New Firm Dynamics and Development

hardtofindcurtainUrban and Civil

Nov 16, 2013 (3 years and 8 months ago)

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© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

“Every individual that we can
inspire, that we can guide, that we
can help to start a new company,
is vital to the future of

our
economic welfare.”




Ewing Kauffman

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

E.J. Reedy

Research
Fellow, Kauffman
Foundation

PhD Candidate, Managerial Economics, Northwestern

Principal Investigator, Kauffman Firm Survey


New Firm Dynamics and Development

2013 Economic Gardening Conference

June 6, 2013

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Kauffman’s Data Strategy

Research

Policy

Data


Systematic improvement
of data infrastructure


Original data collection
and demonstration


Data augmentation and
matching

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Recent Data Development We Have
Supported


Business Dynamics Series
(Census)



NLSY 79 Supplement (BLS)


Entrepreneurship Indicators
(OECD and World Bank)


General Social Survey


Integrated Longitudinal
Business
Database

(Census)


Kauffman Firm Survey



Kauffman Index of
Entrepreneurial Activity



National Bureau of
Economic Research (NBER)
National Repository of
Chapter 11 Filings


NBER COMETS
database



Panel Study on
Entrepreneurial Dynamics II



Stanford Intellectual
Property Litigation
Clearinghouse


© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Recession severely
i
mpacts startups

Source: updated from Reedy and
Litan
, “Starting Smaller; Staying Smaller” 2011

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

A decade of stagnant to falling employment
in startups

Source: updated from Reedy and
Litan
, “Starting Smaller; Staying Smaller” 2011

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

And the businesses aren’t growing later

Source: Reedy and
Litan
, “Starting Smaller; Staying Smaller” 2011

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Falling job contributions are “sticky”

Source: Reedy and
Litan
, “Starting Smaller; Staying Smaller” 2011

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

In
s
ummary


Slowly emerging trends in the U.S. cause concern.


Starting smaller and staying smaller may be having
significant ongoing contribution to sluggish U.S. jobs
growth.


Looking inside of these firms becomes more of a critical
issue.

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Recent Data Development We Have
Supported


Business Dynamics Series
(Census)



NLSY 79 Supplement (BLS)


Entrepreneurship Indicators
(OECD and World Bank)


General Social Survey


Integrated Longitudinal
Business
Database

(Census)


Kauffman Firm Survey



Kauffman Index of
Entrepreneurial Activity



National Bureau of
Economic Research (NBER)
National Repository of
Chapter 11 Filings


NBER COMETS
database



Panel Study on
Entrepreneurial Dynamics II



Stanford Intellectual
Property Litigation
Clearinghouse


© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

The Kauffman Firm Survey (KFS)


8
-
year, annual data collection (2004
-
2011) with
the same
4,928 firms


Their
challenges, opportunities, and day
-
to
-
day activities.


With each year of data, the KFS has become more
unique in its:


Scale


Efficiency


Rigor


Economic environment


Dissemination

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Detailed Data: Baseline & Over Time


Firm characteristics

Industry, Legal Form, # of Owners, # of Employees (PT/FT),
Types of Customers, Location


Firm strategy and innovation

Product/Service Offerings, Intellectual Property, Licensing In
and Licensing Out, R&D


Detailed financial information

Equity & Debt Financing, Income Statement Info (Revenue,
Expenses, Profits), Balance Sheet Info (Assets, Liabilities,
Equity)


Employees



Types of Benefits Offered, Task/Work Structure


Owner characteristics and work behaviors



(Information on up to 10 owners)

Education, Age, Race, Ethnicity, Gender, Citizenship,
Immigrant Status, Hours Worked, Previous Years of Work
Experience, Previous Start
-
up Experience (same/different
industry as this firm)

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.



Browse papers at

http
://
www.kauffman.org
/
kfs

Prolific Research Output Continues

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Our panel in the beginning


60
% of
firms
have no
employees other
than the
founder.


L
ess
than 8% of
firms > 5 employees
in
first
year of
operations.


17% have
over $
100,000 in
revenue in their
first year.


Greater than 5 years industry experience the norm.


Greater than 40%
of business owners
started
a business
before.


80
%
of respondents over
the age of
35.


Roughly
half
the sample
is aged 45 or older
.


More than half
of respondents have completed some
form of a college
degree.


Nearly a quarter of all respondents have received some form of
advanced, post
-
graduate education.


© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

A Few Nuggets


Current Trends


Financial crisis continues to affect firms
.


Biggest challenge faced
by
KFS firms in 2011
was slow
(36%) or
lost
sales (28%).


More companies cited problems with late customer payments
(up from 2% in 2008 to 16% in 2011).


Formal debt capital critical at all stages
.


Bank
loans, lines of credit, and credit cards


more
important
than we thought and
become
more critical over time.


Gender and racial gaps in capital use/access
pervasive
.


Large racial and gender differences in sources, amounts, and
distribution of financing at startup and over time

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Formal credit
c
ritical to U.S. firms


Perhaps
the most
surprising
finding is
that formal credit
channels (business
and
personal bank
loans) are
the most
important sources
of funding for
startups.

Source: Robb and Robinson
, “The Capital Structure Decisions of
New Firms”
forthcoming.

Owner
Equity

29%

Owner
Debt

4%

Insider
Equity

2%

Insider
Debt

6%

Outsider
Equity

16%

Outsider
Debt

43%

Initial Capital Structure (all firms)

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Level varies but sources similar


This distribution largely holds up across cuts.


Biggest variant is the level of financial capital injected.

Source: Robb and Robinson
, “The Capital Structure Decisions of
New Firms”
forthcoming.

Total Capital

Full KFS Sample

$117,457

Nonemployer

44,793

Home
-
based

58,448

Pre
-
revenue

104,755

Survived Thru 2006

113,081

Closed By 2006

98,786

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Equity
-
backed firms are different…

…but still rely on debt


With firms receiving outside equity, we see bigger
changes in levels and distributions of financing types.


Still for Angel and VC backed firms, ~1/4 capital from
outsider debt.

Source: Robb and Robinson
, “The Capital Structure Decisions of
New Firms”
forthcoming.

Full KFS

Sample

Angel

VC

Corporate

Govt

Owner Equity

33,640

116,792

119,459

105,062

47,062

Owner Debt

4,952

12,948

4,278

5,346

5,521

Insider Equity

19,257

15,997

32,365

9,033

3,109

Insider Debt

7,257

19,558

9,949

13,041

5,450

Outsider Equity

2,221

328,999

1,499,644

515,051

171,145

Outsider Debt

50,130

164,891

628,398

75,156

96,030

Total Capital

117,457

659,185

2,294,093

722,689

328,317

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Aging firms rely even more on outside debt


Following these same companies over time lets us see
outside debt becomes an even more important source
of financial injections.

Source: Robb and Robinson
, “The Capital Structure Decisions of
New Firms”
forthcoming.

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

A Few Nuggets


Growth Companies


Growth comes from unexpected
places
.


Occurred
across a huge swath of industries, not just in high
-
tech,
manufacturing, or other likely industries and is difficult to
predict


12
percent of KFS firms that reached more than $1 million in
revenue began as solo entrepreneurs.


Larger markets are essential
.


All
the growth companies in the KFS targeted national and
international markets.


Teams achieving growth
.



Scale
companies had teams of owners/managers more often
than the general population of firms.


© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

A Few Nuggets


Innovation


Innovation important but
diverse
.


Few
firms have
patents.


10
-
20 percent
invest formally in R&D
annually.


40
-
50
percent were investing in brand, worker training, etc
.


Patenting from
beginning
.


A surprising
number of new businesses
reported
formal
intellectual property protections, suggesting that many
came
into
existence with this IP or established it very soon after.


Internet activities prevalent; few Internet
-
only sellers
.


More than a quarter of KFS young businesses were selling
online in 2007, compared with just 6 percent of all businesses.


Companies reporting
majority Internet sales
is more prevalent in
young businesses than general small businesses but for most
Internet sales is only component of overall strategy.

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Young firms selling

more intensively online


Most businesses still use
online sales as a part of their
sales strategies.


Quarter of young businesses
selling online get majority of their
revenues from online sales.

Source: Robb and Reedy
,
“Casting a Wide Net,” 2011.

© 2010 by the Ewing Marion Kauffman Foundation. All rights reserved.

Questions?



Thank you!


E.J. Reedy

ereedy@
kauffman.org