By Tom Still
MADISON – There’s something counter-intuitive about Wisconsin dropping
to dead last among the 50 states in the latest business startup index published
by the Ewing Marion Kauffman Foundation.
Really? The Badger State has fewer entrepreneurs than Mississippi, West
Virginia or Alabama, just to mention three states that often top America’s economic
9-1-1 call list?
Incredulous or otherwise, Wisconsin has never fared well in Kauffman’s
annual Index of Startup Activity, which began in 1997. This year’s fall to last
place was not a high-board dive: Wisconsin was 45th the year before.
In the recently released 2015 report, Wisconsin trailed Alabama, Pennsylvania,
Minnesota and West Virginia among the bottom-feeders.
Come to think of it, how did Minnesota make Kauffman’s Hall of Shame?
In most side-by-side comparisons, Wisconsin often looks like a poor
step-brother to our historically vibrant neighbors to the west.
It all goes to illustrate a simple point about economic rankings. State-by-state
rankings of economic activity depend on what’s measured and how.
Read this commentary in the Wisconsin State Journal here.
The Kauffman index ranks states in three categories: rate of new
entrepreneurs, opportunity share of new entrepreneurs and startup density. The
first category is a measure of business ownership, the second is an indicator
of entrepreneurs starting a business because they spotted market opportunities,
and the third is roughly a per capita measurement.
Other surveys look at slightly different categories. The University of
Nebraska’s Bureau of Business Research studies five components in its annual report:
Net growth in business establishments, per capita growth in business
establishments, business formation rate, number of patents per 1,000 people and
the average income of non-farm proprietors. The Nebraska economists say their
rankings reflect key elements of an entrepreneurial climate: business startups
and failures compared to population, innovation and income.
So how does Wisconsin fare in the Nebraska index? It was 33rd
among the 50 states in August 2014, the last time it was published. That’s not
bragging-rights material, but neither is it dead last.
Here’s a metric that matters: According to the Milken Institute’s State
Science and Tech Index, Wisconsin has risen steadily in the net formation of high-tech
businesses per 10,000 businesses. Wisconsin ranked 38th in its 2010
report, 24th in 2012 and 18th in 2014. It was also sixth
in the number of high-tech businesses growing faster than the U.S. average. Both
measures are important because tech businesses are statistically likely to
create well-paid jobs.
Regardless of rankings, there’s no denying Wisconsin faces startup
hurdles.
Demographics don’t work in
the state’s favor. The state’s population skews slightly older and it attracts
fewer immigrants, who are much more likely to start a business than native-born
Americans. Mom-and-Pop businesses, often in service or retail, account for the
bulk of all startups nationally, even if they are not high-growth businesses
that create a lot of jobs.
Wisconsin’s relatively low
unemployment rate also works against more people starting a business. If
you already have a job, you’re less likely to risk striking out on your own.
Some industries, such as construction,
have high rates of entrepreneurship during boom times. Wisconsin sees fewer
construction startups for several reasons, which is why the Wisconsin
Legislature is debating lifting the “prevailing wage” requirement for local
construction projects. The national entrepreneurship rate in construction is 12
times the startup rate in manufacturing.
Speaking of manufacturing,
the national startup rate for that sector is low. Wisconsin is still a
manufacturing-heavy state, with about 16 percent of its private workforce
engaged in manufacturing versus 9 percent nationally. Because manufacturing
requires high capitalization, startups aren’t as common.
There are some regulatory and
tax hurdles, as well. Wisconsin treats startup companies pretty much the
same as major firms in some critical areas, such as taxes on “paid-in capital.”
Certain types of young, pre-revenue companies in Wisconsin pay a state tax on
venture capital raised – a sore point for investors and unique among the
states.
And while the rate of business creation in Wisconsin is lower than in other
states, the survival rate appears to
be higher. Maybe that’s a credit to Midwestern work ethics combined with a
culture of fiscal conservatism, but it’s also a tribute to a support structure
that wasn’t in place 10 years ago.
For Wisconsin to truly become a startup state, policymakers must
confront the overall development strategy. Is Wisconsin more intent on raiding
Illinois for business relocations or growing its own? So long as it’s the
former and not the latter, expect to stay near the bottom in most startup
rankings.
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