Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
We don’t run our businesses in a vacuum. Anyone seeking to establish a startup should take careful note of the current business landscape so that they’re prepared to jump in with their eyes open. Entrepreneurial research can help you to determine whether it’s a good time to start a business, as well as how and where to seek financing. The Kauffman Foundation helped to pioneer this area of study and continues to provide researchers, business people, and the government with a treasure trove of information.
What is the Kauffman Foundation?
Founded by Ewing Marion Kauffman, a Kansas City entrepreneur and humanitarian, the Kauffman Foundation aims to empower entrepreneurs by providing them with the tools they need to get their businesses off the ground. The Kauffman Foundation features multiple components meant to address the numerous challenges faced by would-be entrepreneurs, from founding to networking to knowledge sharing.
Additionally, the Kauffman Foundation contributes to the field of entrepreneurial studies in order to help provide entrepreneurs and policymakers with up-to-date information to inform their decisions.
Why Does Their Research Matter?
The Kauffman Foundation’s research is freely shared, enabling policymakers and other influential individuals to benefit from the information. Their goal is for the research to inform government policies which aim to nurture the growth of entrepreneurialism in the United States. In the aftermath of the recession, the Foundation’s work may be of even greater value as potential business owners begin to once again find themselves able to start a business.
The Kauffman Foundation also funds scholars working toward their PhD degrees, providing them with the backing necessary to enable the study of entrepreneurship from a wide range of perspectives – from the current marketplace to the needs of entrepreneurs and the effects of the present regulatory environment on new businesses.
The Kauffman Foundation’s research serves as a snapshot of the current entrepreneurial environment and can be viewed as an indicator of a healthy economy.
Currently, the Kauffman Foundation produces three reports: the Kauffman Index of Startup Activity, the Kauffman Index of Main Street Entrepreneurship, and the Kauffman Index of Growth Entrepreneurship.
The Kauffman Index of Startup Activity focuses on the formation of new businesses, including the number of adults who choose to start a new business (rate of entrepreneurs), why they choose to start a business (opportunity share), and whether they employ others (startup density).
The Kauffman Index of Main Street Entrepreneurship looks at how many adults earn the majority of their income from a business and how many businesses last longer than five years. The Kauffman Index of Growth Entrepreneurship highlights whether businesses are able to grow and effectively scale by identifying the number of businesses which have succeeded in growing and remaining operational.
When possible, all three indices identify similarities and differences by gender, age, education, race, immigration status, and veteran status.
For the purposes of this article, I’ll be focusing on the Kauffman Index of Startup Activity.
Kauffman’s Latest Insights into the Startup Environment
A cumulative measure of the rate of new entrepreneurs, opportunity share, and startup density, the Startup Activity Index represents the creation of new enterprises. For 2016, the startup activity index was .48, a slight increase over the previous year. While this is viewed positively, there is some concern with respect to the number of firms which employ others, a figure that continues to decline.
Rate of New Entrepreneurs
A healthy Main Street makes for a healthy economy. New businesses help to support their local communities and provide much-needed employment opportunities. The 2017 Annual Kauffman Index report finds that the rate of new entrepreneurs is slightly down from the previous year, meaning that fewer adults began businesses in 2016 than did so in 2015. The 2016 number, .31%, is roughly an average for the rate of entrepreneurs since measurement began. While it’s unfortunate that the rate has dipped since 2015, the rate of new entrepreneurship remains higher than it was during the Great Recession. Those seeking to start a business should consider why the rate has dipped.
One surprising aspect of the rate of new entrepreneurs is the decline in business ownership by younger Americans. From 1996 to 2016, the rate of new entrepreneurs amongst those aged 20-34 has fallen by almost 10 percentage points, from 34.3% to 24.4%. Increased student loan debt and the Great Recession may have combined to render it more difficult for this generation to pursue entrepreneurial endeavors.
Opportunity Share of New Entrepreneurs
More businesses have been started because an entrepreneur identified an opportunity rather than having been compelled by a financial predicament. Approximately 86% of businesses begun in 2016 were inspired by an idea rather than personal need. To arrive at this figure, Kauffman looks at whether an entrepreneur was employed prior to founding their business. When individuals are employed and start a business or leave their employment to start a business, it’s believed that they’re acting on an idea rather than out of need.
Demographic information indicates that Whites and Asians are more likely to start a business of opportunity. Blacks and Hispanics continue to lag behind, which may illustrate a need for further business educational opportunities and SBA programs to assist with starting a business.
After a serious decline in new firms with employees, the number of firms with at least one employee beside the founder increased over the previous year. While this is certainly positive news, it’s in sharp contrast to measurements from the late ‘70s when the startup density stood at nearly double 2016’s figure. This means that, while more people are starting businesses, a lower percentage of those businesses employ others.
Additional Research from the Annual Survey of Entrepreneurs
To better support their goal of creating and encouraging entrepreneurial research, the Kauffman Foundation has partnered with the U.S. Census Bureau and the Minority Business Development Agency to produce the Annual Survey of Entrepreneurs. This survey helps to paint a picture of the individuals running businesses and where they’re located.
The most recent survey, released in July 2017, covers 2015 and provides some positive news with regard to business ownership and growth. According to the report, minority-owned businesses increased by 4.9% in 2015, as did minority-owned employer firms and their respective payrolls. Female-owned firms increased by 3% over the same period.
The current startup landscape may impact funding and regulations. It’s important that entrepreneurs remain knowledgeable about how businesses are faring, even as they run their own enterprises. Understanding the business landscape can help you to make better decisions regarding financing, hiring, and more. If you’re interested in reading some of the Kauffman Indices, you can visit their website here.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.