Debunking conventional wisdom, and adding to an emerging thread of research, our latest report establishes new and young businesses — not small businesses — as the engine of job creation in the United States. Though older firms are the major source of employment, young business are a critical source of new jobs. In fact, outside of new firms–those aged less than one year–overall job creation was negative the last few decades.
But, not all young businesses are poised for high-growth. In fact, the substantial majority of budding entrepreneurs have no intention of innovating or growing significantly. The distinction between potentially high-growth “startups” and other young businesses is an important one, because painting all entrepreneurs with the same broad brush is an oversimplification that has important implications for public policy.
In our joint report with the Kauffman Foundation, we shed light on the differences between these two types of entrepreneurs by comparing the job creation and business dynamics in the innovative high-tech sector with the private sector as a whole.
The results are telling.
While high-tech firms start small, they scale rapidly in the early years. So much so that young high-tech firms–those aged one to five years–contribute positively to net job creation overall. The opposite is true across the private sector as a whole, where the substantial job losses stemming from early-stage business failures–about half of all firms fail in their first five years–make young firms as a whole net job destroyers. Even when we remove the job destruction from all early-stage firm failures, surviving young high-tech businesses create jobs at a rate twice that of surviving companies in the private sector as a whole.
We also found that high-tech startups exist in a diverse set of regions throughout the United States. Of course, tech hubs like Silicon Valley, Cambridge, Seattle, and San Francisco play an important role, but a number of smaller cities are also having an increasing impact. After adjusting for city size, Boulder, CO has a rate of high-tech business formation that is more than six times the U.S. average. In addition, college towns like Fort-Collins, CO and Corvallis, OR, and smaller cities with a defense presence such as Colorado Springs, CO and Huntsville, AL are among the nation’s leaders in high-tech startup density. What is more, high-tech firm formations have been systematically reaching a broader set of regions during the last two decades — and once again, the opposite is true for firms in the private sector as a whole.
Top 10 Metro Areas for High-Tech Startups, by Density:
1. Boulder, CO
2. Fort Collins-Loveland, CO
3. San Jose-Sunnyvale-Santa Clara, CA
4. Cambridge-Newton-Framingham, MA
5. Seattle, WA
6. Denver, CO
7. San Francisco, CA
8. Washington-Arlington-Alexandria, DC-VA-MD
9. Colorado Springs, CO
10. Cheyenne, WY
But why do startups grow where they do? And what can we do to increase technology startups given their economic significance? Each of the high density metro areas has one of three characteristics, and some have a combination of them all: 1) They are well-known tech hubs with highly skilled workforces, 2) They have a strong defense or aerospace presence, and 3) They are university cities.
“In the case of Boulder, a startup community whose evolution I’ve observed closely over the past many years, the cultural and economic transformation has been extraordinary,” said Brad Feld, Foundry Group founder and Engine advisory board member. “While there isn’t one, definitive blueprint to building a technology industry, this research can hopefully inspire communities and policymakers to work together to ensure that the spread of high-tech entrepreneurship isn’t just a trend, but a long-term phenomenon.”
There is unfortunately no easy solution to fostering, but part of the responsibility falls in the hands of entrepreneurs themselves to create local ecosystems where risk-taking, innovation, and the simultaneous existence of collaboration and competition are encouraged and supported. And for the other part, policy makers should endeavor to understand these high-growth businesses and formulate policy to help, not hurt.