1970-01-01 02:00:00
rlp
The high-growth kind has rebounded sharply from lows after the Great Recession
AT FIRST glance, it seems that America s economy is losing its mojo. Many
economists, most notably Robert Gordon of Northwestern University, have
lamented that productivity growth seems to be anaemic when compared with
earlier golden eras (see Free exchange). A gloomy chorus of business leaders
has echoed what media outlets have by now turned into a mantra, that American
entrepreneurship is in steady decline. Surely America s overall
competitiveness, then, is plummeting?
The answer from one influential think-tank, the World Economic Forum (WEF), is
no. In its latest update to its long-running annual ranking of global economic
competitiveness, published on September 27th, America rose from third place to
second, ranking below only Switzerland.
This is partly because poor economic policies and weak productivity growth are
bedevilling rivals such as China and Europe. Yet glaring American weaknesses,
such as fraying infrastructure and fractured politics, are outweighed in the
WEF analysis by the country s strengths in areas like business sophistication
and technological readiness. And aside from market size, the variable on which
America still outscores other rich countries the most is its culture of
innovation and entrepreneurship.
Hand-wringing about a crisis in business formation relies on official data
showing that fewer new firms are being started than in the past. The latest
figures, released on September 20th, show that there were 414,000 firms that
were less than a year old in 2015 (the latest available year), compared with an
average of 511,000 in the decade before the financial crisis. Still, not every
new firm is equal some entrepreneurs want to create the next Tesla, not open
another bodega. Of the roughly 4.4m firms created in the last ten years, about
30,000 can be described as gazelles, or young, high-growth companies, according
to the Kauffman Foundation, another think-tank that is known for its work on
entrepreneurship. These firms have a disproportionate impact on job creation
and innovation. They pack a powerful punch.
A forthcoming report from the Kauffman Foundation finds that high-growth
entrepreneurship has rebounded in America from the trough induced by the global
financial crisis and is now rocketing (see chart). These experts scrutinise
three things: how quickly startups grew in their first five years; the share of
firms scaling up past 50 employees by their tenth year; and the prevalence of
fast growth firms with at least 20% annualised growth over three years (and
$2m or more in revenues).
The analysis also reveals that such gazelles are found in unexpected places.
Consider ProviderTrust, a health-tech startup. The firm has developed a novel
software-as-a-service offering that helps health-care firms track people s
professional credentials and licences efficiently. Because states do not
typically share timely information about disciplinary actions taken against
health-care workers, footloose rogues can create a costly regulatory headache
for unwitting new employers in another state. The company has been growing at a
rate of over 60% a year since its founding in 2010; revenues should reach $10m
this year.
Or look at Root Insurance, America s first mobile-only insurance firm, which is
increasing downloads of its app by nearly 50% month over month. It uses actual
driving data to set insurance rates for all of its customers, and offers
discounts to drivers for using the self-driving mode of their Tesla car. Alex
Timm, its chief executive, explains that data collected via its customers
mobiles proves that people are much safer when the car does the driving. His
firm monitors drivers for texting and driving, which it discovers by analysing
the micro-vibrations of smartphones.
These gazelles are found not in Silicon Valley or Boston but, respectively, in
Nashville and Columbus. Other overlooked cities in the American heartland are
also hotspots of high-growth entrepreneurship (see map). Mark Kvamme of Drive
Capital, a venture-capital (VC) fund based in Ohio, points to Indianapolis as a
rising technology hub: ExactTarget, a local software-marketing startup, was
acquired in 2013 by Salesforce, a Californian software giant, for $2.5bn.
Luring talent away from Silicon Valley and Seattle is getting much easier,
says Mr Kvamme, a native Californian who left Sequoia Capital, a top Silicon
Valley VC fund, to found Drive.
Steve Case of Revolution, an entrepreneur turned venture capitalist (in 1985 he
co-founded what later became America Online), calls this the rise of the rest
. Having observed this trend on periodic bus tours across America, during
which he encourages (and sometimes invests in) many local entrepreneurs, he
thinks three factors are fuelling it. Barriers to entry have fallen, especially
for technology companies. Access to risk capital for startups, including
through crowdfunding, is no longer limited to the two coasts. Local governments
are increasingly supporting training schemes, accelerators and other bits of
soft infrastructure that greatly boost startups chances of success.
Challenged on whether high-growth entrepreneurship can really be spread like
jam across America, Mr Case acknowledges there is value to clustering. He
insists, however, that nearly three-quarters of all VC money need not go to
just California, Massachusetts and New York. Spreading this to 30 cities , he
reckons, would transform America.
Correction (September 29th, 2017): A previous version of this piece said that
Root Insurance punishes drivers for texting and driving. The company monitors
this activity but does not act on the information. This has been amended.