Startup Activity on the Rebound, Annual Kauffman Index Reports

More people are being drawn to entrepreneurship by opportunity than by necessity; the startup gender gap has narrowed. Despite the large short-term increases, entrepreneurship remains in long-term decline

(KANSAS CITY, Mo.) Aug. 4, 2016 – Key measures of new business creation in the United States point upward for the second year in a row, according to the 2016 Kauffman Index of Startup Activity, released today.

The Startup Activity Index, a key annual indicator of new business creation, rose to 0.38 in 2016 – going up for the second year in a row – a mere two years after plunging to its lowest level in two decades.

“The latest Startup Activity Index data show entrepreneurship finally recovering, with new business creation reaching close to the peak preceding the Great Recession drop,” said Arnobio Morelix, senior research analyst at the Kauffman Foundation, which conducts the study. “Based on the increasing number of new entrepreneurs – the nation’s job-creation engine – the United States entrepreneurial economy has begun expanding. Recent job creation numbers by the Bureau of Labor Statistics point in a similar direction, with 889,000 jobs created by new establishments in the last quarter of 2015 alone – the highest job creation number by new establishments since early 2008.”

The Rate of New Entrepreneurs increased by more than 15 percent from two years ago, with approximately 330 out of every 100,000 adults becoming entrepreneurs each month during the latest year.

“The large increase in female entrepreneurs was a major driver in the rising startup activity levels,” said Robert Fairlie, professor of economics at the University of California, Santa Cruz, and one of the study’s authors. “Further, more people are pursuing entrepreneurship as an opportunity, rather than out of necessity; a big change from the levels of necessity entrepreneurship we saw during and after the Great Recession”

“Understanding what is happening to our country’s startups and entrepreneurs is essential to any policymaker hoping to accelerate and expand on the recent progress we have seen in entrepreneurial activity,” said Senator David Vitter, chairman of the U.S. Senate Small Business Committee, who wrote the report’s foreword. “The Kauffman Foundation, through the Kauffman Index of Startup Activity and its many valuable initiatives, not only provides an important source of information for all of us who care about expanding entrepreneurship in America, but also puts into practice what their research tells us, as we work to help to build the businesses of today and the bedrock of tomorrow’s economy.”

Along with the overall positive recent trend of the Index, certain underlying indicators still a point to a long-term decline in startups when compared to the levels of new business creation in the 80s, 90s and early 2000s.

The Kauffman Index of Startup Activity relies on three indicators to evaluate new business creation:

  • The Rate of New Entrepreneurs in the economy, calculated as the percentage of adults becoming entrepreneurs in a given month.
  • The Opportunity Share of New Entrepreneurs, calculated as the percentage of new entrepreneurs driven primarily by opportunity vs. necessity.
  • Startup Density, the number of new employer businesses divided by the total population of existing employer businesses.

RATE OF NEW ENTREPRENEURS

In the 2016 Index, the Rate of New Entrepreneurs reached an average 0.33 percent of the adult population, or 330 out of 100,000 adults. That represented a larger than 15 percent increase from just two years ago, when the rate was calculated at 0.28 percent, or 280 out of 100,000 adults.

The Rate of New Entrepreneurs increased sharply for women, rising from 0.22 percent (220 out of 100,000) to 0.26 percent (260 out of 100,000). Males saw a modest increase, to 0.42 percent. Men are substantially more likely to start businesses each month than are women, but the startup gender gap diminished from 2014 to 2015.

Among minority ethnic and racial groups, African-Americans experienced a slight increase in the Rate of New Entrepreneurs between 2014 and 2015. Asians saw a drop in rates, and Latinos had constant rates.

Reflecting the longer-term trends showing rising Latino rates of entrepreneurship and a growing share of the total U.S. population, the Latino share of all new entrepreneurs rose from 10 percent in 1996 to 21 percent in 2015. The Asian share of new entrepreneurs also rose substantially from 1996 to 2015. The White share of new entrepreneurs declined over the past almost two decades, whereas the black share increased slightly.

The Rate of New Entrepreneurs increased slightly for immigrants in 2015. At 0.53 percent, the Rate of New Entrepreneurs among immigrants is substantially higher than the 0.29 percent for the native-born.

OPPORTUNITY SHARE OF NEW ENTREPRENEURS                                    

The Opportunity Share of New Entrepreneurs, the proportion of new entrepreneurs not coming from unemployment, was substantially higher than at the end of the Great Recession. In 2015, 84 percent of the total number of new entrepreneurs was from those who were not unemployed and not looking for jobs. This share increased substantially from 2014 and is now more than 10 percentage points higher than it was in 2011, in the aftermath of the Great Recession.

The rise in Opportunity Share of New Entrepreneurs has been widespread among demographic groups. Notably, the opportunity share among men rose from 68 percent in 2011 to 78 percent in 2015. This means that, for every hundred new male entrepreneurs, 10 fewer are coming directly out of unemployment now than four years ago. Over the business cycle, the opportunity share for women is much more stable than it is for men.

All racial and ethnic groups, except Asians, experienced increases in the Opportunity Share of New Entrepreneurs between 2014 and 2015, continuing trends over the past few years. However, the opportunity share overall remains highest among Asians and lowest among African-Americans and Latinos.

The Opportunity Share of New Entrepreneurs increased for immigrants in 2015 and is roughly similar to that of native-born Americans.

STARTUP DENSITY

The Startup Density stood at 80.4 (or 80.4 new businesses out of every 1,000 existing employer businesses) in 2013, the most recent year for which this data is available, representing approximately 406,000 new employer businesses created that year. The 2013 Startup Density fell slightly from 2012, when it was logged at 81.9 (or 81.9 new businesses out of every 1,000 existing employer businesses).

The 2013 Startup Density of 80.4 is the second lowest on record, exceeding only the 2010 Startup Density of 77.7. U.S. Startup Density has been stuck at roughly 20 percent below pre-Great Recession levels for the last four years and has trended downward for some time; although we do not yet have data on how this indicator has performed in the past two years.