Startups are growing faster and reaching scale at higher rates than in recent years. Nevertheless, entrepreneurial growth remains stuck in a long-term decline. #KauffmanIndex
U.S. entrepreneurial growth in 2016 continued to rebound from the Great Recession slump, across different industries and geographies, for the third year in a row, according to the 2017 Kauffman Index of Growth Entrepreneurship.
The report also found that startups are growing more rapidly and reaching scale at higher rates than in the years following the Great Recession. However, despite the rebound in recent years, fewer companies are growing to become medium-sized or larger in terms of employment when compared to the levels in the 1980s and 90s. High-growth companies today create fewer jobs than they did in the past. Thanks to the leveraging potential of technology, revenue and value creation can take off dramatically while job growth lags behind.
"These findings are cautiously promising. We are seeing a new model of economic development emerge – one that infuses entrepreneurship into the economy and removes barriers to starting and growing businesses," said Victor Hwang, vice president of Entrepreneurship at the Kauffman Foundation. "Our research indicates that high-growth firms, particularly of young firms, are important to job, output and productivity growth. However, because businesses are creating fewer jobs, it's more important than ever to empower people to control their own economic destinies."
Startups that turned five years old in 2016 grew an estimated 75.6 percent in their first five years of operation – from almost six employees when they were founded to more than 10 employees for surviving businesses in their fifth year. This in an increase of more than 5 percentage points compared to 2015.
The Share of Scaleups – the number of firms starting small and growing to scale in their first 10 years – stayed at 1.1 percent in the most recent year, but remains below the 1.6 percent seen in the late 1980s.
Entrepreneurial growth is geographically diverse, spreading to places other than the stereotypical entrepreneurial hubs and largest U.S. cities. The five metropolitan areas with the highest levels of entrepreneurship were, in order: Washington, D.C.; Austin, Texas; Columbus, Ohio; Nashville, Tennessee; and Atlanta.
"What this shows us is that, while Silicon Valley, Boston and New York City tend to grab national headlines, other areas of the country have been flying below the radar, quietly growing their ecosystems and nurturing entrepreneurial activity in their back yards," wrote Bobby Franklin, president and CEO of the National Venture Capital Association, in the foreword of the report.
Among the largest states, the five posting the highest entrepreneurial growth activity were Virginia, Georgia, Maryland, Massachusetts and Texas.
Among the smallest states, the five with the highest entrepreneurial growth activity were Utah, Hawaii, North Dakota, Nevada and New Hampshire.
Although high-tech companies play a dominant role, they aren't the only ones experiencing growth. Entrepreneurial growth came from a huge swath of sectors, including food and beverage, retail and government services.
About the Kauffman Growth Entrepreneurship Index
The Kauffman Growth Entrepreneurship Index measures the growth of entrepreneurial businesses in terms of revenue and employment. It relies on three components: the Rate of Startup Growth, which measures the average employment growth of a cohort of U.S. startups in their first five years; the Share of Scaleups, which indicates the prevalence of employer firms 10 years old and younger that start with fewer than 50 employees and grow to employ at least 50 people by their 10th year of operation; and High-Growth Company Density, which represents the prevalence of fast-growing private companies that have at least $2 million in annual revenue and 20 percent annualized growth over a three-year period. The aggregation of these components into a single Growth Entrepreneurship Index statistic provides a balanced and comprehensive measure of business growth that can be tracked over time.