One of the best parts of Minnesota’s barcamp, minnēbar this year was the panel discussion on the state of technology in Minnesota. During the discussion everyone got the chance to hear from and ask questions of some leaders in the Minnesota tech and business communities, including: Doug Olson (Founder of Authorware, led the development of Adobe ImageReady, and now starting a Microsoft office here in Minneapolis), Jamie Thinglestad (Former CTO of Dow Jones MarketWatch, and 2008 Business Journal “40 under 40″ award recipient), Michael Gorman (Co-founder of venture capital firm Split Rock Partners), Robert Stephens (Founder of the GeekSquad), Dan Grigsby (2008 Business Journal “40 under 40″ award ), Matthew Dornquast (Co-founder of code42 Software).

A large portion of the talk was comparing the environment in Minnesota with those on the coasts in terms of entrepreneurial spirit, startups, and venture money with a good deal of discussion mirroring Dan Grigsby’s post titled A Plan For Minnesota. The consensus seems to be that our tech start-up community isn’t thriving,  not for lack of access to great people or ideas (or even money though I think that’s debatable) but rather for lack of guts.

It definitely takes guts to leave a nice salaried job where, frankly the expectations for you are set pretty low. Big banks, insurance companies, and even tech-focused companies rarely can sustain the culture and spirit that got them there. The sheer size of the machine becomes so large that innovation and personal accountability shrink into the shadows. Despite billions of dollars spent on research inside Microsoft, Oracle, Yahoo, and yes even Google, all too often the game-changing innovations are created by small, hungry companies who then get purchased.

Venture capitalist, Mike Speiser over at laserlike.com has some great insights on this. He looks at the 2007 R&D investments at 3 major companies (Microsoft: $7.1 billion, Google: $2.1 billion, Yahoo: $1.1 billion) and then the $5.1 billion VC’s put into startups and makes some observations:

My strong suspicion is that the return earned by investors on that $5.1 billion (in aggregate) will exceed the returns on the $10 billion (in aggregate).  If you buy this argument, then there is only one logical conclusion. There isn’t too much money in venture, but rather there are too many good people in large firms.

He states that startups are the right place for innovation for these three reasons (I am paraphrasing here):

1.  The investment model – Big companies often won’t kill bad projects where small companies must. Startups are more practical and results oriented in what they prioritize. Centralized knowledge and limited employee ownership/investment hinders large organizations. Large firms should create a system for distributing investment and other decisions.

2.  Incentives – Paying for performance is easier in small companies. The probability of success equals the number of experiments per invested dollar times the number of dollars.

3. Risk taking – In big companies perceived risk curtails innovation and agility. This must be overcome.

There is a positive selection bias in startups towards an appetite for risk.  People have “overcome” their fear — at least enough to be at a startup.  When you have an entire group of people who have overcome their fear, you get positive feedback.  People egg each other on to break the rules.  To “think different.”  To be open minded.  That sets off a cycle that drives people to throttle risk up and up and…

As much of the panel at minnēbar concluded, it is this last point that they believe is holding Minnesota back as a hotbed for technology startups. Minnesotans are hard workers but for whatever reason, are more risk averse than their coastal brethren.