Welcome to the New Economy

I had an energizing conversation Thursday with the guys at Element Six Media, a green advertising and branding firm in Minneapolis that builds campaigns around sustainable earth materials and social media buzz. I’ll be unpacking my interview notes in the next couple of weeks for a story on The Line, but I wanted to share one snippet now that particularly lingered with me: This is the New Economy. If we’re waiting for things to turn around or resume to normal, we’re wasting time because this is the new normal. Here’s how co-founder Maikel van de Mortel put it:

“We don’t talk in terms of things turning around. This is the new reality, and we’re at ground zero. The question is: how are we going to build up. The problem is that not everybody has come to peace yet with that new reality, and as long as that doesn’t happen, if you’re not at that point, then you’re going to struggle. The truth of the matter is it’s not going to go back to what it was. We’re not going to see profit margins as high anymore as they used to be. We’re not going to be able to charge those dollar amounts anymore as we were used to. Every single industry is going to have to face some realities, because people are going to object. It’s just part of the new economy. Every day that we talk about how things were, we’re waiting for things to turn around, is time that we spend wasting. That’s what’s really unfortunate. We can’t waste our time. We can’t afford it.”

What does the future of high-tech look like in Minnesota?

I’m reading Steve Alexander’s excellent story in today’s Star Tribune about the high-tech vacuum Minnesota faces following the pending sale of ADC Telecommunications, which manufactures hardware and infrastructure for broadband and wireless data transmission.

It may be the last remnant of “a bygone era when the Twin Cities was one of the nation’s top technology centers.” The region has just a few large tech operations left (Lawson, Digital River, Seagate), and venture capitalists say most local software startups are tiny and will never grow into market leaders or large companies.

Gary Smaby, managing partner at Quatris Venture Capital Fund of Minneapolis, tells the newspaper that venture capitalists now expect a tenfold return on their investment and the ability to reach $100 million in annual sales. “I don’t want to leave the impression that there are not good startups,” he says. “It’s just that there are not many good start-ups with that kind of potential.”

So we’re not likely to find the next IBM or Oracle or Microsoft bubbling up from the Twin Cities startup scene, but maybe that’s not the point. Instead of asking who’s going to be the next big tech blockbuster to come out of Minnesota, should we instead be asking who’s going to be the next hundred successful small companies?

Large companies are may be good for the region’s economic stability, and it will take a lot of successful small businesses to replace the up-to-1,000 jobs thought to be at risk because of the ADC sale. But a conversation I had the other day with local entrepreneur/technologist Dan Grigsby has me wondering whether small companies might play a much more significant role in the future tech scene of the Twin Cities.

(Update 9:38am: Just got a phone call from Garrick Van Buren, who wanted to question whether large companies actually are good for a region’s economic stability. I made the comment offhandedly as a way to say I’m not completely writing off the value of large enterprises, and I’m quite certain I’ve heard that point made, but I can’t prove it. So there’s another can of worms: What is the value of large companies? One theory Garrick had is that they have traditionally been a magnet for attracting talent to the Twin Cities.)

Grigsby says the Twin Cities tech economy is already seeing a shift. It’s nothing unique to our region, and it has to do with the cost of computing power. Moore’s law is a prediction made by a Caltech professor in 1970, and it says that computer power basically gets twice as efficient, and thereby half as expensive, about every other year. He’s been almost spot on so far, and for the past 40 years the cost of computing has continued to plunge.

The cost of computing resources has fallen so much that very tiny companies or even individuals can now attack problems and develop ideas that just five or ten years ago would have been too costly for anyone but a large company to pursue.

I’ve written before about the opportunities cloud computing has presented for startups, which no longer need to pay to set up server rooms and hardware before launching a business. Instead, they can contract with a service like Amazon Cloud Services and only pay for the resources they use. Even without leveraging the cloud, things have gotten cheap. Grisby notes that he has a $1,000 server with enough capacity and redundancy to support any business he wants.

“So my cost of running a business has gone to basically zero,” says Grigsby. “That’s not universally true. There are still big, hard problems, but there’s enough problems that have the scope of business that I can make a living, and a very nice living, and at the same time don’t require a huge infrastructure to do it.”

He was talking specifically about software businesses, but other types of freelancers and entrepreneurs that depend on computing are starting to realize the same efficiencies. And the economics are becoming empowering.

“If I can find 2,000 people to pay me $40 a month for a product, I make $1 million a year. The economics of that are liberating. When I can build a company that costs nothing to operate, that changes the way I can live,” Grigsby told me. “Now, instead of having to spend 9-5 in a dull cube, I literally work from my patio. I look across my yard at a lake, and I love it.”

So what I’m throwing out there is that maybe — maybe — there’s less reason to worry about a bygone era if the next era in Minnesota high-tech looks like Dan Grigsby’s patio.

(Update 12:08: Twin Cities Business Senior Editor Gene Rebeck wades into the same territory on his BTW blog. See my comment over there, too.)