Today, the US Census Bureau released data from the first-ever Annual Survey of Entrepreneurs — a new and unique dataset that offers insight into the state of entrepreneurship in America.
Here are three immediate takeaways from the research:
1. Startup numbers are lower than in previous decades
The numbers that came out today tell us that “nearly 1 in 10 businesses with employees are new” but historically, this is not a high share. The 8.9% of firms that are less than two years old seems small when you consider that from the 1970s until around 2006 the share of firms less than one year old was consistently above 10%.
Since the 1980s in particular, the share of firms 1–5 years old has been declining. Firms less than one year old accounted for 16% of all firms in the 1980s, but by 2011 they only represented 8% of all firms. Over the same time period, the share of employment these firms makeup has declined by 30%. Thus while the hype surrounding Silicon Valley tech firms makes it sound like we are living in a golden era of startups, in fact, we're at a 30-year low.
2. Startups are powerful drivers of job growth
Startups are extremely dynamic: They are characterized by rapid job growth when they are successful and rapid job shedding when they are failing. Economists have found that when startups compose less than 10% of all firms (as is the case today), they contribute 20% of job creation at companies that have more than one employee (PDF).
And startups don’t only contribute to job creation — they contribute to talent creation too. Startups tend to increase competition in a market. They bring innovative thinking that challenges existing firms to grow and change as well. Talent is particularly attracted to these types of markets. People may flock to a startup that’s expanding quickly and stay on as the business grows. If the business fails, those same workers might stay in the sector and bring new ideas and experiences to another firm.
A 2016 study found that high growth firms are more likely to be young than mature, meaning they contribute disproportionately to job creation, output and productivity growth (PDF). And on Indeed, we see a similar trend. There is a positive and statistically significant relationship (+.43) between the number of job postings in a state and the share of firms less than two years old. In other words, states with a large share of firms that are startups tend to have more job postings than states with smaller shares of young firms.
3. Entrepreneurs are choosing to locate away from traditional startup hubs
What are the places with the most startups? They aren’t necessarily where you’d expect.
Top 10 States With Largest Share of Startups
Firms less than 2 years old as a share of all firms in each state
[table id=57 /]
Nevada's tax code and low real estate costs appeal to business owners and may explain its position at the top of this list. But as the metro area ranking below shows, it’s Las Vegas specifically that’s capturing entrepreneurial interest. This is likely in part due to significant investment from Zappos CEO Tony Hsieh, who has committed $350 million to revitalizing the city. Since 2013, some 300 entrepreneurs applied for and received money to set up shop downtown as part of this "Downtown Project."
Top 10 Metro Areas with Largest Share of Startups
Firms less than 2 years old as a share of all firms in each metro area
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Interestingly, three Texas cities make it into the top 10 — with up-and-coming startup hub Austin ranking second (where many tech salaries stack up well against cost of living). Three Florida cities also appear here. And while California makes a showing, Silicon Valley does not. San Jose ranks 14th and San Francisco comes much later at 23rd. On Indeed, we see that more tech job seekers are beginning to search outside Silicon Valley as cost of living rises out of step with other metros. Entrepreneurs may be influenced by some of the same factors.
This survey is based on data from 2014 and it will be interesting to see future releases that give us an understanding of how entrepreneurship is changing over time. For many metro areas eager to attract new businesses, this survey may serve as an important benchmark as they implement new policies to attract innovation and job growth.