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Growing Our Startups: Lessons from the Kauffman Growth Index

The Kauffman Foundation just released its 2017 Growth Entrepreneurship Index, and if you look carefully the news is promising. Kauffman’s Growth index...

The Kauffman Foundation just released its 2017 Growth Entrepreneurship Index, and if you look carefully the news is promising. Kauffman’s Growth index is designed to measure business growth in terms of both revenue and jobs. It is a composite of the rate of startup growth, the share of scaleups, and the density of high-growth companies.

At initial glance, the results of the 2017 Growth Index look positive. The good news is that, in terms of jobs created, startups are growing faster in their first five years than they have in the past. The latest numbers show that startups grew their employment by 76 percent after five years—up from 71 percent in the previous cohort. Another bit of good news is that the proportion of firms that are growing quickly, called the density of high-growth companies, is up since the Great Recession—although this seems to have plateaued.

Less promising is that scaleup share (companies with at least 50 employees by their 10th year) has changed little since the Great Recession and is about 30 percent below the scaleup share during the late 1980s. In 1987, about 1.6 percent of firms were scaleups. The latest numbers show that just over 1 percent of companies are scaleups. These results suggest that firms are growing fast, but stalling out earlier than they have in better times. Why? It’s hard to tell, but part of it might be our boundless excitement for new startups and waning interest in midsize firms. Colts are cuter than grownup horses (but not unicorns!) so they get more attention.

Should we worry about the incidence of high-growth firms (HGF)? What’s the big deal? One reason we should care is that HGFs are a critical part of a healthy economy. They provide about half of the new jobs every year and encourage growth in related industries as well as new geographic areas. A second reason to care is that HGFs are really good at finding and satisfying your unmet needs. Do you need a nonsurgical facelift, integrated payroll management, a tissue graft, or an e-book? The fastest growing firms bring these things to market so that you will have them when you need them.

Hidden among the mixed results are several reasons to be optimistic:

  1. Industrial Variety. High-growth firms are not limited to high tech and are broadly distributed across many industries including food and beverages, health care, and manufacturing. This bodes well for communities and businesses across the U.S.

  2. Recession Rebound. While not at historical highs, the growth index clearly shows a rebound from the Great Recession. We are going in the right direction. However, questions remain about why we aren’t hitting the growth rates found in the 80s and 90s.

  3. Growth Travels Well. The high-growth firms are popping up in nontraditional hot spots. Places like Provo, Charleston, and St. Paul are joining the more famous growth centers like Silicon Valley, Boston, and New York.

How do we support HGFs? We have a pretty good idea of what it takes to create a healthy environment for HGFs.

  1. Growing companies needs lots of financial and intellectual resources. The best regions for HGFs have a variety of sources of capital and proximity to universities and R&D centers.

  2. Growing companies needs guidance. Mentors, incubators, co-working spaces, and accelerators are good sources of advice for companies that are trying to grow.

  3. High-growth companies need respect. A cultural context that tolerates failure and celebrates innovation motivates entrepreneurs to make their companies bigger.

  4. Growing companies need connections. Associations, centers, and clubs bring entrepreneurs, mentors, and resource providers together.

With thoughtful policies, we can create even more places that support our high-growth firms.

Business, Entrepreneurship, Innovation, Silicon Valley
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