Kauffman Foundation Index Suggests Entrepreneurial Businesses Seeing Growth

Although the growth of young entrepreneurial businesses has increased it has not yet returned to pre-Recession levels, according to new research from the Kauffman Foundation.  The Kauffman Index of Growth Entrepreneurship measures the growth of entrepreneurial businesses in the United States. In 2016, the index experienced the largest year-over-year increase in the last decade, according to its authors, Kauffman researchers Arnobio Morelix, E.J. Reedy, and Joshua Russell. Despite this uptick, however, entrepreneurial growth is still down compared to the levels experienced in the 1980s and 1990s.

As a complement to Kauffman’s Index of Startup Activity and Index of Main Street Entrepreneurship, the Entrepreneurial Growth Index is comprised of three indicators:

• Rate of Startup Growth, measuring how much startups grew in their first five years after founding;
• Share of Scale-ups, measuring the share of businesses that start small and grow to employ more than 50 people by their 10th year of operation; and,
• High-Growth Company Density in a region, measuring the prevalence of fast-growing companies with at least $2 million in annual revenue and 20 percent annualized growth over three years.

The authors highlight several key trends for these individual indicators, as well as the index as a whole. In general, the index was relatively high leading up to the Great Recession and fell until reaching its lowest level of activity in 2013, where it has since grown for the last three years. In 2016, the index experienced the largest year-over-year increase in the last decade. Despite this uptick, however, entrepreneurial growth is still down compared to the levels experienced in the 1980s and 1990s.

The rate at which startups grew was 58.5 percent in 2013, the most recent year where data was available. This indicates that the average startup founded in 2008 (which would be five years old in 2013) grew from 5.8 employees when founded to 9.2 employees after five years of operation, according to the authors. In the previous year, the rate at which startups grew was 46.9 percent – the lowest level recorded for the indicator since the early 1980s. This reflects the challenges facing firms founded in 2007 and the wake of the Great Recession.

After falling steadily during the Great Recession and reaching a low point of 0.9 percent in 2011, the share of scale-ups rose in 2012 and grew to 1.1 percent in 2013. This indicator suggests that approximately 1,100 companies out of every 100,000 firms aged 10 years or younger in 2013 started small but eventually reached more than 50 employees.

While the high-growth company density indicator has no upper-bound on age, a plurality of high-growth firms (31.5 percent) are aged between five and seven years old, and 59.1 percent are 10 years or younger, according to the report. After increasing for two years beginning in 2013, high-growth density essentially plateaued in 2015 at 79.3 high-growth companies for every 1000,000 employer businesses in the United States.

The report also presents trends on business exits, particularly initial public offerings (IPOs). Focusing on de novo IPOs – those related to emerging-growth companies as opposed to new legal entities of existing companies – the authors find that the number of IPOs has largely recovered to pre-Great Recession since its low in 2008, when only 18 American companies went public. Still, current levels of IPO density – as measured by the number of IPOs per 100,000 employer businesses – are well below the levels they were in the late 1990s before the burst of the dot-com bubble.

The five industries with the highest share of high-growth companies were IT services, advertising and marketing, business products and services, health, and software. Since 2007, the health industry has experienced a steady increase in the number of high-growth firms, even growing throughout the Great Recession while many other industries experienced declines.

While the preliminary version of the Kauffman Index of Growth Entrepreneurship looks at national totals, state and metropolitan data will be made available on June 2, 2016.

Read the Kauffman Index of Growth Entrepreneurship here: http://www.kauffman.org/~/media/kauffman_org/microsites/kauffman_index/growth/kauffman_index_national_growth_entrepreneurship_2016_report.pdf