Contact:
Rossana Weitekamp, 516-792-1462, rossana@weitekamp.com
Barbara Pruitt, 816-932-1288, bpruitt@kauffman.org, Kauffman Foundation
Results confirm the important role of banks and other formal debt providers in young firms' survival and growth
(KANSAS CITY, Mo.), May 12, 2010 – Now in its fifth year of data collection, the world's largest longitudinal survey of new businesses consistently confirms that external debt markets become increasingly important as startup firms survive and grow in their early years.
Data released today in the fifth follow-up report of the Kauffman Firm Survey (KFS), a Ewing Marion Kauffman Foundation-sponsored study of new businesses founded in 2004 and tracked over their early years of existence, showed that the 2,606 firms that survived 2008 and were surveyed injected about $78,000 into their businesses in 2008, with outside debt markets making up more than $52,000 – or almost 67 percent – of that total. By comparison, external debt markets provided 40 percent of financing in 2004, these companies' first year of operation.
Thirteen percent of the firms in the KFS study submitted new external credit applications for debt financing in 2008. Of those firms that sought financing, nearly 68 percent always received approval. A little more than 17 percent had mixed results, and almost 15 percent of the firms said their loan applications always were denied. For those whose loan applications were denied, 42 percent said insufficient collateral to guarantee the loan was a primary reason given for the denial. The second-most common reason was flaws in the owner's personal credit history.
"While it's early in our full understanding of these new and rich data, this report clearly shows that formal capital markets continue to play an important role in the development of young firms in the United States," said Robert E. Litan, vice president of research and policy at the Kauffman Foundation. "Policymakers should take notice of the importance of banks and other formal debt providers for new business formation and growth, in addition to the job creation that comes from these new firms."
The KFS fills a void in valuable data collection on young U.S. businesses, providing an understanding of how businesses are organized and operate in their early years, and shedding light on survival and growth indicators. Its baseline study started with a cohort of 4,928 firms that began operations in 2004. This group of companies is tracked annually and principals are asked an extensive set of detailed questions that cover a range of topics, including the founders' backgrounds, their sources and amounts of financing, firm strategies and innovations, and outcomes such as sales, profits and survival. The project has an additional three years of study planned. At the end of the project, the KFS will contain data from 2004 to 2011.
Other key findings from the most recently compiled data include:
- By 2008, the four-year survival rate of the firms that began operations in 2004 was 68 percent, with another 1 percent of the startups temporarily not operating. A small number, 4.8 percent, had either merged with or were sold to other businesses.
- Surviving employer firms increased average employment from 4.6 employees in 2004 to 6.7 employees in 2008.
- About 33 percent of firms had revenues greater than $100,000 by 2008, compared with just 21 percent in 2004.
- While the high-technology sector comprises only 5.6 percent of the firms, these companies are more likely to have employees, higher sales and larger assets than non-tech firms do. They also have a significantly higher four-year survival rate of 91 percent, versus 61 percent for non-high-tech firms.
- Almost 80 percent of the firms in the study were somewhat affected or affected a lot by the nation's economic crisis.
