Archives: Reports

Into early 2010, more than two years after the recession began, the American economy continues to send out mixed signals with respect to economic recovery: GDP growth looks set to recover, while unemployment is projected to remain high for many more years. The most important economic matter facing the country is job creation, not only in terms of employment itself but also for boosting sectors such as housing, which will not fully recover until job creation recovers.

Discussions about jump-starting the U.S. economy—both from policymakers and pundits—primarily focus on measures that would expand job growth in existing companies. This report, the third in the Kauffman Foundation Research Series on Firm Formation and Economic Growth, draws on a new set of data, a special tabulation conducted by the Census Bureau at the request of the Ewing Marion Kauffman Foundation, calculated from the Business Dynamics Statistics (BDS) database.

While previous research has emphasized the importance of new and young companies to job creation overall, this paper focuses on high-growth firms—the so-called “gazelles” that, despite their relatively small numbers, nonetheless account for a disproportionate share of job creation.

The data generally show that:

• In any given year, the top-performing 1 percent of firms generate roughly 40 percent of new job creation.
• Fast-growing young firms, comprising less than 1 percent of all companies, generate roughly 10 percent of new jobs in any given year.

This paper examines the relevance of these points in the national discussion on job creation. When the current conversation turns to small business as an instigator in economic growth, it still emphasizes existing firms. But a new discussion—one that not only promotes entrepreneurship, but, specifically, high-growth entrepreneurship—is necessary, because top-performing companies are the most fruitful source of new jobs and offer the economy’s best hope for recovery.

Finally, this paper recommends strategies policymakers could follow to facilitate the creation and growth of more gazelle companies:

• Remove barriers that potentially block the emergence of high-growth companies.
• Focus on taxation, regulation, immigration, access to capital, and academic commercialization.
• Target immigrant entrepreneurs and universities, which may be likely sources for high-growth firms.

While the country’s 6.5 million privately held, women-owned firms generated an estimated $940 billion in sales and employed 7.1 million people in 2002, according to the U.S. Census Bureau, a Kauffman Foundation research report indicates that women-owned firms have relatively underperformed men-owned firms in a number of measures. The Kauffman Foundation research tracked new businesses’ performance measures from 2004 to 2006 and correlated the data to gender based on primary owner characteristics, firm characteristics, industry and outcomes.

The research paper, titled Characteristics of New Firms: A Comparison by Gender, was prepared by Alicia Robb, Research Associate, University of California at Santa Cruz; and Susan Coleman, Assistant Professor of Finance, University of Hartford. It is third in a series of Kauffman Firm Survey (KFS) studies. The KFS surveyed nearly 5,000 businesses founded in 2004 and tracks them annually over their early years of operation. The survey focuses on the nature of new business formation activity and characteristics of the firms and owners over time. This dataset provides a rich picture, and a first-time glimpse, of the early capital structure decisions of new firms.

Women-owned firms made impressive gains from 1997 to 2002, when the number of women-owned firms grew 19.8 percent, compared with a 10.3 percent growth rate in U.S. firms overall. During the same period, however, women-owned firms recorded lower survival numbers, as well as lower numbers for size, growth, earnings and profits. The data suggest that women-owned firms are smaller and less growth-oriented than men-owned firms.

One measure in the KFS revealed that women-owned firms tended to start with less capital. Nearly 62 percent of women started their firms with less than $25,000, compared with 55.9 percent of men. A higher percentage of women had “low” credit scores (38.1 percent) compared to men (31.6 percent). This distinction in credit quality could have implications for women owners’ ability to secure financing, particularly in the form of debt, for their firms. Multivariate results provided a positive link between startup capital inputs and performance outputs in terms of assets, revenue and employment.

Other key findings in the Gender Comparison report include:

• On average, both women and men firm owners were 44 years old, but men had more years of prior industry experience and devoted more time to the business.
• More women owners than men owners attended college, but men were more likely to graduate.
• Women were more likely to operate home-based businesses and were more likely to be organized as sole proprietorships, whereas men-owned firms tended to be LLCs or corporations.
• A higher percentage of women than men felt they had some comparative advantage.
• Approximately one-fifth of both women- and men-owned firms owned companies that had some type of intellectual property (patents, trademarks and/or copyrights) in their first year of operation.
• Women are more heavily represented in retail and “other services,” while men-owned firms are more heavily represented in construction.
• On average, men-owned firms had assets of $104,313, compared with $57,338 for women-owned firms.

A follow-up to the KFS study, which will examine the first four years of these young firms, will be available in spring 2009.

Women’s reliance on internal funding sources makes a difference: Years after startup, women-owned high-tech firms continue to lag behind men-owned firms in numerous performance measures, including revenues, profits, assets, and employment. This paper was compiled using data from the Kauffman Firm Survey (KFS), and authored by Alicia Robb of the Kauffman Foundation and Susan Coleman of the University of Hartford.

Key findings:

• Women-owned high-tech firms were more likely to be organized as sole proprietorships or partnerships than as corporations or limited liability corporations. They also were more likely to be home-based businesses and less likely to have employees. This suggests that, even at startup, men anticipated developing larger and more complex firms than women.
• Over that same period of time, the women-owned high-tech firms continued to lag behind the men-owned firms in critical performance measures. For example, on average, women-owned firms had four employees in their fourth year of operation compared with nearly seven employees at men-owned firms.
• From startup through the fourth year of operation, the women-owned high-tech firms did make progress in raising substantial amounts of capital and in developing intellectual property.
• The women entrepreneurs remained unwilling or unable to develop external sources of equity capital over their first four years of operation, which could fund further innovations, employment or growth.
• Women in high-tech firms invested substantially higher levels of financial capital in their businesses than women not in high-tech industries, at startup, and over time.

Credit card debt reduces the likelihood that a new business will survive its first three years of operation, according to findings from the study, The Use of Credit Card Debt by New Firms, released by the Ewing Marion Kauffman Foundation.

The study suggests that, during many firms’ first few years of operation, their credit card debt increases and then eventually stabilizes to manageable levels, while firms with high credit card debt close, and successful firms start paying off their debt. The report, The Use of Credit Card Debt by New Firms, bases its findings on data from the Kauffman Firm Survey, a panel study of new businesses founded in 2004 and tracked over their early years of operation. The new research was conducted by Robert H. Scott, III, assistant professor of economics and finance at Monmouth University in West Long Branch, N.J.

More than half of all new firms rely on debt financing when they begin operations, and a vast majority of these businesses rely on credit card debt to fill any equity gap. Credit cards tend to appeal to small businesses for several reasons. They help small businesses manage their finances and streamline payments, and they are easier to get than traditional bank loans or government business grants. Credit cards smooth revenue streams—especially at the startup phase of operations—and, unlike other types of loans, credit card companies will never ask where their money went.

About 58 percent of the KFS firms relied on credit cards to finance operations in their first year of business. The study results found that every $1,000 increase in credit card debt increases the probability a firm will close by 2.2 percent.

In 2004, those businesses that closed had less credit card debt ($2,365) than businesses that survived ($3,638). This average increases 40 percent by 2005 for surviving firms and increases 190 percent for businesses that closed. However, by 2006, the one-year change in credit card debt balances for surviving firms was a marginal 1.8 percent gain; but the average balance actually decreased by 18.5 percent for firms that closed.