Innovation can come from anywhere—large established companies, individuals, and of course, small startup businesses. The innovation from startups can ultimately create new established companies. Many of today’s household names—Amazon, Google, Facebook, Intel—started out as a couple of founders and one innovative idea. So, if we want to see if innovation remains an important part of the American economy, looking at startup activity is a good place to—if you’ll pardon the pun—start.
New Startup Activity
One way to track startup activity is using the Kauffman Startup Activity Index.[1. It’s also important to consider the lingering effects of the global financial crisis of 2008 when examining any financial or business statistical information.] This index incorporates the number of new businesses formed, the number of those businesses which were formed as an opportunity rather than out of necessity, and the number of new businesses as a percentage of all businesses.
Looking at the Startup Activity Index, we can see that startup activity has been climbing for the past several years as we continue to recover from the global financial crisis. In fact, startup activity is now higher than it has been at any time since the early 1990s.
But it isn’t enough to just look at the number of new businesses created each year, like the Startup Activity Index does. A number of those businesses aren’t the sort of innovators we think of when we talk about startups. They’re the new neighborhood restaurant, the corner store, the small lawn services company. These businesses are important, but we need to disentangle their creation (or lack thereof) from the sort of startups we think of when we talk about innovation.
Activity of Highly Scaling Startups
For that, we can turn to another Kaufman metric, the Growth Entrepreneurship Index. This examines startup growth rates, the number of businesses that scaled from small startup to larger, and the percentage of businesses that hit a revenue threshold.
Again, we see that startup growth dipped during the financial crisis and for the past few years has returned to pre-crisis levels. The sort of high-growth startups that tend to produce innovation are just as strong now as they were pre-recession; innovation appears to continue to be a strong suit for American entrepreneurs.
The Growth Entrepreneurship Index incorporates the innovative startups of interest, but it also incorporates other businesses that succeed. The lawn services company might have done well and now be employing a few hundred people and making enough money to hit the threshold, but it probably isn’t creating a new cure for cancer (or even a new eco-friendly pesticide.)
One other way to separate innovator startups from non-innovator startups is by looking at venture capital activity.
Venture Capital Activity
Looking at reported venture capital activity requires looking at two factors—the total amount spent, and the number of venture capital deals completed.
In 2017, the total amount of venture capital financing was the second highest amount ever. The number of deals completed declined slightly, but remains strong, meaning that the number of businesses displaying sufficient promise (and innovation) to achieve a high valuation and large venture capital investment was extremely high in 2017. Again, venture capital provides no indication of an absence of innovative companies in the U.S.
Startups and venture capital show that innovation from the newest businesses is strong. How about from larger businesses? In my next post, I’ll look at evidence from R&D spending, illustrating that innovation also remains alive and well at large companies, who are spending more money on research than ever before.