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January 22, 2002

When we look back on 2001, we’d have to say it was a pretty bad year for entrepreneurs. We all have been affected by September 11th and its aftermath, as well as the general economic doldrums accompanying the current recession.

For entrepreneurs, it might have been even worse. They’ve also been hit by a general collapse of many of the support structures that existed in the late 1990s. Venture capital funding has plummeted from a record-breaking year in 2000 (albeit 2001 is still the third-highest year for VC investing on record), and the chance of an IPO has been close to zero for much of the last year. The general consensus is that things have to get better — but where, when, and how this happens is not so clear. This NCOE Update looks at sectors, mainly focused on high-tech, that might be hot for entrepreneurs in 2002.

As we examine potential hot areas, we can feel optimistic about some key lessons from history. Bad economic times can be good for entrepreneurship. Because smart people with good ideas have fewer employment options, they may be more likely to take the leap in terms of starting a new business. We all can recount stories of business leaders who started great companies because they couldn’t get or hold down a regular job. And many regions of the country have prospered after local economic distress forced business and political leaders to think about doing things differently. For example, some observers credit part of California’s 1990s boom to the defense downsizing of the late 1980s and early 1990s when hundreds of thousands of smart engineers and technicians were loosed on the market and transformed themselves into the IT professionals of the late years of that decade.

Thus, we know entrepreneurs are tinkering away with new businesses in the current recession. Success will not come easy, but it is possible. So, what areas are most likely to help drive new jobs, new companies, and new innovations in the coming decade? Successful entrepreneurs can arise in any business and in any region, but investors and analysts have focused most of their attention on the following (mainly high technology-focused) sectors:


Defense spending is climbing in the aftermath of September 11th, but it was already expected to climb before that tragedy. The on-going war against terrorism is simply accelerating existing trends. Nonetheless, rising defense budgets by themselves don’t necessarily translate into new business for entrepreneurs. Most defense contracts and defense dollars still go to the big prime contractors and will likely continue to do so. And competition is fierce. A recently announced call for “new ideas” in the war against terrorism has generated more than 12,400 proposals, yet only $40 million is available. On the bright side, the Pentagon doesn’t just buy weapons. It’s a huge customer for nearly every product — from clothing to IT to consulting services. All of these areas offer ripe opportunities for firms in the right niches.


Information security is getting a lot of media attention today, but some observers think this boom is something more of a boomlet. Information security will be a steady business, but its growth in 2002 will not make it into one of the IT industry’s leading sectors. Meanwhile, the fields of vulnerability assessment and intrusion detection are considered to be good candidates for growth. Wireless security also is gaining a lot of interest. As more of us become reliant on our Palm Pilots, cell phones, and Blackberries, the dangers of poor security grow. In fact, the market research firm IDC predicts 55 million Americans will use mobile devices at work by 2004. This threat creates a huge untapped market for wireless security and privacy services.


Believe it or not, e-commerce did not die with the collapse of the dot-com economy. A huge boom is not expected, but steady business in e-business has been predicted by some observers. For example, A.T. Kearney industry surveys predict an 11 percent rise in e-business spending, while overall IT spending only grows 4 percent. Web services, a huge sector that focuses on integrating various software applications via Internet protocols (XML language), is considered to be especially hot. Web services ultimately allow businesses to transact most of their business functions over the Web.


It seems every region of the country now bills itself as a biotech center, so something must be happening here. Venture capital is flowing to some niches in the industry, but, alas, it’s not that easy to build a company and make money in biotech. Within biotech, two areas receive a great deal of attention. Bioinformatics, the merging of biotech and information technology, is widely recognized as a hot sector. A recent Frost & Sullivan analysis predicted the market would grow to $6.9 billion in 2007 (up from today’s total of $1.3 billion). And Neurogenomics, combining genomics with neuroscience to fight diseases like Alzheimer’s, may also see increased visibility.


Nanotechnology — the manufacturing of miniature machines based on the manipulation of atoms — has been touted as a hot area for so long that we might consider referring to it as the “old new thing.” Nonetheless, some investors now feel it may be possible to make money on nanotechnology businesses. Government funding is quite robust (overall research funding in the United States, Japan, and Europe exceeds $1.5 billion) and now venture capitalists and large technology firms are getting into the act. Applications for this technology exist in many fields, but fields like drug development, advanced manufacturing, and health care are likely to see the first applications.


Fughedaboutit! — at least for the short term. In the United States, telecom is a story of unlimited, untapped potential. The market for new services is huge: a recent Brookings Institution (hardly an industry cheerleader) study estimates American industry and consumers could gain as much as $500 billion in economic development if broadband services become widely available. This would require us to move from today’s current level of eight percent household use of broadband services to something close to the 100 percent penetration. Despite this enormous potential, the industry is unlikely to boom this year until the White House, Congress, and the FCC act to do something about the sector’s current predicament of ailing firms, declining demand, and spectrum shortages. So far, there’s lots more talk than action.

This list hardly exhausts the possibilities. Opportunities galore exist outside of these largely technology-focused and capital-intensive sectors. In fact, most fast- growing new companies will emerge from less-technology intensive sectors. After all, the number one firm on the 2001 Inc 500 — High Point Solutions of Sparta, New Jersey — was a computer network hardware retailer. The top ten also included an auto-collision repair firm and a cleaning products company. While these firms often fly underneath the media’s radar screen, they are a key part of the entrepreneurial economy.

This NCOE Update article was written by National Commission on Entrepreneurship on 2/28/2005

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