Founder of SourceLink. Maria builds entrepreneurial communities and measures their economic impact.
How do you know if your region is ripe for an entrepreneurial explosion? In a phrase: a critical mass of startups that have the intent to grow.
That’s the message and metrics from the 2016 Kauffman Index of Startup Activity, a comprehensive indicator of new business creation in the United States. In the latest report, 25 states and 40 metros were ranked according to their startup activity, market opportunity and startup density. Capturing new entrepreneurs in their first month and new employer businesses in their first year, the Kauffman Index provides the earliest glimpse in startup activity nationwide.
Among the 40 regions, the biggest upward movement in the Startup Activity Index rankings came in Orlando, Kansas City, Cincinnati, Nashville, Detroit and San Francisco. Among the 25 largest states, Texas, Florida, California, New York, and Colorado had the highest startup activity. In the 25 smallest states, Montana, Nevada, Wyoming, Oklahoma, and Alaska ranked highest.
Measuring Startup Activity
The Kauffman Index tracks three measures: starts, jobs and, interestingly enough, intent.
- Starts are tracked through “rate of new entrepreneurs”: the percentage of adults becoming entrepreneurs in a given month, across businesses of all types.
- Jobs are tracked through “startup density”: the rate at which businesses hire their first employees.
- Intent is tracked through “opportunity share”: the percentage of new entrepreneurs driven primarily by “opportunity entrepreneurship,” as opposed to “necessity entrepreneurship.”
Taken together, these three metrics offer a more complex view of entrepreneurial activity than merely starts alone. First, employer businesses represent only a small share of all new business, but they are generally larger and have higher growth potential than, say, non-employer businesses.
Second, teasing out entrepreneurs who come out of wage or salary work from those who come to entrepreneurship out of unemployment, the Index argues, could provide a more accurate picture of high-growth potential businesses, helping researchers distinguish between those who are chasing opportunity to those who come to entrepreneurship out of limited opportunity—although both can and have created very successful businesses.
From Data to Action
So what does data like this tell entrepreneur service organizations?
First, it gives us a benchmark against which to measure our own efforts. If you haven’t had the opportunity to measure or even assess your ecosystem, data like this helps open the dialogue, giving aim and direction to entrepreneurial efforts.
Simply knowing what you want to measure—startup activity (as measured here) or Main Street entrepreneurship or growth entrepreneurship or diversity entrepreneurship—will help you set the metrics that matter to your community and give shape to your initiatives.
Second, it gives communities perspective. If your region or state didn’t make the cut, why? And what can you do today that will help your community move entrepreneurship forward? What’s hindering the rate of new entrepreneurs in your community? Do they have and do they know where to find resources to help them start their businesses? Do they have the access to funding—loans, grants and equity—they need to hire that first employee? Are there enough ideas in the pipeline to provide entrepreneurial opportunity—and do entrepreneurs know where to find them?
Third, it gives communities a starting line to identify, connect, measure and empower their entrepreneurial communities.
Increasing the Rate of New Entrepreneurs
To have a fighting chance at success, entrepreneurs need help: they need fast, easy access to the right resources for their challenge, industry and business stage. And while many communities have an abundance of startup resources, often entrepreneurs—especially those new to the startup scene—can’t find them or find the wrong one.
Where to start: Mapping your entrepreneurial resources and helping entrepreneurs better access them is the first step to removing the barriers to entrepreneurial entry.
From a simple printed poster of startup resources to an interactive online database that entrepreneurs can filter according to their unique needs (and that can provide ongoing insight into the kinds of help they’re seeking), identifying resources and providing easy access is key to removing barriers and connecting entrepreneurs with the help they need most.
Entrepreneurship will never be easy, but knowing what an entrepreneur needs and being able to match them with the right help at the right time can improve their chances of survival and success.
Increasing Startup Density
Identifying entrepreneurial assets—resources, challenges and gaps—is the first step. Building an entrepreneurial community that is positioned to create jobs is another.
Access to capital, loans or equity that give startups the room and fuel to grow, is a challenge, especially in regions off the Kauffman Index—those states and metros located in the geographic middle. Those that rank highest in startup density (the states of Florida, Texas, California, Arizona, Colorado and the metro regions of Las Vegas, Miami, Orlando, Austin, Tampa) have strong immigrant populations and a strong pipeline of talent.
With or without those particular ingredients, communities can still rally resources to collaborate to solve problems and fill gaps within the entrepreneurial ecosystem.
In Kansas City, KCSourceLink has developed the We Create Capital report now used to benchmark entrepreneurial access to capital. In Iowa, IASourceLink created a Business Concierge service to offer free market research in addition to hotline referrals. Kansas has expanded their statewide reach by empowering local cities with resources via their E-Community program. Each of these regions—Kansas City (18), Kansas (18), Iowa (23)—made the Kauffman Index.
Increasing Entrepreneurial Opportunities
A healthy entrepreneurial ecosystem acknowledges that not all entrepreneurs and business owners are the same. This is a good thing, because economies are based on many different kinds of businesses and each play a different role in defining an economy.
Innovation-led enterprises are businesses in which research and development brings forth an innovative product or process. The innovation typically involves intellectual property that contributes to a strong competitive advantage in the marketplace and serves as a foundation for a
high rate of growth. Often formed around life sciences or technology innovations, these enterprises can require significant funding and specialized facilities. Owners are willing to give away equity to investors to secure the financial resources they need to grow. These businesses may cluster around research institutes and universities as technology is transferred from research labs into the marketplace.
Second stage enterprises have survived the startup phase and have owners who are focused on growing and expanding. The second-stage firms generally have between 10 to 99 employees and/or $750,000 to $50 million in revenue.
For these companies, business plans have morphed into strategic marketing plans. Finding a location is replaced by funding an expansion. Defining a market niche transforms into finding new markets, launching a new product line, exporting or selling to the government. And finding a team to launch the business becomes a search to find the experts who can take the business to the next level.
Main Street companies make up a large segment of the economy, serve communities’ growing populations and define a community’s cultural character. These entrepreneurs are found among the local dry cleaner, grocery store owner, coffee shop owner, restaurateur or graphic design boutique.
Main Street entrepreneurs aren’t driven by rapid growth. The founders create them to build a successful career in their area of passion and expertise and plan to work in the company for a long time. Their exit plan may involve selling the company to a key employee or passing it on to a family member.
By definition, microenterprises are businesses that require less than $35,000 in capitalization to start. In today’s economic environment, dislocated workers and retirees are starting these companies to replace income lost through downsizing or retirement.
In the microenterprise space, there is a segment of support organizations that help those in poverty build wealth through microenterprise programs. Referrals may come from social services agencies and this group may need additional technical assistance due to lack of basic math skills, etc.
Understanding the types of entrepreneurs in your ecosystem helps you understand the types of resources they need, the types of challenges they face and the kinds of capital they need to grow, create jobs and increase startup activity and density.
Are you ready to activate and measure your entrepreneurial ecosystem?
Maria Meyers is the founder of SourceLink and executive director of the University Missouri-Kansas City Innovation Center. Maria’s approach has always been to first identify gaps, then inspire networks to create new programs, improve existing offerings and recruit outside support to meet the changing needs of the ecosystem.