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High-Impact Startups: America’s Herd of Gazelles Seems to Be Thinning
You may have seen some version of this ominous looking chart. America — the original Startup Nation — seems to be in the midst of an entrepreneurial crisis. Since the late 1970s, startups as a share of all firms have fallen by more than half. But not all startups are created equal. For instance, some economists differentiate between “lifestyle” startups — family restaurants, local dry cleaners, mom-and-pop antique stores — and high-impact “transformational” startups — the kind you find in Silicon Valley. Economists also refer to startups generating high job growth as “gazelles.” In the analysis “Disappearing gazelles: New evidence from administrative data,” researchers Benjamin Pugsley, Petr Sedlácek, and Vincent Sterk write the following:
We estimate that gazelles make up only about 5% of the startup population. However, despite their modest share among new firms, gazelles are key drivers of aggregate job creation and output. … Gazelles disproportionately contribute to aggregate employment not just because they grow faster, but also because they survive longer. By age five, gazelles account for about 35% of aggregate employment within their age group. The disproportionate growth contributions of gazelles to aggregate employment extends to aggregate output and productivity. Overall, these results indicate that the birth of high-potential startups is key to macroeconomic performance.
And there’s apparently some bad news on that front, as the title of that report hints:
Looking only at realised growth, high growth firms are indeed a shrinking share of new entrants. This disappearance set in already during the late 1980s. Figure 1 shows average employment in cohorts born between 1977 and 1994. Average employment growth in the cohorts born since 1987 is substantially lower than in the earlier cohorts. … Importantly, our estimated model attributes this downwards shift largely to a decline in the number and also the growth potential of ex ante gazelles. Their fraction in the startup population declined by about a fifth. Moreover, we find that on average, gazelles grow less than they used to, which further contributed to the decline in average size growth. In our model, this thinning out of gazelles has substantial macroeconomic effects, lowering aggregate output by 4.5%.
It’s worth noting that “high growth” is based on job creation, not revenue or earnings or valuation. But as this key paper on the subject points out: “. . . it might be that, historically, young businesses with high draws of productivity/profitablity rapidly expanded employment. However, more recently innovative young businesses may be growing through adding machines or by expanding internationally. ”
Today’s transformational startups may be different than those of the past in that they can generate economic value with fewer people. Here is analyst Benedict Evans from Andreessen Horowitz, via the a16z podcast: “The way I try to think about it is the prototypical startup 15 years ago, you’d raise $10 million and you had a hundred people and you had a million users. And now you’ve raised a million dollars and you’ve got 10 people and you’ve got 100 million users.” Which is fine, although the issue of tech firms not generating jobs like companies of old would hardly be insignificant.
Published in Culture, Economics
JamesP,
I think culture matters. When you lionize marketeers who just ride the wave, Zuckerberg, and brutally punish real creators, Brendon Eich, you kill the goose that laid the golden egg. PC wants to have its cake and eat it too. They are all for science and the new except they haven’t a clue what produces it.
Get back to basics and the big American engine of innovation will crank up like you’ve never seen it before.
Regards,
Jim
Good post, James.
It all comes down to:
• Low regulation which translates to low costs and speed, which is absolutely necessary, and all too often just the opposite.
• Available financing, which has been effectively been shut off to all but the most well heeled start-ups.
• Available affordable space to start your business in , which has in many of our most dynamic metro areas has become very unaffordable.
• Reasonable taxation.
Our political establishment and our government have been at war with small business and their start ups since Reagan left office and now we are starting to see the horrendous price of that war.
As digital marketing keeps not working, monetization is going to keep getting harder.
I know you don’t mention it in your article, but one thing which might have a small impact on fewer startups is the way young entrepreneurs are crushed by government. Of course, I’m talking about how local governments force children out of business.
When a police officer is ordered to force a child to shut down his lemonade stand because he didn’t obtain a business license, or stops kids from selling cookies because they were baked in kitchens not coated in stainless steel, it kills the spirit of these children in wanting to start up their own businesses when they grow up.
The excuses are always the same: “No one is exempt from the law,” or “We must ensure proper sanitation practices are observed in all commercial businesses.”
… or Michelle Obama shutting down bake sales at schools, people stop trying and demand more government.