As I read the recent ExitEvent article "With Growing Economy and Entrepreneurial Ecosystem, Is North Carolina Bucking a National Trend?", I felt the need to respond with some of my own views on the topic.
First, the Kauffman Foundation is great, but the researchers there observe and serve a much broader universe of entrepreneurs than I do as an early stage technology investor. As a result, I find that a good bit of their research and recommendations are tangentially relevant to much of what I see happening within the tech ecosystem, both locally and nationally.
On the topic of business formation, Kauffman's Entrepreneurial Activity Index expects to see an increase in company formation during a weak economy and a decrease in company formation during a stronger one. When it comes to tech companies, however, I have seen the exact opposite over the last 20 years. Let me explain why.
Let's say you're an engineer at IBM or a developer at Red Hat. While those companies were impacted during the recent recession, the tech sector in general did not suffer to the extent that financial services, durable goods and branded products companies did. In other words, if you were decent at your job, you probably held on to it. At the same time though, your employer most likely didn't add jobs at a frenetic pace between 2009 and 2011, so you weren't exactly having to ignore calls from recruiters.
On the other hand, your friends working at venture-backed or bootstrapped startups, if they were able to keep their jobs, weren't exactly getting rich off their equity. Their companies were raising money to stay alive and doing so at whatever valuation they could get. It was a time of down-rounds and massive equity dilution for many—not exactly an environment where you're likely to feel good about contingency plans.
Fast-forward just a couple of years though, and your employer is putting referral bonuses in place to help bring on new employees. You're getting calls from recruiters who saw your profile on LinkedIn and managers who saw your code on GitHub. It seems like every week you're hearing about another tech startup going public or getting acquired for amazing valuations, with founders walking away with tens of millions, hundreds of millions or even billions of dollars. Now you start thinking to yourself, "If ever there was a time to make the leap".
In our business, we see people start or join companies because they see opportunity, not because they need to pay the rent. In fact, most founders work for no pay during the company inception phase and their companies do not typically pay 'market' salaries even after they obtain funding and are generating revenue. What startups can offer is a chance to play a role in building something great and maybe getting rich along the way.
It is when you are confident you could get another job if you have to but think you can get funding if you want to, that the tech entrepreneur will start a new company or join a small one. So, while the Kauffman index might be relevant for the national economy as a whole, I don't think it's particularly relevant for the Triangle, and even less so for the technology startup communities both here and elsewhere.