(Economist) Business formation is down, but fast-growing startups are in high gear.
NEARLY a decade after the onset of the Great Recession at the end of 2007, entrepreneurial activity in America still appears hobbled. Data released by the Census Bureau recently show that in 2015 the number of new firms created in America—a standard measure of economic dynamism—was nearly a fifth lower than the annual average between 1998 and 2008. If history is any guide, just half of the 414,000 companies founded in 2015 will survive to 2020.
Nonetheless, a recent report by the Kauffman Foundation, a think-tank, suggests that these gloomy surface numbers may be masking more encouraging deeper trends. The authors attempt to measure the future potential of America’s new firms using three metrics: employment growth in a company’s first five years; the share of startups growing beyond 50 employees in their first decade; and the prevalence of “fast growth” businesses—those which boast more than $2m a year in revenue and a 20% annualised revenue-growth rate over a three-year period. The 30,000 young and ambitious American firms that meet these criteria, which the Kauffman Foundation calls “gazelles”, have a disproportionate positive impact on employment and economic growth. The authors find that, despite the overall decline in business formation, their high-growth-entrepreneurship index, which has tracked fast-growing startups since 2005, has now rebounded to match its pre-recession value.
A further welcome development is that entrepreneurship is starting to spread beyond the main startup hubs. Even though California, New York and Massachusetts currently account for three-quarters of venture-capital investment, the best performer in Kauffman’s index among the country’s 50 biggest metropolitan areas was Provo, Utah, a city of 600,000 people south of Salt Lake City. Most economists would gladly trade a bevy of less ambitious young firms in well-established clusters in exchange for a few high-impact startups in regions that have historically lacked them.
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