Utilizing the Kauffman Firm Survey to Predict Growth in Venture Size and Scope among Small Firm Startups: 2004

 

 
 
April 2013                          No. 405
 
Utilizing the Kauffman Firm Survey to Predict Growth in 
Venture Size and Scope among Small Firm Startups: 
2004 Startups Tracked through 2008
 
by Timothy Bates, Alicia Robb, and Simon Parker; Beacon Economics LLC, 
San Rafael, Calif., 94901. 70 pages. Under contract number SBAHQ-10-M-0210.
 
Is it possible to identify startups and very young 
ventures that will successfully grow and flourish? 
This study identifies some of the factors that predict 
growth among startups and very young ventures and 
provides insights into small firm growth dynamics. 
The factors considered include the founders’ education 
and experience, the size of the ownership team, 
and their access to capital. The researchers test their 
hypotheses using the Kauffman Firm Survey (KFS), 
which follows a set of nascent and new firms over 
several years, from 2004 through 2008.
 
Background
 
New businesses are major contributors to the 
productivity and growth of the U.S. economy. 
Understanding the dynamics of the business creation 
process is important in the implementation of policy 
approaches to facilitate job creation and economic 
growth. In the past two decades about 40 percent of 
the private sector’s net new jobs have been created 
from the churn of startups minus closures.1 The factors 
affecting the decision to embark on entrepreneurship 
are highly complex. Past research has indicated 
that socio-demographic factors including age, 
gender, race, ethnicity, marital status, and education 
have a major impact on who becomes an entrepreneur 
and participates in the business creation process. 
Individuals as well as teams develop and grow 
new firms with diverse approaches. Existing research 
indicates there is no single way to successfully start 
and expand a new venture. There is some evidence 
 
that the creativity and dedication of entrepreneurs in 
the early phases of venture development, rather than 
their personal backgrounds, are the key to successfully 
launching a viable new business venture.
 
Overall Findings
 
The researchers find two key features of small business 
startups likely to endure, operate profitably, and 
expand: 1) involvement of capable entrepreneurs 
possessing appropriate human capital for operating 
their business; and 2) assembly of, and access to, 
sufficient financial capital to achieve efficient scale 
to exploit opportunities. 
 
Several other broad relationships are also 
observed:
 
• Firms with groups of three or more owners 
often experience higher growth, other factors equal, 
than businesses with fewer owners. Since new ventures 
demand a great amount of uncompensated time 
from their founders, being able to share the investment 
of time among a number of people may make it 
more manageable.
 
• At the point of venture startup, owner education 
and relevant work experience are poor predictors 
of subsequent firm growth. However, for 
firms in operation for four years, owners’ level of 
educational attainment was associated positively 
with enhanced venture performance. This apparent 
paradox is explained by the opportunity costs facing 
highly educated and experienced individuals when a 
firm is brand new—whether to gamble on a startup 
that may not see a return on investment for some 
years or accept the security of a well-paid job. Many 
opt for a steady immediate income rather than accept 
business risk and an uncertain future payout.
 
• As expected, home-based businesses experience 
less actual firm growth relative to businesses 
operated outside of the home. 
 
• Beyond year three, ownership of intellectual 
property predicted higher growth for high-tech and 
financial-capital-intensive firms, other factors being 
equal.
 
• Confirming earlier research, higher credit 
scores, a measure of credit market access, successfully 
explained higher venture growth, and vice versa 
for low scores.
 
• Many firms caught by heavy bank indebtedness 
burdens were harmed by the severe credit market 
contraction during the four-year study period. As 
a consequence, they experienced lower growth than 
their counterparts less burdened by outside debt.
 
• Female-owned firms had lower growth rates 
than otherwise identical male-owned small businesses.
 
Discussion of Findings
 
The study period, 2004–2008, coincided with a 
downturn in the U.S. economy and a tightening of 
available credit. Prior analysis of new venture startups 
suggests that U.S. firm creation has been stable 
over the last few decades. The venture growth analyzed 
in this study, importantly, overlapped with a 
time period of both a downturn in the U.S. economy 
and a tightening of credit availability. Small business 
growth dynamics may differ in more normal times 
when credit market ease and strong growth prevail in 
the entire economy.
 
The factors identified by the researchers as predicting 
growth are rather unsurprising. In general, 
scholars analyzing databases of startup ventures 
with the objective of identifying likely winners have 
had, to date, rather less success than venture capital 
funds. Successful venture capitalists, of course, 
typically earn their livelihood by selecting young 
ventures having considerable growth potential and 
investing equity capital to acquire ownership stakes 
in these promising ventures.
 
Policy Implications
 
The findings provide support for policies that:
 
• Increase the sources of financial capital to 
startup firms (through banks and nonbank sources);
 
• Increase technical assistance to help small 
business startups raise their credit scores; 
 
• Provide increased assistance to women-owned 
and home-based businesses; and
 
• Provide additional business assistance to startups 
during economic downturns—e.g., from SBA 
and other federal and local sources.
 
Scope and Methodology
 
The researchers chose to measure firm growth in 
terms of employment (instead of revenues or other 
measures). They use the Kauffman Firm Survey, a 
database of 4,022 firms considered to be startups in 
2004. The survey is unique in attempting to capture 
businesses in the gestational stage, and many in the 
sample do not end up making it to the startup phase 
within the time frame studied. They distinguish 
nascent businesses (i.e., not yet in operation) from 
actual startups by excluding firms with very low or 
zero revenues from the analysis files until their sales 
pass a threshold value. 
 
The researchers identify three industry-specific 
and factor-intensive subsets of businesses: 1) high-
tech firms, 2) financial-capital-intensive young firms, 
and 3) human-capital-intensive small firms. The 
results were corrected using weights, since the KFS 
over-represents high-tech ventures. Financial-capital-
intensive firms were identified and defined using the 
Annual Capital Expenditure Survey (ACES), and 
human-capital-intensive firms were defined using 
the 2000 Census of Population Public Use Microdata 
Sample. 
 
To account for the recession’s varying effects 
throughout the country, the authors added two state-
specific annual macroeconomic control variables—
state unemployment rates and the annual change in 
the state unemployment rate. 
 
The study reports statistics of owner traits, firm 
traits, and firm outcomes that show how various 
groupings of growing firms and their owners differ 
from firms with no or negative growth in revenues 
through yearend 2008. It divides firms into three 
overlapping groups reporting positive growth in 
annual sales revenues from their base year through 
2008 (increasing three-fold, four-fold, and five-fold) 
as well as those with no-growth or negative-growth. 
 
This report was peer-reviewed consistent with 
Advocacy’s data quality guidelines. More information 
on this process can be obtained by contacting 
the director of economic research at advocacy@sba.
gov or (202) 205-6533.
 
Additional Information
 
This report is available on the Office of Advocacy’s 
website at www.sba.gov/advocacy/7540. To receive 
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releases, regulatory communications, publications, 
and the latest issue of The Small Business Advocate 
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Listservs.
 
1. “Frequently Asked Questions,” SBA Office of Advocacy, 
September 2012, www.sba.gov/advocacy/7495.
 
This document is a summary of the report identified above, developed under contract for the Small Business Administration, Office 
of Advocacy. As stated in the report, the final conclusions of the full report do not necessarily reflect the views of the Office of 
Advocacy. This summary may contain additional information, analysis, and policy recommendations from the Office of Advocacy.