Archives: Reports

This study shows, for the first time, business creation by veteran status at the individual level over the past 16 years.

Until three years ago, U.S. veterans generally started companies at higher rates than non-veterans did. However, the “Kauffman Index of Entrepreneurial Activity by Veteran Status: 1996–2011” shows that veteran entrepreneurship shares have been declining steadily over the past two decades. In 1996, veterans represented 12.3 percent of all new entrepreneurs. By 2011, veterans comprised just 6 percent of new entrepreneurs.

Part of the decline can be attributed to falling veteran entrepreneurship rates compared to rising non-veteran rates. The biggest drop in the veteran share, however, coincides with increasing numbers of veterans aging out of the U.S. working-age population. The share of this population fell from 11.2 percent in 1996 to 6.4 percent in 2011, the study showed.

In 2011, 320 out of 100,000 adults, or 0.32 percent, created new businesses each month, while just 300 veterans out of 100,000 adults started companies.

The study is based on data from the Kauffman Index of Entrepreneurial Activity, which captures new business owners in their first month of significant business activity and provides the earliest documentation of new business development across the country.

The percentage of the adult, non-business owner population that starts a business each month is measured using data from the Current Population Survey. New data extracts for every month of CPS data from 1996 to 2011 were downloaded and compiled to create estimates of entrepreneurship rates by veteran status.

While the U.S. economy continues to wrestle with persistently high unemployment, slow growth and challenges from other developed and emerging economies, the more than 600 American companies named as finalists in the 2012 U.S. Ernst & Young Entrepreneur Of The Year® program are creating jobs, expanding their businesses and planning for growth. Ernst & Young, in collaboration with the Kauffman Foundation, looked at what these companies are doing right, and in a new paper, “Defying gravity: High-growth entrepreneurship in a slow-growth economy,” released today at the Ernst & Young Strategic Growth Forum®, identify eight reasons why these exceptional companies are bucking the trend and finding success.

The Entrepreneur Of The Year finalists are spread across all industries, including technology, manufacturing, consumer products and energy. Between 2009 and 2011, these companies, which together employ nearly 700,000 people, achieved 30 percent job growth (over 150,000 jobs) and 48 percent revenue growth, dwarfing U.S. figures as well as companies in the Standard & Poor’s index, which had revenue per share growth of only 15.9 percent over the two-year period from 2009 to 2011. Companies in energy, cleantech and natural resources led in employment growth, at 49 percent over the period 2009 to 2011, closely followed by technology (42 percent) and services (33 percent).

 So what are these companies doing right? According to the paper, the eight key reasons these companies are succeeding are because they:

• Have a unique perspective on risk. A majority of the entrepreneurs indicate they believe entrepreneurs are born, not made. This explains their passion to identify an unmet need in the marketplace and then set out to solve it, versus their counterparts who either miss the need altogether or see a need and conclude someone else could or should solve it.
• Communicate their vision and instill passion in great teams. Regardless of their position in the marketplace, these companies overwhelmingly cite people as their leading priority. This is not simply a generalized focus on the workforce. The findings reveal a strong concern for the individual employee among entrepreneurial companies. This is in sharp contrast to well-established global companies, many of which have been more interested recently in implementing efficiency and productivity increases that translate into headcount reductions. In addition, where entrepreneurial companies really differentiate themselves is in their ability to communicate their vision and instill their passion. More than 40 percent cite this as their biggest strength.
• Demonstrate resilience and rapid recovery. Everyone makes mistakes, including successful entrepreneurs. More than 30 percent of the entrepreneurs acknowledged having made one or more bad decisions or encountering significant difficulty in execution. But while all businesses make bad decisions from time to time, the best entrepreneurs and their teams seem to be more resilient. Encountering obstacles, they are able to set a new course and rapidly recover — perhaps being able to react much more nimbly than their large corporate counterparts and to learn from mistakes to avoid making them again.
• Embrace innovation. Entrepreneurial companies are the predominant sources of radical innovations. While older and larger companies can also innovate effectively, more established companies tend to resist radical innovation that might displace their existing revenue streams in the short term. Successful entrepreneurs know that their agility and propensity for innovation can make them an attractive investment, acquisition or partnership target.
• Do what they do best. High-growth entrepreneurs focus on the things they do best and appropriately partner with other, often larger corporations, to carry out certain infrastructure and technology needs, administrative functions, sales channels, manufacturing and distribution and regulatory compliance. This enables more rapid, flexible and cost-effective scalability as the business grows.
• Pursue geographic expansion. The majority of the entrepreneurs indicate they are continuing to expand their businesses in domestic (U.S.) markets, while more than 20 percent indicated they are expanding in developed global markets. Many, especially those with revenues greater than $1 billion, indicate they are expanding into emerging global markets.
• Secure the right capital at the right time. The entrepreneurs report accessing a wide range of funding sources as they have grown their businesses. Nearly half report raising venture capital, angel investment or private equity. Roughly a third cite the use of personal funds, while another quarter access bank loans. And, 16 percent received funds from friends and family. Few indicate they have accessed government grants – perhaps due to the risk- reward tradeoff involved in paperwork and compliance, continued volatility in the rules, concerns about government disclosure requirements or simply the length of time it takes for such grants to be completed.
• Preserve what they’ve built. Successful entrepreneurs look to preserve those company qualities that made them a market leader. Their four top concerns as they are grow and mature are preserving company culture (52 percent), attracting and maintaining top talent (44 percent), protecting and enhancing brand and reputation (38 percent) and retaining best customers (30 percent).

Despite elevated worker turnover rates, the percentage of hiring based on job creation is much greater at startups than at more mature firms. Four out of every 10 hires at young firms are for newly created jobs, much higher than in older firms, where the ratio fluctuates between 0.25 and 0.33.

Further, post-recession, only startups show signs of recovery in the pace of worker churning, which is critical to improving the allocation of employees to jobs and boosting wage growth over workers’ careers. The study showed, however, that churning declined between 1998 and 2010 for all firm ages, with worker turnover as a percent of employment flagging as companies age.

The research draws its conclusions from the U.S. Census Bureau’s Quarterly Workforce Indicators, which use federal and state administrative data on employers and employees combined with core Census Bureau data. The QWI recently began including firm age and size information, making it possible for the first time to review jobs, earnings and employment turnover by firm size and age, and to make regional and demographic comparisons.

The study also showed that earnings per worker are lower at young firms than at more mature firms. While this is not surprising, since larger firms have larger capital bases on which to draw, the research revealed that the firm age wage premium has risen over time, and that all real earnings growth in the last decade has occurred at established firms.

Just before the 2001 recession, workers at new firms earned about 85 percent as much as workers at mature firms. By 2011, this earnings ratio had dropped to 70 percent. The earnings premium associated with working for a large employer versus a smaller employer also grew during this time period: Average real monthly earnings in small firms fell from a high of 78 percent in 2001 to a low of 66 percent in 2011. The trend is exacerbated by a decline in the share of the number of startups.

Churning rates are procyclical, dropping during recessions as firms become cautious about hiring, and employees, with fewer jobs available, stay where they are. In both the 2001 and, especially, 2007-2009 recessions, worker turnover rates declined, but failed to recover to their previous peak after the recession ended. Churn rates for the youngest businesses recovered modestly after the most recent recession, but dropped slightly after first quarter 2011, perhaps reflecting eroding worker and business confidence, the study said.

“Then and Now: America’s New Immigrant Entrepreneurs, Part VII” shows that the proportion of immigrant-founded companies nationwide has slipped from 25.3 percent to 24.3 percent since 2005. The drop is even more pronounced in Silicon Valley, where the percentage of immigrant-founded startups declined from 52.4 percent to 43.9 percent.

This report, which evaluated the rate of immigrant entrepreneurship from 2006 to 2012, updates findings from a 2007 study that examined immigrant-founded companies between 1995 and 2005.

The implications of the research findings, conducted by Vivek Wadhwa, director of research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering, Duke University; AnnaLee Saxenian, dean and professor at the Berkeley School of Information; and F. Daniel Siciliano, professor of the Practice of Law and faculty director, Rock Center for Corporate Governance; are the subject of a bookbeing released today by Wadhwa.

The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent, draws on the research to show that the United States is in the midst of a historically unprecedented halt in high-growth, immigrant-founded startups.

With funding from the Kauffman Foundation, Wadhwa has launched a website — ImmigrantExodus.com — as a resource for journalists and a voice for immigrant entrepreneurs.

From the 107,819 engineering and technology companies founded in the last six years, the study examined a random sample of 1,882 companies in a nationwide survey. Of those companies, 458 had at least one foreign-born founder.

The exceptions to this downward trend were immigrants from India. Although founders in the study hailed from more than 60 countries, 33.2 percent of them were Indian, an increase of 7 percent in 2005. Indians, in fact, founded more of the engineering and technology firms than immigrants born in the next nine immigrant-founder countries combined.

After India, immigrant founders represented China (8.1 percent), the United Kingdom (6.3 percent), Canada (4.2 percent), Germany (3.9 percent), Israel (3.5 percent), Russia (2.4 percent), Korea (2.2 percent), Australia (2.0 percent) and the Netherlands (2.0 percent).

While immigrant entrepreneurship has stagnated, the rates of Indian and Chinese startups have increased. In 2005, Indians and Chinese entrepreneurs accounted for 26.0 percent and 6.9 percent of immigrant-founded companies, respectively.

The highest percentage of immigrant-founded firms are mostly in traditional immigration gateway states: California (31 percent), Massachusetts (9 percent), Texas (6 percent), Florida (6 percent), New York (5 percent), and New Jersey (5 percent). Indian founders tended to establish businesses in California, New Jersey, and Massachusetts, and Chinese founders showed a propensity to start companies in California and Maryland. Except for Germans, who most often chose Ohio as the location for their startups, all immigrant groups displayed a preference for establishing businesses in California.

Immigrant founders, who are most likely to start companies in the innovation/manufacturing-related services (45 percent) and software (22 percent) industries, employed about 560,000 workers and generated an estimated $63 billion in sales from 2006 to 2012, underscoring the continuing importance of high-skilled immigrants to U.S. economic expansion.