Research shows that innovative U.S. start-ups are not in decline, but timing and location are critical.
A decent time to be an entrepreneur was the year 1995.
Particularly for a Silicon Valley high-tech entrepreneur. The Internet boom began, the economy expanded, venture capitalists were searching for new investments, and a whole horizon of new business concepts had to be explored.
In fact, a new study co-authored by an MIT professor shows that between 1988 and 2014, U.S. startups founded in 1995 had more growth than startups founded in any other year. All else being equal, startups in 1995 were three times more likely to expand dramatically than startups in 2007 that suffered during the 2008-2009 Great Recession.
More generally, innovative entrepreneurs remain an important part of the U.S. economy, as the study demonstrates. Over the long term, the number of new firms filing in the U.S. has decreased, but the number of startups capable of achieving fast growth has increased. These companies flourished, especially in the mid-1990s and mid-2010s, but start-up rates were still higher than in the 1980s, even as the ranks of high-growth start-ups thinned, including in 2008 and 2009.
“Entrepreneurship is an economic engine,” says Scott Stern of MIT, co-author of a new paper that outlines the results of the report. “Job growth is disproportionately concentrated in a relatively small number of young firms, which then in turn scale quite rapidly.”
Yet, Stern adds, the study reveals just how often start-up journeys are influenced by prevailing economic winds: “We can provide the first real proof that bad economic times, such as the Great Recession, are reducing the amount of high-quality entrepreneurship.”
Currently, in the 1990s, there was a rise in growth-oriented entrepreneurship, then a fall from the bubble – but not as much as people thought.
In 2014, in terms of GDP, we were near record levels [of entrepreneurship].
The study also shows that in Silicon Valley, the Boston-Cambridge area and Austin, among others, startups did especially well, while lagging significantly in Florida.
In the current issue of the American Economic Journal: Economic Policy, the article, “The State of American Entrepreneurship: New Estimates of the Quantity and Quality of Entrepreneurship for 32 U.S. States, 1988-2014,” appears.
Stern, who is David Sarnoff Professor of Management at the MIT Sloan School of Management and Faculty Director of the Martin Trust Center for MIT Entrepreneurship, and Jorge Guzman MBA’ 11 PhD’17, Columbia Business School assistant professor, are the co-authors.
What’s going into a name?
Guzman and Stern reviewed nearly 28 million new business registrations in those 32 states for their report.
Their research is focused on the finding that start-ups have different growth profiles and, at the time of creation, are differentiated by certain main features, such as intellectual property ownership or even the name of the company.
That is, not all entrepreneurs have the same ambitions, while entrepreneurship creates jobs. Your local business closest to you – maybe a pizzeria, gift shop or thrift store – is all worthy, but not inherently focused on creating an increasing number of jobs.
In comparison, a few start-ups are striving to increase their size.
Stern says: “The vast majority of entrepreneurs are not interested in growth,” “We want to create a local business – a plumbing company, a bakery, a dry cleaner.
And those companies are playing an important role in our economy, as we’re seeing this year.
Except with a limited number of outliers, new employment growth and economic growth will come.
Along these lines, Guzman and Stern found that startups that use the name of an individual (“Karl’s Plumbing”) are 78 percent less likely than other startups to expand significantly. (Ben and Jerry’s, originally planned as a one-store venture, is a rare counterexample.) Startups with shorter names are three times more likely to expand dramatically than those with names longer than three sentences – think biotech companies like Moderna.
In the past, as stated by the United States, entrepreneurial activity was also calculated by the sheer number of new business registrations. Census Buu Buu