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Beyond Metropolitan Startup Rates: Regional Factors Associated with Startup Growth

Understanding what fosters — and hinders — firm formation and growth at the metropolitan level across the United States is a challenge. Entrepreneurship can be measured by a variety of indicators, and they each can tell somewhat different stories. Furthermore, because entrepreneurship can refer to the growth of firms from a startup stage to mid- or large-scale, no one dataset covers the full range of companies that fall in this category. This report contributes to the Kauffman Foundation’s recent series of analyses on the rate of business creation in metropolitan areas. Going beyond identifying metropolitan areas with higher rates of entrepreneurship, we analyze what regional factors are associated, or unassociated, with entrepreneurial activity. Understanding what drives entrepreneurship at the regional level — especially high-growth business creation — will help policymakers and entrepreneurship supporters know where to invest their efforts. We examine entrepreneurship activity at 356 metropolitan areas in the United States employing three sources: the Business Dynamics Statistics, the National Establishment Time-Series (NETS), and data on high-growth Inc. firms. This allows researchers to investigate the rates of entrepreneurship from multiple angles: • the startup rate for all industries (BDS) • the rate for high-tech sectors (NETS) • the rate for high-growth firms (Inc.) Key findings in this paper dispel some myths about what factors influence startup rates and growth in metro areas: • Contrary to conventional understanding in literature, we find few significant factors that the public sector can affect. Despite billions of dollars in government research expenditures, the presence of research universities and patents are not associated with higher rates of entrepreneurship. • The most significant factor by the public sector is related to education. High school and college completion is important when it comes to startup rates. However, while it is true that a high ratio of college graduates in a metropolitan area means more startups, a substantial high school completion rate will further increase the area’s startup rate. • The investment level of financial organizations, primarily by venture capitalists, in a metro area does not correlate to high startup activity. And VC-invested regions do not necessarily generate a higher ratio of startups. Policymakers should not rush to create public venture funds in the hope of creating more startups or a startup culture. • High-tech sectors are not hotbeds for all kinds of startups – only for high-tech sectors. In other words, promoting high-tech entrepreneurship does not necessarily bring up the overall economy. • Not surprising, but confirming, larger metropolitan areas tend to have higher entrepreneurial rates, possibly from the diversity and resilience of their economies. We hope that this paper and the new compilation of metro-level data will serve as the first step in promoting more rigorous research about the dynamic relationships between startups and regional factors, and the relationships between different startup indicators, geographic factors, and others.