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SBA.gov » Office of Advocacy » Research and Statistics » Research Issues » Utilizing the Kauffman Firm Survey to Predict Growth in Venture Size and Scope among Small Firm Startups: 2004
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.
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.
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
• 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
• 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
• 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.
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
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.
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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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.