Kauffman Index Highlights Growth Entrepreneurship Across State, Metropolitan Geographies

Newly released research from the Kauffman Foundation finds that in 2016, Washington, D.C., Austin, San Jose, Columbus, and Nashville were the five highest ranked metropolitan areas for the Index of Growth Entrepreneurship. The five highest ranked states were Virginia, Utah, Maryland, Arizona, and Massachusetts. As described in the SSTI Digest last week, The Kauffman Index of Growth Entrepreneurship measures the growth of entrepreneurial businesses in the United States, complementing the foundation’s recently released Index of Startup Activity and Index of Main Street Entrepreneurship.

At the metropolitan level, few broad geographic conclusions can be made, as entrepreneurship has grown in pockets of virtually every region, according to The Kauffman Index of Growth Entrepreneurship Metropolitan Area Trends report. As an aggregate, the index was the highest in the Washington, D.C. (14.4), Austin (10.9), and San Jose (8.0) metropolitan areas, and lowest in Detroit (-1.3), Miami (-1.0), and Riverside-San Bernardino (-0.7).

At the state level, The Kauffman Index of Growth Entrepreneurship State Trends report distinguishes between the largest and smallest 25 states by population, and perhaps unsurprisingly, the larger, wealthier, and more urbanized states performed better. Of the largest 25 states by population, the index was the highest in Virginia (6.9), Maryland (3.7), and Arizona (3.2), and lowest in Michigan (-1.4), Florida (-0.9), and Wisconsin (-0.7). The high ranks of Virginia and Maryland are largely driven by the highly entrepreneurial Washington, D.C. area, according to the report.  Utah (5.2), New Hampshire (1.6), and Delaware (1.5) had the highest index scores of the smallest 25 states by population, while South Dakota (-4.5), Vermont (-2.7), and Montana (-2.6) had the lowest scores.  

Cincinnati (+19), San Antonio (+11), and Cleveland (+7) had the largest positive shifts in index ranking among metropolitan areas, while Pittsburgh (-15), Baltimore (-10), and Milwaukee (-10) had the largest negative shifts. States among the 25 largest that experienced the biggest increase in ranks in 2016 were North Carolina (+7), Alabama (+4), Ohio (+4), and Tennessee (+4), while those with the biggest decrease in ranks were New Jersey (-12), Pennsylvania (-6), Illinois (-3), and Wisconsin (-3). Mississippi (+12), Wyoming (+8), North Dakota (+7), and Nevada (+7) had the biggest increase in ranks among the 25 smallest states, while Vermont (-13), Arkansas (-10), and Maine (-6) had the largest decreases.

Kauffman’s Index of Growth Entrepreneurship 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.         

On average and as a cohort, employment in startups grew the most in their first five years after founding in the San Jose (128.1 percent, on average), Washington, D.C. (116.9 percent), and Jacksonville (93 percent) metropolitan areas, while cohorts in Indianapolis (35.2 percent), Orlando (37.3 percent), and Miami (39.5 percent) had the smallest growth. Large states with the highest rate of startup growth were Virginia (81 percent), Maryland (78.5 percent), and Colorado (70.3 percent), while Minnesota (44.7 percent), Georgia (45.1 percent), and Florida (47.5 percent) had the slowest rates. North Dakota (86.5 percent), Wyoming (84.2 percent), and New Hampshire (78.3 percent) had the highest rate of startup growth in their first five years among the smallest 25 states, while South Dakota (20.4 percent), Nebraska (33.3 percent), and Kentucky (36.2 percent) had the lowest levels of growth.

Share of scale-ups refers to the number of firms that started small but grew to employ at least 50 people by their 10th year in business. At 2.7 percent, Columbus, home of the 2016 SSTI Annual Conference, has the highest density of startup scale-ups in the United States. This percentage suggests that approximately 27 out of every 1,000 companies ten years and younger in the region started small and became medium sized businesses with at least fifty employees – the highest share in the nation. Other regions scoring highly in this indicator include San Antonio (2.7 percent) and Washington, D.C. (2.3 percent), while Detroit (0.8 percent), Miami (0.8 percent) and Orlando (1.0 percent) had the smallest share of scale-ups.  Louisiana (2.2 percent), Maryland (1.8 percent), and Texas (1.8 percent) had the largest share of scale-ups of the largest 25 states, while Michigan (0.8 percent), Florida (0.8 percent), and New York (1.0 percent) had the lowest shares. Among the 25 smallest states by population, Oklahoma (1.9 percent), Hawaii (1.7 percent), and West Virginia (1.7 percent) had the highest share of scale-ups, while Montana, South Dakota, and Vermont were essentially tied with the lowest proportion at 0.9 percent.

While the first two indicators assess the direct outcomes of startups and young companies, the third indicator, high-growth company density, measures all of the fast-growing companies that have at least $2 million in annual revenue and 20 percent annualized growth over three years, regardless of age, and normalized by total business population. The metropolitan areas with the highest levels of high-growth company density are Washington, D.C., (271.5), Austin (234.7), and Atlanta (173.5), while those with the lowest levels are Sacramento (40.4), Riverside-San Bernardino (42.9), and Milwaukee (48). At the state level, Virginia (175), Georgia (113.4), and Massachusetts (104.7) had the highest levels of high-growth company density among the 25 largest states, while Utah (160.6), Delaware (61.7), and New Hampshire (59.4) had the highest levels among the smaller states. Wisconsin (37.9), Louisiana (40.7), and Michigan (49.7) had the lowest levels of high-growth company density among the largest 25 states, while the small states with the lowest levels were Wyoming (6.4), Alaska (7.3), and Arkansas (11).

At an industry level, Washington, D.C. had the highest density of high-growth companies in the IT services industry, while San Jose metro had the highest density of high-growth companies in software. Nashville had the highest density of high-growth companies in both the health and business products and services industries. Columbus had the highest density of high-growth companies in the advertising and marketing industry.

With a first-place rank in the share of scale-ups and a fourth place rank in the overall index, Columbus’ success at entrepreneurial growth is a validation for the regions startup ecosystem, but also surprising considering its ranks in other small-business health measures, according to Columbus Business First. Although indices such as those developed by Kauffman are a helpful way to tell a region’s economic development story, they only tell one part. Join your colleagues in the technology-based economic development field to hear the rest of this story – and much more – at SSTI’s Annual Conference, held in Columbus on November 1-3, 2016.

The Kauffman Index of Growth Entrepreneurship Metropolitan Area Trends can be downloaded here: http://www.kauffman.org/~/media/kauffman_org/microsites/kauffman_index/growth/kauffman_index_growth_entrepreneurship_metro_report_6_2016.pdf

The Kauffman Index of Growth Entrepreneurship State Trends can be downloaded here: http://www.kauffman.org/~/media/kauffman_org/microsites/kauffman_index/growth/kauffman_index_growth_entrepreneurship_state_report_6_2016.pdf

Interactive data for the metropolitan area rankings of growth entrepreneurship can be found here: http://www.kauffman.org/microsites/kauffman-index/rankings/metropolitan-area

Interactive data for the state rankings of growth entrepreneurship can be found here: http://www.kauffman.org/microsites/kauffman-index/rankings/state