[Editor's Note: We asked selected Xconomists a series of questions designed to zero in on the big issues of the year, including "What would you be willing to throw a punch over?"]

Regulatory overkill. We spend so much time and resources in the USA due to regulations that, while well-intentioned when conceived, are set into law due to a crisis. They are driven by emotion and the desire to protect future occurrences or to punish a minority of wrongdoers. However, in hindsight, they are usually overly burdensome, lack risk/benefit analysis, and therefore stifle innovation. The real problem is that once they become law they are nearly impossible to roll back. I would love to see an approach that identifies the most stifling of these regulations in the USA and that requires the stakeholders (regulatory body, industry, and users) to draft a completely new and modern approach to regulation every 10 years. That could help ensure that innovation can thrive and that risks and benefits are balanced.

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[Updated 1/11/12 5:15 pm. See below.] “Sermo has been my baby, my blood and tears,” its former CEO Daniel Palestrant told me in a phone call last week.

So it was pretty shocking last week when news surfaced that the founder of the Cambridge, MA-based online community for doctors was moving onto a new Web startup, along with Sermo chief medical officer Adam Sharp. It wasn’t always going to be that way, Palestrant said, but more on that later.

Par8o, the new startup, began as a research project within Sermo. Drawing on the insights of its large online physician community (more than 130,000 people strong now), Sermo had formed the opinion a few years ago that the healthcare bill would not achieve its goals of improving patient care and lowering costs, Palestrant said. Among other things, the community thought the bill (signed into law March 2010) needed greater reform to medical malpractice policy and ways to improve patient engagement.

The research team at Sermo hypothesized that to achieve these goals, what’s needed is “the introduction of Pareto dynamics,” where efficiency is created through better matching supply and demand, said Palestrant. The idea comes from the Italian economist Vilfredo Pareto.

So what exactly does that look like and how can a new health Web startup help? Palestrant explains that in Par8o’s case, it’s about improving the patient referral process. Referrals, he said, are “a critical moment in a patient’s healthcare journey, either a change in diagnosis or an escalation in care.”

Often, this means the general practitioner sees a new health problem in a patient and needs to bring in a specialist to really tackle it, said Palestrant. That should work fine, right? Not exactly, according to Palestrant. Of the tens of millions of patient referrals per year, somewhere between 20 percent and 40 percent never actually result in another appointment or handoff to a new doctor. “The patient never … Next Page »

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Lexington, MA-based FirstFuel Software is among a crop of experimental energy projects picked to help the Department of Defense curb its energy output across military installations, the company announced yesterday. The startup was one of 27 teams selected as part of the DoD’s Installation Energy Test Bed initiative, a program designed to help emerging energy technologies get to market quicker while also slicing the roughly $4 billion a year the department spends on energy across its 300,000 sites.

FirstFuel’s software enables customers to measure building energy output—and target effective efficiency upgrades—without ever setting foot on site. The technology uses a building’s address, a year’s worth of energy meter readings, satellite imaging, and weather patterns to conduct the audit remotely. CEO Swapnil Shah has previously stated that his company is targeting utilities and government agencies as customers because of their massive reach and their need to cut the costs of pricey on-site audits, which can run between $5,000 and $30,000 a pop. In this case, the FirstFuel technology will be tested out in a pilot of about 100 DoD buildings and then evaluated for use in more sites, said Shah.

The Installation Energy Test Bed program, founded in 2009 as part of the DoD’s Environmental Security Technology Certification Program, has selected other technologies in the building management, energy efficiency, renewable energy, and energy storage arenas. Through the program, the government aims to take on some of the risk as one of the first users to validate the new technology, and “for those technologies that prove effective, DoD can go on to serve as an early customer, thereby helping create a market, as it did with aircraft, electronics, and the internet,” the Installation Energy Test Bed’s website explains. FirstFuel seems to be alongside some heavy hitters for the 2012 pool, which includes projects from 3M, Raytheon, Autodesk, and Honeywell.

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As we turn the page on the year 2011, there is no shortage of topics about which the entire world seems to be debating. One that interests me the most is the renewed debate on the role of government in the energy sector, specifically in the United States. Budget shortages, deficit increases, front-page analysis of public-backed private enterprises, and a particularly bitter political climate have combined to push this topic to the forefront more so in 2011 than in recent years. It’s as though we are back in the smoky classrooms of the University of Chicago in the ‘50s and ‘60s where economists engaged in frequent Keynes Vs. Friedman (Milton not Thomas, mind you!) debates.

Energy is always a popular topic in the U.S., given its strategic importance to national security. All this recent debating has been interesting to follow but a bit confusing. Economists, reporters, business folk, and politicians do not seem to agree on what constitutes a government subsidy, let alone which sub-sector is the recipient of how much. While I do not want to take any sides, I thought it would be worthwhile to examine what constitutes a government subsidy, and what subsidies and how much were provided by the U.S. government historically.

As I began to think about what sectors to focus on, it made sense to examine those that have been of significant strategic importance to U.S. economic growth in the past. The rise of the U.S. to be the largest economy in the world was driven to a large extent by what some refer to as the second industrial revolution constituting the rise of the railroad, steel making, telecommunications, petroleum, and the automobile industries. This article attempts to capture the subsidies provided by the U.S. government to some of these industries at different stages of their growth cycle.

What is an energy subsidy?

I am no economist, but it seems to me that we can all agree on what constitutes a government subsidy without too much debate. Table 1 (below) attempts to summarize the different forms that energy subsidies can take. Most of these subsidy types are immediately recognizable. The “type” that has generated much debate so far is the “Failure to include Externality Costs.” No matter where you stand on the climate change debate, it is not that hard to see that pollution has at the very least caused smog and acid rain—ask the residents of the Los Angeles from the ‘80s and, more recently, those from Beijing. There has not been a worldwide accepted externality cost measure yet, but as we move forward the chances of that happening are higher.

Regardless, it is safe to say preferential tax treatments and price controls are as much a government subsidy as a cash grant or a low-interest loan. The U.S. government wallet is a bit lighter in both cases.

Historical U.S. government subsidies

The growth of the U.S. economy after the Civil War to become the world’s largest economy was driven by increasing commercialization of technologies including the railroad, iron and steel making, petroleum, and the internal combustion engine. Besides private capital and resources, an important catalyst behind the development and growth of these industries were U.S. government subsidies at different stages. Table 2 summarizes the amounts, types, time period, and stage at which government subsidies were provided to these industries.

Railroad and transportation

U.S. railroad companies laid more than 35,000 miles of track between 1867 and 1873—more than three times that laid in the previous 30 years. Congress gave the railroad companies more than $64 million ($8 billion in 2011 US$ at 3.5 percent inflation) in loans and tax breaks and more than … Next Page »

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The Federal Communications Commission gave AT&T and T-Mobile USA a little kick on the way out the door today, releasing its staff report on the companies’ proposed $39 billion merger. AT&T and T-Mobile parent Deutsche Telekom pulled their merger application last week (on Thanksgiving!), choosing instead to focus their regulatory fight where it really matters—the antitrust lawsuit from the Justice Department.

The companies didn’t want the FCC report to be made public, but they lost that battle, so we now have some extremely detailed reading to dive into. You can check it out for yourself over at the FCC site. The document is chock full of technical detail and legal analysis, but it really boils down to a broad rejection of the claims made by the two companies to support their deal.

The upshot is on pages six and seven, where the staff report tears apart the justifications for the buyout. There are three basic areas of concern—first and most broadly, the report says the effects on competition would be too severe, with a higher likelihood of coordination among the remaining players and questions about the markets for handsets along with roaming, wholesale, and other wireless services.

The report also slaps aside the economic and engineering models that AT&T and Deutsche Telekom used to claim that the buyout would drive down wireless industry prices and network costs. And finally, the report says any savings from the combined operations of the two carriers could result in poorer customer service rather than lower prices, and wouldn’t drive any increase in jobs.

Of course, lots of the really interesting information is redacted—but I did find one fun spot where someone messed up and forgot to white out some things that are marked confidential. It’s in the footnotes on page 12, where the commission is discussing T-Mobile’s strength as an independent competitor.

“Indeed an email exchange argues that ‘T-Mobile’s 4G network is much faster than AT&T’s network,’” the unredacted material says, citing December 2010 email between Paul Weisbecker of AT&T and Kelsey Joyce of T-Mobile. Here’s a screenshot of that passage, in case it gets pulled later:

As you can see, a second area that appears to be unintentionally published immediately follows that, saying that T-Mobile’s network expansion “puts T-Mobile ahead of its competitors in terms of network speeds.” That citation points to Network Business Quarterly, an industry report by the analysts at Technology Business Research, so I’m not sure why it would have been designated for redaction in the first place.

The report’s discussions of small, regional wireless carriers has some new weight amid the New York Times report that AT&T’s hope now is to carve off chunks of T-Mobile  to prop up a new No. 4.

The discussion on pages 33-38 of the FCC report lays out just how tiny these small wireless providers are in relation to the big guns—if measured by revenue, the three largest of those also-rans only makes up about 6.5 percent of the national wireless market combined, compared to T-Mobile’s 11 percent.

“To provide service comparable to a nationwide provider, and thus be able to compete effectively and prevent competitive harm, a regional provider would most importantly need to obtain a nationwide spectrum footprint and the resources to build it out,” the report says. “In only one of the top ten markets to Leap, MetroPCS and U.S. Cellular, the largest regional firms, have half as much spectrum combined as T-Mobile’s spectrum holdings.”

That’s a pretty big gap to make up with pieces from a dismembered T-Mobile. If AT&T can get a deal in place with the feds to make a new fourth-place carrier, this report would provide plenty of ammo for evaluating whether the deal passes the smell test.

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While most of us were sleeping off the effects off too much turkey and pumpkin pie, AT&T and federal regulators were engaging in a very public spat over Ma Bell’s $39 billion bid for T-Mobile USA. But now that things have simmered down a bit, it actually looks like the prospects for this deal haven’t changed a whole lot.

AT&T and Deutsche Telekom’s announcement that they were pulling their application from the FCC—expertly issued on Thanksgiving—was a counterpunch to the FCC chairman’s decision to send the case to an administrative law judge for a hearing. As The Associated Press succinctly explained, “that’s what the FCC does when it opposes a merger.”

But the real focus for this deal is the U.S. Justice Department’s antitrust lawsuit blocking the merger (you can check out the latest filings in the case at this DOJ site). As I wrote when the lawsuit was filed back in August, the DOJ’s civil suit essentially “yanks the merger away from regulators at the Federal Communications Comission and puts the whole thing in the court system.”

It’s kind of like that moment in a TV cop drama when the hardened detectives arrive at a crime scene and send the beat cop out to work crowd control. Yes, they’re separate agencies. And yes, the FCC would have to bless any deal that might be worked out. But the DOJ’s lawsuit is the main event.

So, while it has been fun to see the FCC and AT&T quibble over arcane procedural details—the FCC saying it will consider the withdrawal, and AT&T threatening to sue if the application isn’t dropped—the DOJ lawsuit has always been the place where this deal would really be killed or allowed to stand.

What could happen in that process is still anybody’s guess. A failure would definitely cost AT&T, though—the company said it would charge a breakup fee of $4 billion to this quarter’s earnings, a precaution that some analysts are saying is probably required by accounting principles at this point, given the lingering uncertainty.

Reading through all of the coverage of AT&T and T-Mo’s wild weekend is a very informative primer on the current state of the wireless industry, where big, traditional carriers are trying to consolidate scale and spectrum while cable companies and even software players like Google hint at greater involvement.

Among the mounds of excellent reporting out there, I recommend this overview by The New York Times and a breakdown of several industry analysts’ takes at The Wall Street Journal. Greg Lamm at TechFlash also gets great regional reaction from the CEO of a Portland, OR-based small carrier.

But it’s also remarkable to see how closely all of those possible ideas are tracking to this piece from GigaOm’s Ryan Kim, who rounded up the possible next steps for T-Mobile if the deal fails. Kim wrote his piece back on Aug. 31, the day the DOJ lawsuit was filed. The fact that we’re still talking about the same kinds of outcomes gives you a good idea of how little has changed in the big picture.

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[Editor's note: Cross-posted from The Economist, 11/2/11]

New York Mayor-entrepreneur Michael Bloomberg, not known for shyness, recently proclaimed New York City as America’s new entrepreneurship capital, roaring past Boston in venture capital and soon to leave Silicon Valley in the dust as the “go to” destination for entrepreneurs. Indeed, the world media are awash with proposals to kick start entrepreneurship as a strategy for economic revival, with support for venture finance at the heart of many programs. Yet the title of Harvard’s Josh Lerner’s recent book, “Boulevard of Broken Dreams,” is no coincidence, because proclamations are one thing, actual success is quite another.

Fortunately, there is a lot of experience around the world about what works and what doesn’t. Here are some practical principles that the Babson Entrepreneurship Ecosystem Project have been identifying and developing for public leaders who have, correctly in my opinion, identified entrepreneurship as an essential plank in economic policy.

1. Be clear that the objective is to foster an entrepreneurial finance ecosystem, not to directly provide capital to entrepreneurs. Over time, a healthy entrepreneurship ecosystem makes available capital to ventures that deserve it, while denying it to ventures that do not. This does not mean that governments need to revert to selecting the deserving. This idea has regained currency recently, but we learn time and again (Solyndra anyone?) that it does not work. It does mean that the availability of capital, and other resources, needs to be part of a natural process in which the ecosystem elements—in this case, deal flow and capital—continually evolve and adjust to each other, a concept that is consistent with Smith’s “invisible hand.” But the concept goes further by suggesting that enlightened and skillful leadership can play a critical role in encouraging the evolution of a self-sustaining ecosystem, but leaders have to understand how and when to get in, and how and when to get out.

2. Stimulate financing, but stay off of ventures’ balance sheets. Presence of government and government-owned entities as direct debt or equity holders of ventures should be a red flag. The only reason government should be on a venture’s balance sheet is in the rare case when it is absolutely necessary to entice private, profit-oriented entities to get involved as the natural selector of investment targets, and in those cases, government should have a clear plan to get out. Governments can, as have Israel, Finland and some other countries, provide smart, off-balance sheet funding in the form of repayable grants, matching grants and so forth. But presence on ventures’ balance sheets ultimately leads to a conflict of interest between governments’ social priorities and obligations, and the need to provide a positive return to invested capital. Overall, there is evidence that a moderate amount of this kind of financing can be beneficial, but as it gets to be too great, the benefits rapidly turn into liabilities.

3. Make sunset clauses for financial support programs the rule, not the exception. Permanent, or evergreen programs of government-supported venture capital, loan guarantees, startup grants, angel tax credits and so on, risk becoming white elephants and/or political assets, not economic ones, and in the process risk squandering public funds. Sunset clauses, or “sell-by dates,” help focus policy-implementation programs on (a) achieving results, and (b) creating self-sustainability by building capacity and mutually reinforcing systems (for example, by showing private sector players that they can actually make profits.)

4. “Pulse” incentives to foster discovery. An implication of sunset clauses, in general, is that if providers and consumers of risky capital can “discover” that it is profitable to engage, then they will accelerate self-interested behavior when the “visible hand” is removed. Seeing if providers and consumers of entrepreneurial capital “discover” the correct pricing mechanisms to allow them to engage in a profit-seeking transaction is one test as to whether the problem is really a market failure or not, and is not just … Next Page »

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Between the FutureM conference, Web Innovators Group, Mobile Monday, the Entrepreneur Walk of Fame, and the MIT tech festival t=0, there wasn’t a lot of time for Boston techies to breathe last week.

To keep you up to date, here are some high-level takeaways from FutureM, the sprawling MITX event that was really 50-plus separate events, focused on the future of marketing—and with a lot of Boston-area companies represented. This is just a small sample of what I saw and heard from a few panels and gatherings:

1. Ad tech sucks. For consumers, that is. Lots of startups and big companies are trying to make it suck less. That was the message from Sim Simeonov, the entrepreneur and angel investor behind Shopximity, a young Boston-area startup that’s trying to improve consumers’ shopping experience using display ads.

2. The frontiers of mobile marketing are automation, engagement, and transparency. Automating the marketing process is key in a world of near-unlimited Web content and cheap ad prices. So is getting (and keeping) people’s attention. “The trend we’re going to see is around making it more clear why [a consumer] would want to explore an ad,” said Lars Albright, a veteran of m-Qube, Quattro Wireless, and Apple. (His new startup is called Session M.) It remains to be seen whether a billion-dollar business can emerge from this sector, however. Albright would bet on Apple’s iAd network reaching $1B, while Paul McNulty of IBM’s enterprise marketing division (he’s from Unica) said, “I don’t know if [a marketing automation company] is the horse I’d bet on as the next EMC.” (I took that to mean because there are lots of different companies with complementary strengths, it’s hard to imagine one big category winner.)

3. “California is a one-night stand, while Massachusetts is a long-term relationship.” That was Senator Karen Spilka (D-Mass.) summarizing the views of a panel of entrepreneurs and investors on building companies in the Bay State versus Silicon Valley. “We’re still number one in education,” she said. “And number two in [venture capital] as a small state is pretty good.” (Alas, non-compete laws are also part of the long-term relationship here. Interestingly, Brian Shin of Visible Measures noted that his thinking on non-competes has changed, presumably from positive to negative: it sounds like he originally thought they would be helpful in retaining a core group of top employees in the state.)

4. Diversity in tech is a challenge and an opportunity. Investor Eric Paley of Founder Collective noted that young entrepreneurs in New York and Silicon Valley “can rattle off names of success stories.” Whereas in Boston, people don’t hear much about companies like EnerNOC, Acme Packet, EqualLogic, and Unica, “because we’re so distributed” across different sectors, he said. “It’s the diversity and the modesty.” Case in point: On the panel, Paley asked Brian Shin if he knew of Unica, the marketing tech firm that would be bought by IBM for $480 million last year, back when Shin was starting Visible Measures in 2005. “I didn’t know any company,” Shin said. On the other hand, he said that “because there is diversity, you can find [a mentor] who’s done something big in almost anything you want to do.”

5. Connecting students with startups, perhaps with VC or government support, is key to the state’s tech future. It’s a well-known issue: top kids go to school in Boston and then leave for the West Coast or New York to join hot startups, or they become business consultants. “We should be insanely aggressive about internships,” Paley said, for undergrads, grad students, and MBAs alike. That means championing broad efforts to get young people who are interested in entrepreneurship (there seem to be more and more lately) to work at local companies for the summer. That echoes something Jon Pierce told me a few months ago: “Working at a startup is the best education you can have as an entrepreneur.”

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Washington state Attorney General Rob McKenna, the Republican favorite for governor in 2012, has joined his counterparts from six other states to support the U.S. Justice Department’s lawsuit blocking AT&T’s proposed $39 billion takeover of T-Mobile USA.

It’s not unusual for state governments to get involved in cases like this, particularly when there may be some business or consumer impact on their residents. In McKenna’s case, of course, part of the motivation is that T-Mobile is based in Bellevue, WA. As Politico noted, “Washington … stands to lose, potentially, many jobs if the transaction is approved.” The other states involved are California, Illinois, Massachusetts, New York, Ohio, and Pennsylvania.

In his announcement about the lawsuit, McKenna said allowing the buyout would lead to fewer choices and higher prices for consumers. “If the deal goes through, two companies will control roughly three quarters of mobile subscribers in the U.S.,” McKenna wrote. “Antitrust laws exist to prevent such strangleholds over products and services.”

McKenna had previously said he shared the DOJ’s concerns about the merger, but this is obviously a much stronger step. McKenna’s Democratic opponent for governor, U.S. Rep. Jay Inslee, also opposes the merger. Inslee has publicly criticized the two companies’ responses to his request for more details about the effects of the buyout, and applauded the DOJ’s lawsuit, saying “the last thing Washingtonians need are more layoffs, increases in their wireless bills and fewer choices for wireless service.”

McKenna joining the lawsuit will turn some heads because Republicans are generally friendlier with business than Democrats. But it’s been a long time since the GOP elected a governor in Washington, and the consumer and local-jobs angles to opposing this deal are probably winners with the voting public.

One last note: I checked the state campaign contribution database to see how the candidates were faring with any money from AT&T or T-Mobile. I couldn’t find any contributions to the candidates or to their respective parties’ major political action committees. Both McKenna and Inslee did have some small contributions from individual employees.

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Not understanding and agreeing what “entrepreneur” and “startup” mean can sink an entire country’s entrepreneurial ecosystem.

I’m getting ready to go overseas to teach, and I’ve spent the last week reviewing several countries’ ambitious attempts to kick-start entrepreneurship. After poring through stacks of reports, white papers and position papers, I’ve come to a couple of conclusions.

1) They sure killed a ton of trees.

2) With one noticeable exception, governmental entrepreneurship policies and initiatives appear to be less than optimal, with capital deployed inefficiently (read “They would have done better throwing the money in the street.”) Why? Because they haven’t defined the basics:

What’s a startup? Who’s an entrepreneur? How do the ecosystems differ for each one? What’s the role of public versus private funding?

Six Types of Startups—Pick One

There are six distinct organizational paths for entrepreneurs: lifestyle business, small business, scalable startup, buyable startup, large company, and social entrepreneur. All of the individuals who start these organizations are “entrepreneurs” yet not understanding their differences screws up public policy because the ecosystem in supporting each type is radically different.

For policy makers, the first order of business is to methodically think through which of these entrepreneurial paths they want to help and grow.

Lifestyle Startups: Work to Live their Passion

On the California coast where I live, we see lifestyle entrepreneurs like surfers and divers who own small surf or dive shop or teach surfing and diving lessons to pay the bills so they can surf and dive some more. A lifestyle entrepreneur is living the life they love, works for no one but themselves, while pursuing their personal passion. In Silicon Valley the equivalent is the journeyman coder or web designer who loves the technology, and takes coding and U/I jobs because it’s a passion.

Small Business Startups: Work to Feed the Family

Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7 percent of all companies and employ 50 percent of all non-governmental workers.

Small businesses are grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business.

They work as hard as any Silicon Valley entrepreneur. They hire local employees or family. Most are barely profitable. Small business entrepreneurship is not designed for scale, the owners want to own their own business and “feed the family.” The only capital available to them is their own savings, bank and small business loans and what they can borrow from relatives. Small business entrepreneurs don’t become billionaires and (not coincidentally) don’t make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of “entrepreneurship” than entrepreneurs in other categories—and their enterprises create local jobs.

Scalable Startups: Born to Be Big

Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook, Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living but rather in … Next Page »

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CyPhy Works, the Boston-area robotics startup led by iRobot co-founder Helen Greiner, has raised an additional $1.2 million in equity financing, according to a regulatory filing. The investors in the round weren’t disclosed, but John Simon and Anita Jones are listed on the form as directors of the company, which was originally called The Droid Works. General Catalyst is an existing investor in CyPhy, which is still in stealth mode but is reportedly working on flying robots (UAVs), among other things. The startup previously raised $1.75 million early last year and won a $2.4 million government research grant in late 2009 to study UAVs.

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I recently had the pleasure of taking a two week academic trip to China with Babson’s MBA program, where several dozen of my classmates and I were led through Beijing, Dalian, and Shanghai by the inimitable Robert Eng. During the course of the journey, our group visited with government officials, leaders from state-owned enterprises, and a number of businesses operated by domestic and foreign owners. While there are many interesting and non-trivial idiosyncrasies of doing business in China, such as the need for government contacts, I thought it would be more informative to share some of the broader business trends that became clear during the course of our visit.

First, China is beginning to capture more of the value chain. As the world’s third largest manufacturer, China has developed a solid reputation as a nation that builds products for Western companies to attach their brands. Apple is one of the most famous examples of this. Perhaps more surprisingly, Nike and Reebok both have their shoes manufactured in the same facility. Li Ning, China’s leading sports apparel maker and the number four sports apparel company in the world, also has its shoes made there. If you’ve heard of Li Ning, you’re ahead of the curve. If not, you probably will soon. Li Ning has begun opening stores in the United States and other countries overseas. In the U.S., it decided to launch its pilot store in Portland, OR, which seems like an odd choice until you realize that it’s right in Nike’s backyard. It’s a bold statement from a bold company and serves an appropriate example for the changing mentality of Chinese business; no longer content with the margins available to them making things for others to sell, the Chinese are now looking for ways to move up the value chain and capture the margins commanded by being a globally recognized brand.

Second, China is starting to look inward for markets. While the rest of the world is still staggering from financial crisis to financial crisis, China’s chugging along at a brisk 9 percent annual growth rate. Shanghai has joined the list of top tier metropolises, on par with London and Moscow, complete with a Starbucks and a McDonald’s around every corner. Shopping malls are awash in luxury brands. With that kind of affluence at home comes increased spending power, and Chinese companies are beginning to recognize the potential of the domestic market. (By Chinese companies, I also mean the Chinese government. State-owned enterprises still command roughly half of the country’s industrial assets, and the government has tentacles in just about every successful business in the country, private ownership or no.) As evidence of this, the 12th Five Year Plan explicitly discusses the yawning trade imbalance that China has created with the U.S. and other nations, and proposes to address this dependence on foreign consumption by directing more goods to the domestic market. It’s uncertain what the government will do about Chinese households’ astronomical savings rate.

Third, national stability is not a guarantee. Incidents of social unrest have been growing more frequent in the past couple years. Chaffed by a widening wealth disparity and the trampling approach to development, Chinese citizens are expressing their dissatisfaction in a way that makes government officials and many members of the business community nervous. Restrictions on freedom of speech and the flow of capital have done a great deal to boost the Communist Party agenda of security and growth, but they’ve also created an economic and social pressure cooker. The 12th Five Year Plan seeks to address these concerns by explaining how the government plans to handle rising inflation and housing costs (regulatory controls), the income gap (higher taxes for the rich), and the blistering pace of development (cleaner environmental standards and lower growth targets). Perhaps more revealing, social stability was a concern voiced by several businessmen we visited during the trip. One Chinese business leader who spoke to our delegation put it especially elegantly: “China will continue to grow as long as the Communist Party is in power. The Communist Party will stay in power as long as China continues to grow.”

The state of Chinese development offers an interesting puzzle: free market incentives bounded by strict financial and political controls. The tremendous opportunities of doing business there are matched by equally tremendous challenges. From this point in history, it almost seems possible that Communist China will continue growing in perpetuity, achieving global dominance in our lifetimes. Or the entire system could collapse spectacularly, and we will ask each other why we didn’t see it coming. 

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Boston-based Kyruus, a health-IT startup whose name I cannot spell, said today it has raised a $5.5 million Series A round led by Highland Capital Partners, Venrock, and Gerson Lehrman Group. Angel investors Jonathan Bush, Ed Park, John Goldsmith, and James Golden also participated in the financing. Kyruus has developed a software platform that includes professional profiles of doctors and “big data” analytics. The software provides what Kyruus calls “a unified view of the physician” that can be searched and analyzed by healthcare deliverers, government workers, and payers. The company started in 2010 and is led by co-founders Graham Gardner and Julie Yoo (both from Generation Health). Gardner told Forbes that the goal is to become “the Bloomberg or ITA Software of physician information.” Xconomy first wrote about Kyruus back in January.

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[Editor's note: Cross-posted from The Economist, 6/16/11]

As the G8 last month pledged $10 billion to aid the Arab Spring to support the building of economic and political institutions, the May 24th NASDAQ debut of Russia’s $10 billion Yandex was but one of many green shoots of an equally significant Entrepreneurial Spring blossoming out from Chile to China, and Israel to India. Led by two brilliant entrepreneurs who knew how to take native search engine technology and implant it in the emerging Russian marketplace, for over a decade, Yandex, a Moscow-based Internet venture, had been growing inside of its language-walled garden. Finally, after a planned 2008 IPO was foiled by the economic crisis, this ambitious venture burst onto a global stage with the largest NASDAQ Internet offering in recent history.

Like its Middle East counterpart, the Entrepreneurial Spring is a grass roots movement, and, although fertilized by innovations originating in the United States, it is fundamentally global and only loosely connected to America. China’s RenRen, Estonia’s Skype, Japan’s Rakuten, and Bangladesh’s GrameenPhone represent ripe fruits of the last decade’s entrepreneurial investments in environments outside the U.S.

Also similar to its Middle East counterpart, the global Entrepreneurial Spring can lead to the democratization of opportunity and increased control by citizens over their own economic fates. However, just as the Arab Spring is a first fraught step on a long, even treacherous, path, so is the Entrepreneurial Spring neither a panacea nor a fait accompli. Left unaided, exposed to the vicissitudes of climate and availability of resources, the fragile shoots can easily be stunted or trampled. To take root, they will require enlightened leadership and the patient cultivation of a rich environment of institutions and norms in order to become part of a self-sustaining ecosystem.

To sustain and spread these new ventures, like political democracy, leaders everywhere—not only publicly elected leaders, but a broad base of leaders of public and private, formal and informal, institutions—need to democratize the entrepreneurial choice without over-controlling it. That will require deliberately fostering an entrepreneurship ecosystem that (a) is conducive to increasingly broad numbers of citizens making the choice to take their economic futures into their own hands, and, (b) after that choice is made, facilitates the broad, merit-based access to the resources—capital, human, cultural, institutional, educational, and legislative—required in order to be successful. The helping hand and the invisible hand must clasp each other.

Fortunately, there are also green shoots of such enlightened leadership. Startup America, StartUp Britain, Startup Africa, and Start-Up Chile are but a few outward manifestations of the new national priority that leaders are assigning to entrepreneurship. Kauffman Foundation-initiated Global Entrepreneurship Week, launched less than three years ago, already conducts 100,000 discrete activities in more than 100 countries. In four years, Startup Weekend has spread to more than 100 cities in 30 countries with 30,000 participants. These two private initiatives, impressive by themselves, show that leadership of the Entrepreneurial Spring can and must go beyond government.

The bubbling up of the Entrepreneurial Spring shouldn’t be confused with the capital market bubble of social media valuations. Up-and-coming next generation stars from Lebanon (SABIS; management of K-12 schools in 15 countries), to Slovenia (Studio Moderna; multi-channel retailing in 20 countries), to Brazil (Tecsis; wind-turbine blades for the US and Europe) to Iceland (Actavis; generic pharmaceuticals in 40 world markets) show that entrepreneurship spreads far beyond the latest Internet technology. These rapidly growing, high potential ventures––and thousands like them––may still be under the public radar, but they are already having huge impact in their respective fields; no less importantly, they are making their economies more competitive, their citizens more prosperous, and they are creating jobs for many and inspiring further entrepreneurship in others.

For those countries not yet blooming with new ventures, get ready. As the successes become more visible and prove that value-creating entrepreneurship can and does happen anywhere and everywhere, the cultivation of a conducive ecosystem will not be a “nice-to-have” opportunity but a “must-have” necessity. Citizens everywhere will expect and demand the equal access to the possibility of prosperity that entrepreneurship can provide.

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With a hot market for their skills and employers who offer top-notch salaries and benefits, should computer science students pay more for their bachelor’s degree than theater or history majors? In Washington state, the answer could soon be yes.

Historically, undergraduates in this state have paid flat tuition rates based on the number of credits they’re earning. For example, a Washington resident taking a full-time load of classes would pay $8,122 in tuition this year at the University of Washington, no matter which bachelor’s degree they’re pursuing.

Those flat rates were set under previous state law, which gave the Legislature the exclusive power to set tuition for in-state undergrads. But a new law approved this week by Gov. Chris Gregoire gives universities broad power to set tuition rates on their own for all students—opening the door for varying undergraduate tuition rates.

“I don’t expect the institutions to jump whole-hog into this model the first year. It will take a little bit of thought and study and reflection,” says state Rep. Reuven Carlyle, a Seattle Democrat who was the main sponsor of the tuition flexibility law. But he also says the old flat-rate model is “just wildly economically inefficient,” and doesn’t give policy-makers a good idea of what it will cost to improve education in particular disciplines.

“It’s extremely difficult from an efficiency point of view for us in Olympia to figure out how an institution should cross-subsidize programs,” Carlyle says. “One-size-fits-all, top-down, Olympia-centric is just not good policy anymore.”

With flat tuition rates, the less-expensive students are effectively subsidizing the education of their peers in more expensive fields. An English major, for instance, pays the same as a student studying engineering, chemistry, or computer science, which are much more expensive to teach because of higher faculty salaries, special equipment, and other costs.

Freshmen are also generally cheaper to educate than seniors, since the younger students take survey courses packed with other students, while the older ones are in smaller groups with more specialized subjects. It’s also assumed that the cost will be less of a burden for students entering higher-paid professions. Those factors already help drive the variability in tuition rates for graduate degrees in Washington.

While some university leaders have publicly discussed the issue, it doesn’t appear that any school is poised to imminently move to a “differential tuition” model for undergrads. Washington State University, for example, just announced that it was increasing next year’s resident undergradate tuition by a flat rate of 16 percent—the baseline rate assumed in the state budget.

But faced with back-to-back state budgets that were hammered by the Great Recession, it may be an attractive option to help sustain the highest-cost and highest-demand majors in the years ahead. The boards of Western Washington University and the UW are set to consider their new tuition rates later this week, although UW officials aren’t expected to make a decision until the end of June.

If Washington schools do eventually make the leap to differential tuition rates for undergrads, they would have plenty of company: One widely cited study found that more than half of U.S. public … Next Page »

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We had a great time at our latest Xconomy Seattle event, “Separating Hype from Reality in Alternative Fuels,” held last night at the new Institute for Systems Biology headquarters in Seattle’s South Lake Union neighborhood.

The presenters sketched some meaty ideas about the drive to develop oil alternatives, challenged a bit of conventional thinking, and got the audience to dive in with great follow-up questions. Here are a few of the big themes that emerged as Luke moderated the main discussion with Ned David and Kristina Burow of Arch Venture Partners—two of the co-founders of San Diego-based Sapphire Energy—and Margaret McCormick, the co-founder and CEO of Seattle-based Matrix Genetics. If you want to see some images from the event, check out this Flickr gallery from Vinh Chung of Total Effects Video.

—Biofuels 3.0: David pointed to the U.S.’s last two attempts to develop biofuels—after the 1970s energy crunch and in the mid-2000s, when national policy ramped up the production of ethanol. Neither of those eras, of course, have delivered much in the way of energy independence.

David said the 1970s saw the first big effort to cultivate algae as an alternative fuel source, but that fell short because the technology wasn’t advanced enough to get results. That wrongly led many to believe that algae wouldn’t work, he said.

The ethanol boomlet of the past decade was the 2.0 wave of biofuels for this country, but that hasn’t produced anything like what all those optimistic politicians pledged at the outset. “Forty percent of the U.S. corn crop goes to replacing 8 percent of our transportation fuel,” Burow said. “That is not sustainable.”

At present, David said, we’re in the 3.0 phase of U.S. biofuels. Algae was a big focus of this particular discussion, since all three of our panelists have direct experience with that field. With projects like Sapphire Energy’s drive to put a huge algae-fuel production facility in the Mexican desert, you’re seeing “the first building blocks of world-scale capability” for these fuels.

“I think that microorganisms can solve most of the problems of the world. If you go back, it was alcohol or it was cheese,” McCormick said. “There’s so much potential that can be harnessed out of these microorganisms and the DNA that’s in them, and we can look at them to solve all kinds of problems.”

—High stakes, but no quick fixes: McCormick said the latest phase of alternative fuels work is not purely driven by an economic need to reduce spending on oil, but is also by the need to address climate change and national security issues.

Burow added a fourth factor: “This has got to work. By 2020, we’ll have increased our need for energy by 40 percent as a world. And there’s simply no way to meet that increase without these types of alternative fuels.”

At the same time, Burow said, the cycle for developing such culture-shifting technologies is still much slower than we expect from other areas of innovation. “This isn’t Twitter. This isn’t … Next Page »

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Microsoft has scored a bit of a coup in rival Google’s backyard: The Redmond, WA-based software giant has landed a contract to provide cloud-based email for San Francisco’s city and county government, winning out against options from Google (NASDAQ: GOOG) and Lotus. San Francisco will pay Microsoft (NASDAQ: MSFT) about $1.2 million per year for the service, which will cover email for about 23,000 government employees, San Francisco’s chief information officer, Jon Walton, said at a news conference today.

Google (NASDAQ: GOOG), based just down the Peninsula in Mountain View, CA, has made inroads with other government agencies that want cloud-based email. One noteworthy customer came in 2009, when the city of Los Angeles picked Gmail for its e-mail services, despite a hard-fought effort by Microsoft.

Walton said San Francisco officials looked at Google and Lotus Notes before settling on Microsoft, in large part because it allows the city to more easily adopt additional Microsoft cloud services in the future, such as instant messaging, video conferencing, and web-based file sharing. “This creates for us the foundation, the core of the system that we could expand in the future,” Walton said.

San Francisco already has moved a pilot group of about 300 people over to Microsoft Exchange Online already, and plans to transition the rest of the workforce over the next year. That means last week’s Microsoft online email outage gave San Francisco officials their first taste of what a big cloud crash could do to their system.

Walton put a happy face on the situation, saying the outage actually allowed San Francisco’s IT department to see how Microsoft would react under fire—and he said the city was pleased, getting good communication as the company worked to resolve the problem. “It only impacted us for about four hours,” Walton said. “Because nothing was lost, it was perceived as a delay by our users.” He also noted that having its own physical email servers—San Francisco government currently has seven separate email systems—didn’t preclude outages either.

Obviously, the numbers on this contract aren’t huge for Microsoft—the real value is the PR. As governments deal with a new era of austerity following the Great Recession, the opportunity to remake their old IT departments will start to look much more attractive. Having a tech-savvy city like San Francisco on its client roster just makes additional sales for the company that much easier.

And, hey, it never hurts to score on the other side’s home turf, either.

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On Tuesday, May 10, 2011, I had the opportunity to participate in a hearing convened by the U.S. House of Representatives Committee on Oversight and Government Reform. This was an incredible honor as an entrepreneur to sit on a distinguished panel and speak directly to leaders in the House of Representatives and from the Securities and Exchange Commission on matters that impact startups.

The hearing was called “The Future of Capital Formation” and was designed to discuss ways that the government could reform existing rules and regulations to help entrepreneurs, small businesses and startups better gain access to capital. As a former startup lawyer that worked with lots of entrepreneurs and startups, and a current entrepreneur here at Zaarly, I know firsthand how important this issue is. And that’s why I felt it was important to share some lessons from the front lines of the startup world.

One of the most important lessons that Zaarly has taught me is how crucial it is to have access to funds in order to build a business and build it quickly. I consider us extremely fortunate to have presented our idea at Startup Weekend Los Angeles and quickly used our success that weekend to raise funding to help build the business. That initial capital helped Zaarly build its prototype for South by Southwest, make our first hires, open an office and ready our product in record speed. All of that fast-success is thanks to having available funds to grow the business and not to have to spend time and energy fundraising.

If anything, the story of Zaarly is a perfect example of why streamlining the rules and regulations for raising money is so crucial. And that’s why I’m so thankful for this opportunity and passionate that it is our duty and responsibility to help others in the startup ecosystem.

My Recommendations to Congress and the SEC

I don’t begin to say that I’m an expert on anything, but I have spent a significant portion of my career helping entrepreneurs think about raising capital. And what I know is this: raising money is not easy; rules governing raising money are complicated and working with a lawyer to decipher them is expensive; and we need to rethink the rules that limit the ability of startups to raise money.

With those things in mind, I came up with four key recommendations for Congress and the SEC that I presented to the leadership. While these are not a silver bullet nor will they necessarily help all entrepreneurs, I think that these are part of a package of reform to help:

—Private Company Fundraising and Financing Regulations:

In general, I believe that regulations governing private company financing be thoroughly examined with an eye to decrease the regulatory scope, simplify procedures, and ensure that the cost-benefit of regulations for raising funding for small investments be met. Investors continue to be in the best position to protect themselves in their investment decisions. This may include contractual requirements for audits of financial statements, seats on a board of directors, or the receipt of regular financial statements.

First, I encourage the removal of the Ban on General Solicitations, which limits the ability of private businesses to locate and identify prospective investors.

Second, I encourage the creation of regulations to extend/expand the concept of accredited investors to individuals that are deemed to be sophisticated based on their knowledge, experience, … Next Page »

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As chief technology officer for the Obama administration, Aneesh Chopra has been heavily involved in efforts to expand access to huge amounts of government data, and encourage techies and entrepreneurs to help solve public policy problems using that data. Xconomy’s Wade Roush talked with Chopra last year, producing this in-depth Q&A that included discussions about healthcare innovation, the government’s role in baiting entrepreneurs with competitions, and big data feeding commercial solutions.

Since then, President Barack Obama announced a new initiative called Startup America, a public-private partnership that aims to boost the economy by improving the conditions for entrepreneurs. Chopra has been among the key evangelists of this effort, which he described as “the national call to arms, so to speak, around the opportunities to promote high-growth entrepreneurship.”

As a preview to his appearance tomorrow at the Technology Alliance’s State of Technology Luncheon, I spoke with Chopra about the administration’s efforts, the role of the private sector, and what it takes to produce results that last beyond the next State of the Union speech.

One of his big messages includes a strong dose of economic optimism: “It is my thesis that there’s never been a better time to be an innovator than today, especially when tackling the big challenges that are in front of us.” Specifically, he calls out the nation’s systems for healthcare, education, and energy.

In healthcare, the focus of Obama’s signature domestic policy initiative for his first term, Chopra says there are “three forces that are coming into play that we believe will act as rocket fuel for innovators.”

The first is changing the way society pays for health services.

“In this country, you get what you pay for. And if Medicare pays people more if they perform more procedures, schedule more visits, then what you see is a pretty healthy growth in both of those areas. If you incentivize value, which is making sure people stay healthy, we believe that shift in payments will open up a new market for a range of IT-enabled services that do not exist today,” Chopra says.

The second trend spurring healthcare innovation, he said, is the modernization of health records and information, allowing better sharing among providers and other actors in the system.

“We will have an unprecedented transformation in the healthcare sector to digitize healthcare information that today is locked up in a file cabinet. And we have put in place the technical foundation for that data to be liberated with full respect to patient privacy and security,” Chopra says. “It’s not just the fact that the information is now digital, it’s that it’s now more liquid and accessible.”

The third force boosting entrepreneurship in healthcare, Chopra says, is throwing open the doors to vast troves of government data. The Department of Health and Human Services, he says, … Next Page »

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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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