According to Kauffman Foundation, indicators of early stage entrepreneurship include four (4) key measures that are taken from Bureau of Labor Statistics (BLS) data. The four indicators are:
- Rate of new entrepreneurs: The broadest measure possible for business creation by population. It is the measure of entrepreneurship via the capturing new business owners regardless of business size.
- Opportunity share of new entrepreneurs: The percentage of new entrepreneurs who created a business out of choice instead of necessity
- Startup early job creation: Employment of a cohort of startup businesses in their first year of operation.
- Startup early survival rate: The percentage of new employer establishments that are still active after one year of operation.
Rate of New Ventures
The five-year trend for the rate of new entrepreneurs shows that the Inland Empire region has a higher rate of new entrepreneurs than at the national level.
A key thing to remember when assessing new ventures is how many of them are what HBR author James McNeill calls ‘Mom and Pop’ and how many are startups with functional management. Another aspect is what will happen to the business if the founder/owner leaves.
Opportunity Share of New Entrepreneurs
The report reveals that the ‘Inland Empire lags overall in the creation of opportunity-based firms. Since 2018, the Inland Empire has been primarily driven by necessity entrepreneurship, as opportunity entrepreneurship has continuously declined during the period of 2018 – 2020; in 2020-2021 this downward trend continued‘.
Opportunity entrepreneurs are defined as “people who start businesses to exploit a potential opportunity“.
Startup Early Job Creation
This leading indicator reveals the number of jobs jobs startups create.
In 2019 – 2020, startup job creation levels fell below the national level but were still above the state-level average. In the Inland Empire region, new startups outperform their peers at the national and state levels, on average, regarding creating total new jobs.
As opposed to popular belief, startup job creation is not that high. And even when it is, the jobs created are low-skilled jobs. Thus the need to read and interpret data carefully.
Research, such as by Danish authors Johan, Nikolaj, and (2016) revealed that a disproportionate number of jobs created by startups were low-skilled services jobs. Similarly, a UK-study found startups, on average, only reach $180K in revenues in their sixth year, making it difficult to support jobs. Lastly, according to an HBR article by Daniel Isenberg cites a study by Dun and Bradstreet that attributes over 90% of jobs since 2008 to mid-market firms (those having $10M to $1B in revenues).
What this means is that although startup activity should be encouraged (as they push forward the frontiers of innovation), it needs to be carefully considered how many good jobs they create.
Startup Early Survival Rate
In 2019 – 2020, the survey found a slight increase in firm death rates for Inland Empire firms, while at the national and state levels, the firm death rate continues to decline.
To put things in perspective, an article that appeared in Cal Matters quotes data crunched by economists in collaboration with U.S Bureau of Statistics “Across the U.S., about 4.4 million applications for new businesses were filed last year, compared to roughly 3.5 million in 2019”.
However, careful reading suggests that even when ‘Mom and Pop’ startups get successful, they have a modest impact on new hirings. In the same article, when the author asked about the mystery behind a rise in new business registrations, even in the wake of COIVD-19 and its after effects, Mark Herbert, vice president in California for Small Business Majority, a national organization advocating for small businesses had to say that:
““It’s something we’ve been tracking and we have more questions than answers at this point.”
If you are here, you may want to learn about the “opportunity industries” and how good jobs are related to investing in these industries. What are Opportunity Industries and How Are Good Jobs in the Inland Empire Related to Them?
We will report more about the “State of Entrepreneurship 2021 Report” next week.
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