A new study of American entrepreneurship between 1988 and 2014 shows that startups did particularly well in Silicon Valley, the Boston-Cambridge region and Austin, among others. Credit: Image: MIT News
Study shows ambitious U.S. startups aren’t in decline, but timing and location matter.
1995 was a good time to be an entrepreneur. Especially a high-tech entrepreneur in Silicon Valley, with the Internet boom beginning, the economy growing, venture capitalists looking for new investments, and a whole horizon of new business ideas to explore .
Indeed, a new study co-written by a MIT The professor shows that American startups founded in 1995 experienced greater growth than startups founded in any other year between 1988 and 2014. All things being equal, startups from 1995 were three times more likely to experience growth. significant growth than those of 2007, which had to fight against the great recession of 2008-2009.
As the study shows more broadly, ambitious startups remain a vital part of the U.S. economy. New business registrations have seen a long-term decline in the United States, but the number of startups capable of high-impact growth has increased. These companies particularly thrived in the mid-1990s and mid-2010s – although even as the number of high-growth startups declined, notably in 2008 and 2009, they were still created at a faster rate. higher than in the 1980s.
“Entrepreneurship is an economic engine,” says MIT’s Scott Stern, co-author of a new paper detailing the study’s findings. “Job growth is disproportionately concentrated in a relatively small number of young companies that are themselves growing relatively quickly. »
But, Stern adds, the study shows how startup journeys are affected by prevailing economic winds: “We are able to provide the first real evidence that difficult economic times, for example the Great Recession, decrease the amount of high quality entrepreneurship. . There was a real rise in growth-oriented entrepreneurship in the 1990s, then a decline after the boom – but not as much as previously thought. In 2014, we were at near record levels (of entrepreneurship), relative to GDP.
The study also shows that startups have done particularly well in Silicon Valley, the Boston-Cambridge region and Austin, among others, while they lag significantly in Florida.
The article titled “The State of American Entrepreneurship: New Estimates of the Quantity and Quality of Entrepreneurship in 32 U.S. States, 1988-2014” appears in the latest issue of American Economic Journal: Economic Policy. Co-authors are Stern, the David Sarnoff Professor of Management at the MIT Sloan School of Management and educational director of the Martin Trust Center for MIT Entrepreneurship; and Jorge Guzman MBA ’11 PhD ’17, assistant professor at Columbia Business School.
What’s in a name?
To conduct the research, Guzman and Stern looked at nearly 28 million new business registrations in those 32 states. Their research is based on the idea that startups have different growth profiles and are distinguished by certain key characteristics at the time of creation, such as intellectual property or even the name of the company.
In other words, even if entrepreneurship creates jobs, not all entrepreneurs have the same objectives. Your closest local businesses – perhaps a pizza place, gift shop or thrift store – are all worthwhile but not necessarily designed to create increasing numbers of jobs. On the other hand, a few startups aim to achieve greater scale.
“The vast majority of entrepreneurs are not interested in growth,” Stern says. “They want to start a local business – a plumbing company, a restaurant, a dry cleaner. And these companies, as we are seeing this year, play a vital role in our economy. But new job growth and economic growth will be associated with a small number of outliers.
With this in mind, Guzman and Stern found that startups using a person’s name (“Karl’s Plumbing”) are overall 78% less likely to grow much than other startups. (Ben and Jerry’s, originally intended to be a single-store company, is a rare counterexample.) Startups with shorter names — think biotech companies such as Moderna — are three times more likely to grow significantly than those with names longer than three words.
In the past, entrepreneurial activity was often measured by the simple number of new business registrations, as compiled by the U.S. Census Bureau, with little distinction between types of new businesses. But Guzman and Stern have led the way in changing that approach and identifying which companies have growth ambitions.
In the study, companies receiving a patent were about 47 times more likely to reach 1,000 employees than those that did not; those who received a patent while registering in Delaware, which has business-friendly incorporation policies, were 131 times more likely to have 1,000 employees.
The study, Stern says, addresses “a really central question in economic policy: What’s happening in terms of entrepreneurship?” We are trying to provide evidence of a debate between two camps.”
The methods used in the study are among those that inform the work of MIT’s Regional Entrepreneurship Acceleration Program (REAP), which Stern also helps lead. REAP works with communities around the world to help establish entrepreneurial ecosystems.
Kendall Square: More good shots on goal
The new paper also provides empirical support for other ideas about entrepreneurship, such as the value of moving quickly to capitalize on technological trends. Many dot-com stocks reached their highest valuations around 1999-2000; but in 1995, the boom created by the commercial Internet was still in full swing. Companies founded in the mid-1990s had a head start in seeking venture capital, hiring software engineers and establishing their brands.
“Companies founded in 1995 have had tremendous results,” says Stern. “Quality-wise, you had your greatest chance of success…at the start of the dot-com boom rather than at the peak of the dot-com bubble (around 1999-2000). During the bubble, when capital dried up, high-quality companies were not established enough to realize their growth potential.”
The research also sheds light on the geography of startup success and failure. In addition to Silicon Valley and the Boston area, Dallas, Detroit, Houston, Los Angeles, Seattle, and the Washington suburbs of Northern Virginia all have significant numbers of growth-oriented startups. But many other places are lagging behind on this point.
“There are always Silicon Valley companies (growing), and here in Kendall Square we have companies that are growing fast,” Stern says. “But it seems that outside of a few regional pockets, it’s difficult to scale up.” Ultimately, he observes, “having a greater number of high-quality shots on goal allows you to be successful compared to other (geographic) areas.” »
With that in mind, Guzman and Stern — along with Valentina Tartari, an associate professor at Copenhagen Business School and former visiting scholar at MIT Sloan — are working on another study assessing the connections between academia and new, high-growth companies, also a factor associated with the geographical distribution of startups.
“Universities have played an increasingly disproportionate role in driving or at least co-locating these vibrant entrepreneurial ecosystems,” says Stern.
Reference: “The State of American Entrepreneurship: New Estimates of the Quantity and Quality of Entrepreneurship for 32 U.S. States, 1988-2014” by Jorge Guzman and Scott Stern, November 2020, American Economic Journal: Economic Policy.
DOI: 10.1257/pol.20170498
Research support was provided, in part, by the Jean Hammond (1986) and Michael Krasner (1974) Entrepreneurship Fund and the Edward B. Roberts Entrepreneurship Fund (1957) at MIT, as well as by the Foundation Kauffman.
