Utilizing the Kauffman Firm Survey to Predict Growth in Venture Size and Scope among Small Firm Startups: 2004
Timothy Bates, Alicia Robb, and Simon Parker, April 2013
Is it possible to identify startups and very young ventures that will successfully grow and flourish? This study identifies some of the factors that predict growth among startups and very young ventures and provides insights into small firm growth dynamics. The factors considered include the founders’ education and experience, the size of the ownership team, and their access to capital. The researchers test their hypotheses using the Kauffman Firm Survey (KFS), which follows a set of nascent and new firms over several years, from 2004 through 2008.
New businesses are major contributors to the productivity and growth of the U.S. economy. Understanding the dynamics of the business creation process is important in the implementation of policy approaches to facilitate job creation and economic growth. In the past two decades about 40 percent of the private sector’s net new jobs have been created from the churn of startups minus closures.1 The factors affecting the decision to embark on entrepreneurship are highly complex. Past research has indicated that socio-demographic factors including age, gender, race, ethnicity, marital status, and education have a major impact on who becomes an entrepreneur and participates in the business creation process. Individuals as well as teams develop and grow new firms with diverse approaches. Existing research indicates there is no single way to successfully start and expand a new venture. There is some evidence that the creativity and dedication of entrepreneurs in the early phases of venture development, rather than their personal backgrounds, are the key to successfully launching a viable new business venture.
The researchers find two key features of small business startups likely to endure, operate profitably, and expand: 1) involvement of capable entrepreneurs possessing appropriate human capital for operating their business; and 2) assembly of, and access to, sufficient financial capital to achieve efficient scale to exploit opportunities.
Several other broad relationships are also observed:
- Firms with groups of three or more owners often experience higher growth, other factors equal, than businesses with fewer owners. Since new ventures demand a great amount of uncompensated time from their founders, being able to share the investment of time among a number of people may make it more manageable.
- At the point of venture startup, owner education and relevant work experience are poor predictors of subsequent firm growth. However, for firms in operation for four years, owners’ level of educational attainment was associated positively with enhanced venture performance. This apparent paradox is explained by the opportunity costs facing highly educated and experienced individuals when a firm is brand new—whether to gamble on a startup that may not see a return on investment for some years or accept the security of a well-paid job. Many opt for a steady immediate income rather than accept business risk and an uncertain future payout.
- As expected, home-based businesses experience less actual firm growth relative to businesses operated outside of the home.
- Beyond year three, ownership of intellectual property predicted higher growth for high-tech and financial-capital-intensive firms, other factors being equal.
- Confirming earlier research, higher credit scores, a measure of credit market access, successfully explained higher venture growth, and vice versa for low scores.
- Many firms caught by heavy bank indebtedness burdens were harmed by the severe credit market contraction during the four-year study period. As a consequence, they experienced lower growth than their counterparts less burdened by outside debt.
- Female-owned firms had lower growth rates than otherwise identical male-owned small businesses.