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The Most Intriguing New Businesses November 12, 2009, 5:00PM EST

Fertile Ground for Startups

History shows that a certain breed of entrepreneur feeds off adverse conditions, and this recession is no exception

By Spencer E. Ante

Who needs job security? In June 2008, as the recession was moving from bad to worse, Caterina Fake gave up a comfortable, executive-level job at Yahoo! (YHOO) to launch a company. She left California and set up shop in New York City to co-found Hunch, a Web site that uses the experiences of others to help people make decisions. The 40-year-old, who had co-founded the photo-sharing site Flickr before it was acquired by Yahoo, couldn't resist the idea of creating something new, whatever the economic headwinds. "The entrepreneurial spirit really thrives in situations of adversity," says Fake. "The world is full of more possibility."

Fake isn't alone in betting on that. A crop of potentially groundbreaking companies is emerging from the wreckage of the Great Recession. No question, some will blow up, and others will fail to reach their potential. But the downturn has done little to dampen the entrepreneurial spirit. During the first half of this year, angel investors financed 24,500 new ventures, 6% more than during the same period last year, according to the Center for Venture Research. The overall amount of money going into startups has declined, but the figures suggest that this year will see the birth of roughly 50,000 companies with enough promise that someone is betting money on them. "It may be that this is the best time to start a company," says Carl Schramm, president of the Kauffman Foundation, an organization that promotes entrepreneurship.

"VAST AND UNTAPPED"

With that backdrop, BusinessWeek set out to find the world's most intriguing new companies. After much reporting and research, we've assembled a list that's a barometer of innovation trends in the global economy, with startups that are pioneering new markets in biotechnology, clean technology, health care, and Web computing. Hunch is just one of 25 that made the final cut. Other standouts include Epizyme, a Massachusetts outfit creating cancer-fighting drugs that attack errant proteins; China Water & Energy, a Hong Kong company developing massive wind-power farms in the Chinese countryside; and Driptech, a California startup engineering low-cost irrigation systems for poor farmers around the world. "The markets that we are addressing in India and China are vast and untapped," says Driptech's 26-year-old founder, Peter Frykman.

History shows that great companies are often built during bad times. In 1939, at the tail end of the Great Depression, two engineers started Hewlett-Packard (HPQ) in a garage in Northern California. Silicon Valley itself was largely created during the nasty recession of the mid-1970s. During that decade, entrepreneurs laid the groundwork for the boom of the 1980s, building companies that pioneered three new industries: Atari in the video game business, Apple (AAPL) in personal computers, and Genentech in biotechnology. "The only people who venture out in tough times are on a mission, which is what you need," says Michael Moritz, managing partner of Sequoia Capital, a venture capital firm that invested in Apple back in the '70s. "The people we are meeting are the genuine article, as opposed to the pretenders."

Entrepreneurs, financiers, and historians point to several other reasons for this phenomenon. For starters, everything is cheaper during a downturn, including the cost of labor, materials, and office space. There's less competition both from incumbents preoccupied with putting out their own fires or from other startups unable to raise money. Tighter money means stronger ideas edge out weaker ones. And the tough times force entrepreneurs to work on their business models earlier, so they end up reaching profitability more quickly than when money comes cheap. "[The years] 2010 and 2011 should be extremely good years for innovative small companies," says Jim Breyer, general partner of Accel Partners, a venture capital firm that has invested in Facebook. "We'll see dozens of very successful companies emerge."

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