Before we dig into the numbers, here's a bit of an explainer on the reports. The Kauffman Foundation has measured entrepreneurship for over a decade through its “Startup Activity Index" (coming soon), but last year added a second index to the series, “Main Street Entrepreneurship" (coming soon) along with separate reports on the states and MSAs.
A third index, the “Growth Entrepreneurship Index" released this week, completes the series. It’s a compilation of measures to better understand how fast well-established startups are growing (or scaling in startup lingo). To measure this, Kauffman has combined three indicators: the rate of startup growth, the share of scale-ups and high-growth company density.
The group of reports is now called "The Kauffman Index of Entrepreneurship Series," and they're important because they allow for better measurement of the outputs of entrepreneurship—the number of startups, jobs, revenue, growth, etc. They also give policy makers and local leaders better tools to design and implement targeted policies and programs for building thriving entrepreneurial ecosystems.
That's why we hope, one day, that the Triangle will be counted as a top MSA. In the meantime, here's a breakdown of the data.
More Startups Are Growing Up (or Scaling) Faster Nationwide
In 2015, startups “grew up” or scaled faster than they have since 2011. And more startups are projected to grow faster in 2016, surpassing pre-recession numbers. This means startups, on average, are growing more five years post-founding than those in years past.
The share of scale-ups, or companies that started small but grew to employ 50 or more people within 10 years of founding, is also rising. And the number of private businesses with at least $2 million in revenue is also increasing. This is important for the nation’s economy and the growth of entrepreneurship because if businesses start up but never scale up, the real benefits of entrepreneurship are never realized.
More of North Carolina’s startups are scaling faster than peer states
As a whole, North Carolina performs well in the state rankings found in the index. Among the 25 larger states (Kauffman splits the states into two categories: large and small), NC’s rank increased more than any other state. Among all states, NC ranks 10th, beating out larger states like California and New York. Virginia ranked first, Utah second and Maryland third.
The Triangle is left out of the MSA ranking because Raleigh and Durham are split in the definition Kauffman uses of MSAs, Raleigh appears as its own MSA while Durham is paired with Chapel Hill. These delineations are made from Census Bureau data by the US Office of Management and Budget (OMB) and only significantly changed after each census. So unless Kauffman begins to include more than the top 40 most populous MSAs in their rankings, we can expect to be left off the list until at least the next census occurs.
But while the Triangle may not appear on the list of MSAs, when reading between the lines, it can be extrapolated that NC’s high rank is mostly thanks to the Triangle and Charlotte. With data from reports like CED’s Innovators Report, we know the majority of NC startup activity occurs in the Triangle.
For example, one measure Kauffman uses to calculate “high-growth company density” is IPO growth. NC ranks 8th with four IPOs reported in 2015, two of which—NephroGenex and MaxPoint—are based in the Triangle. And given that many of the startups that meet Kauffman’s scaling requirements are based in the Triangle—like Bronto, Automated Insights and Appia—it’s clear the Triangle significantly influences NC’s high rank.*
The Charlotte-Gastonia-Rock Hill MSA represents NC in the MSA list, ranking 11th out of the 40 MSAs compared in the index, up two slots from 2015. That's likely partially dueWashington DC ranks highest for both 2015 and 2016, followed by Austin and San Jose. Charlotte beats out cities like Atlanta, New York, Chicago and Kansas City.
If a greater number of NC’s startups continue to scale faster than peers in other states, NC could continue to rise in this index. But it will also need to continue to excel in creating new businesses, and supporting Main Street businesses if a robust entrepreneurial ecosystem is to be achieved. Soon, when Kauffman releases its subsequent reports we’ll know if NC has succeeded in improving in these areas this past year.
The demand for data measuring entrepreneurship is increasing
The fact that Kauffman continues to add new measures, reports and indices to its portfolio indicates there is a demand for better data and reporting on entrepreneurship and its impact on the economy. Indeed, lists and reports claiming to measure entrepreneurship are sprouting up in national and local publications all over the country. Some of this research, like CED’s Innovators Report, has tested, reliable methodology behind it. Other reports’ methodology wouldn’t hold up to any real scrutiny.
Within a sea of unreliable reports, a trusted resource with entrepreneurship expertise is essential. And lucky for us, Kauffman is answering that demand with new reports and measures. Further research is always needed, however. Especially for the MSAs (like Raleigh and Durham) that are not populous enough to receive individual rankings and scrutiny from Kauffman.
That said, Kauffman need not be the lone expert and researcher in this field. Researchers, economists and policymakers interested in the economy should measure their own entrepreneurial ecosystems, but could use Kauffman’s measures and methodology as a starting place to build their own measures.
*The measures for scaling companies are only calculated through 2013, so companies like Windsor Circle, Spoonflower, or many of the companies who appear on our "Tweeners" list, have not yet shown up in Kauffman’s data set.