Compared to other states, Wisconsin doesn’t fare well in terms of how startup companies perform after they launch, according to a new report from the Kauffman Foundation.
The report comes in the wake of other Kauffman Index reports that, likewise, didn’t paint a rosy picture of entrepreneurial Wisconsin. One report last year in particular made waves when it pegged the state dead last in the country in startup activity.
This “Growth Entrepreneurship” report, released Thursday, is measuring something different than what the Kauffman Foundation defined as “startup activity”: Instead of looking at things like entrepreneurial opportunity and the rate of startup creation, the new release is looking at the way new businesses grow and develop.
“It’s focused on, ‘OK, what happens with the businesses that you have after they’ve started?'” said EJ Reedy, a director of research and policy for the Kauffman Foundation.
It would seem that young businesses aren’t doing so well in Wisconsin, at least in relative terms. Of the 25 states with the largest populations in the U.S., the report ranks Wisconsin 23rd in terms of its entrepreneurial growth. Only Florida and Michigan fared worse. Virginia, Maryland and Arizona top the list.
The report doesn’t rank all 50 states on one comprehensive list, instead focusing on ranking states with more comparable population sizes. However, had a comprehensive list been used, Wisconsin would have ranked 33rd overall.
The report based its scoring for each state on three different metrics: the rate at which startups grow in terms of number of employees, the percentage of startups that successfully “scale up” — in other words, that hire a significant number of workers over its initial 10-year lifespan — and the proportion of companies that achieve “high growth” in terms of revenue.
Based on the analysis of the Kauffman Foundation, Wisconsin’s performance in terms of scaleups and the overall startup growth was just slightly lower than average compared to the other 24 “large states.” But it was in the “high-growth company density” category where the state truly suffered — the report found that Wisconsin for every 100,000 businesses, Wisconsin has about 37.9 that attain high growth. That put it dead last among its similarly sized peers.
High growth was defined as companies that record revenue growth of 20 percent for three years, while making at least $2 million annually.
The Kansas City-based Kauffman Foundation is one of the most well-known nonprofits tapped into the entrepreneurship ecosystem in the U.S., and its Kauffman Index reports have long been used as a benchmark of how the country and individual states are doing in terms of startups and young companies.
That said, according to people plugged into the Madison and Wisconsin economic development landscape, this report is by no means a perfect measure of growth.
“The study only looked at three variables,” said Scott Resnick, the COO of the software-building company Hardin Design & Development and the executive director of the proposed entrepreneurial hub StartingBlock. “However, that’s not telling the whole story. There’s a lot more going on.”
The president of the Wisconsin Technology Council, Tom Still, agrees that the report didn’t give a holistic look at entrepreneurial growth. He said that it would have been worthwhile to look at the survival rates of young companies — an area in which he thinks Wisconsin fares pretty well.
“People here tend to stick with it,” he said. “They don’t give up.”
Said Resnick, there’s also the metric of venture capital investment — a variable that’s known to be a major factor in the ways that young companies grow.
And at least for some Wisconsin communities, venture capital investment is strong. Take Madison — according to analysis conducted by the University of Toronto’s Martin Prosperity Institute, the city has the 14th-highest level of venture capital investment per capita in the world.
In fact, said Resnick, Madison’s status as a relatively healthy startup community that’s outpunching its class in the realm of entrepreneurship is not reflected whatsoever in the new Kauffman Index.
“The trends in Madison that you see at the ground level, you’re not seeing them in the report,” he said.
Resnick also questioned the value of comparing states that are in many ways very disparate in terms of their entrepreneurial landscapes. Weighing a state like California against a state like Wisconsin, he said, can be a tricky thing to do.
That said, both Resnick and Still agreed that there are some lessons to be taken away from the report in terms of what Wisconsin needs to do to foster growth.
“Wisconsin has a strong foundation for entrepreneurial growth, but it has to be nurtured, and it has to be the subject of investment, both public and private,” said Still.
Still said that the state has taken good steps forward in terms of growing its investment community, pointing to enterprises like the Badger Fund of Funds. However, he said that there needs to be a bigger push to attract capital and talent to the state, and overall, a bit more attention paid to entrepreneurship in the state economy.
“There needs to be a shift in emphasis of economic development and strategies,” he said.
Resnick said that the state could also do more to boost broadband access in different parts of the state, as well as to strengthen and protect its university system.
Reedy, for his part, suggested that on top of things like the level of capital available in the state, non-compete clauses — employer-worker contracts that prevent employees from entering the field as a competitor if they quit their job — are another factor that could be holding back entrepreneurs.
“There’s no doubt that there’s a lot of issues at play,” he said.
Both Reedy and Still also noted that while the state hasn’t performed well in the Kauffman Index’s startup activity and entrepreneurial growth reports, it has actually fared well in another report looking at “Main Street businesses” — essentially, smaller companies that operate within larger-to-midsized cities and towns.
“We continue to be more of a Main Street economy state,” said Still. “We’re much more about midsized cities that are generally prospering, but not growing at fast rates.”
The Kauffman Index’s “Growth Entrepreneurship” report based its analysis on data taken from the Bureau of Labor Statistics and the Inc. 500|5000 list.