model above. We have selected a number of the most talented and passionate students at MIT from multiple science disciplines and coupled them with top policy graduate students and MBAs with significant energy background and put them into teams to work on building new energy companies. We are watching the experiment with great interest. The full results are not in, but we do know that it is much different and much harder than most people realize.

There are many other efforts to cultivate energy entrepreneurship in organizations such as the MIT Energy Club, MIT Enterprise Forum, TIE (The Indus Entrepreneurs), and the like. We plan to create a unified competition platform (the MIT Energy Prize) with significant support for prospective energy entrepreneurs inside and outside our community to help audition and improve their skills in a highly constructive, networking environment. It will be a learning process for everyone.

While there is still much to learn, we do know that in time, through these efforts (and many others), a new breed of entrepreneurs, the energy entrepreneurs, will arise to meet the challenges of the energy sector. When that day comes, another major bottleneck to resolving the energy challenge will be removed. But until then, we must recognize the limit in the system and act appropriately.

Bill Aulet is a senior lecturer at MIT’s Sloan School of Management and Entrepreneur in Residence at the MIT Entrepreneurship Center. He is currently teaching a new class at MIT called Energy Ventures.

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I just returned to Kendall Square after spending a spectacular weekend at Squam Lake in New Hampshire and at the forefront of my mind—and what I could not shake over the weekend—is the state of the development of the New England energy ecosystem. Granted, I have a personal agenda, as in 30 days I commence teaching a new class at MIT called Energy Ventures. Still, it’s an extremely relevant question for the local economy, and arguably the nation and the world. Energy is, after all, the biggest industry on the planet and certainly faces the biggest challenges. Therefore, it offers the biggest and most attractive opportunities for investors and others who want to make a difference.

A lot of smart and well-intentioned people have made a lot of progress in recent years in developing the regional energy ecosystem. But let’s not congratulate ourselves too fast. For every EnerNoc success story, there has been a GreenFuel setback (hopefully temporary). Not that such setbacks are necessarily a bad thing, especially if they cause us to reflect and learn how to improve. So the question that we should seek to answer is “what is working and what is not working in developing a New England-based energy ecosystem?” Or even more specifically, “what’s wrong with energy investing?”

To answer this question, we might refer to the Beatles’ George Harrison, who sang in “Got My Mind Set on You” that “it’s gonna take time, a whole lot of precious time…to do it right.” But the time is precious indeed, and I think enough results are in to make two important points about energy investing.

Majoring in Minors
While there clearly used to be a shortage of private equity capital for energy ventures (and rightly so because of their highly cyclic nature), that problem has gone away. Money is now gushing in. By my simple calculations, the amount of money available to energy ventures from dedicated private-equity funds quadrupled from 2005 to 2006, soaring from approximately $5B to $20B. I believe this is even understated. The point is that the money is flowing in at an amazing rate. But where is it going? Energy as a sector is almost as non-specific as technology or transportation. We have to peel back the label and take a closer look.

The lion’s share of the money that is dedicated to energy is earmarked for renewable or alternative energy. Renewable or alternative energy is a fantastic thing and it is necessary, but wholly insufficient, to deal with the energy problem. The biggest part of the energy riddle that needs to be solved resides—and will continue to reside for the next 50 years—with the hydrocarbon side. How do we find more to meet the booming demand? And, how do we find ways, through technology, process, and/or business-model innovation, to reduce the environmental impact of hydrocarbon usage? Renewables is a rounding error when compared to the 80 to 90 percent of the demand that hydrocarbons (i.e., oil, gas, coal—ah!, there it is the four-letter word of energy) fill and will continue to fill for the foreseeable future.

We should and must invest in renewables and alternative energy for the future and there will be some big wins there relative to investing. But with all the new money and attention rushing into this small part of the sector, we are majoring in minors. The major focus should be how do we deal with the continued need for hydrocarbons and how do we make this cleaner energy. Just to put this in perspective, the world would be dramatically better off from an energy-supply standpoint if we could find a way to improve recovery rates at oil and gas wells by 1 percent than if we built a million new wind turbines. If we could find a way to reduce CO2 emissions from automobiles by 1 percent it would be, from a quantitative and practical point of view, thousands of times more positively impactful than increasing solar energy production by a hundred times.

For the investor, this line of thought would seem to make sense as well. One of the top funds of any kind in the U.S. last year was First Reserve Corporation, and while they do not release their results, we know they did very well. One gauge is that they were the top fee producer on Wall Street last year. They also just raised an additional $7.8 billion to continue to do what they do best—investing in the basic energy industry with a focus on making the good old hydrocarbons industry more effective and efficient. These days the herd mentality of private-equity investors, in my humble opinion, has them putting too much money into renewable/alternative energies and not enough into fixing the core business of energy, the hydrocarbons. There will be a correction but until such time, I think this is a fundamental problem with overall energy investing.

Not Enough of the New Brand of Innovators/Entrepreneurs
The nature of the energy industry is far different from that seen in IT, healthcare, biotech, telecommunication, or any other field and it requires a new brand of innovator/entrepreneur which is in short supply relative to demand. The lessons from other industries do not translate effectively in many cases. The scope, scale, time horizon, interdisciplinary skills required, and the question of how independent a new venture can be from the existing infrastructure are problems that, in combination, are unique to the energy industry. But more on that in the next post…

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…is coming soon

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