How do you measure entrepreneurial activity? What factors make a community favorable to entrepreneurship? These are by no means straightforward questions to answer. However, the Kauffman Foundation has provided a framework to start addressing these issues with their newly development Kauffman Index to measure startup activity, main street entrepreneurship, and growth entrepreneurship levels at the national, state, and local levels. According to these indicators, Minnesota ranks poorly in producing new entrepreneurs and startups. However, once established, Minnesota businesses are here to stay.
Why measure entrepreneurial activity in the first place? Entrepreneurship is linked to innovation and economic growth. High levels of entrepreneurial activity can indicate regions where economic and market opportunities exist, businesses can grow, and companies can be sustained. Levels of entrepreneurial activity can also provide measurable outcomes for cities and regions actively promoting innovation.
A few months ago, Livability.com and Entrepreneur magazine ranked Rochester as the 9th best mid-sized city for entrepreneurs in the United States. But if you shifted through to the details, the indicators used to analyze entrepreneur-friendly cities were largely based on standard of living: things like household income growth, commute times, and unemployment rates. Not necessarily indicators that supported entrepreneurship or indicated strong entrepreneurial activity. Entrepreneurs in Rochester themselves did not necessarily agree with this #9 ranking or the metrics that contributed to it. (For more information, listen in to a recent podcast.)
The Kauffman Index attempts to provide better indicators to measure entrepreneurial activity and demonstrate regions favorable to innovators.
The Kauffman Index was developed by the Kauffman Foundation, a Kansas City based non-profit that fosters entrepreneurship and entrepreneurial education. The national program 1 Million Cups is based out of this foundation.
This April, the Kauffman Foundation published the Kauffman Index, a series of data points that measures entrepreneurial activity at the national, state, and major metropolitan levels. This index consists of three separate indices: startup activity index, main street entrepreneurship index, and growth entrepreneurship index.
The startup activity index measures new firm formation in the United States. This metric is composed of three separate indicators: rate of new entrepreneurs, opportunity share of entrepreneurs, and startup density. (See Figure 1 for more details.)
On the national level, the startup activity index is on a continued rise since 2015. In particular, the opportunity share of new entrepreneurs- the percentage of adults who become entrepreneurs based on a perceived market opportunity and not from necessity- rose 4.44% from 2014 to 2015.
The main street entrepreneurship index examines small business activity. This metric is also based on three indicators: rate of business owners, local business survival rate, and established small business density. (See Figure 2 for more information.) In the US, the main street entrepreneurship index reached the highest level in 2016 since before the recession. This was largely caused by an increase in new business survival rates, or the percentage of new businesses that make it to their 5th year of operation. The national new business survival rate reached 48.7% in 2014.
The growth entrepreneurship index examines growth in entrepreneurial activity. This number is also based on three indicators: rate of startup growth, share of scaleups, and high growth company density. (See Figure 3 for more details.) While the national growth entrepreneurship index rose for the third year in a row in 2014, several of the indicators remained in a long-time decline.
No Kauffman Indices were calculated for the City of Rochester. However, data exists for the state of Minnesota. So how did we rank?
The startup activity index across Minnesota is quite poor according to the Kauffman data; we rank 21st out of the 25 largest US states, based on population (see Figure 1). Minnesota is well under the national average for all startup activity index indicators. We have less people becoming new entrepreneurs and fewer businesses less than one year of age with at least one employee than in the rest of the United States, on average.
We perform slightly better in the growth entrepreneurship index, ranking 15th out of the 25 largest US states (see Figure 2). Minnesota businesses have a lower rate of growth over their first five years, based on number of employees. However, the state has a higher than average percentage of companies that grew to mid to large size over ten years and a larger than average number of companies that brought in at least $2M in revenue with 20% annual growth over three years.
Minnesota is a rock star in the main street entrepreneurship index, ranking 1st out of the 25 largest US states. We have a higher than average percentage of business owners, a higher business survival rate, and a larger than average high growth company density.
What does this data tell us? Collectively, these metrics suggest that less people are becoming new entrepreneurs and a lower percentage of new businesses are being created in Minnesota than in the US on average. But when businesses in Minnesota are launched, they are here to stay and contribute to the local economy.