Study follows startup businesses over time

Study follows startup businesses over time


BY JOYCE SMITH / Kansas City Star
Posted on Sun, Mar. 23, 2008

New firms are critical to economic growth, but there is little data on how to encourage new business development and growth.

Now
a study by the Kansas City-based Ewing Marion Kauffman Foundation hopes
to determine what startup decisions make a difference.

The
private, nonprofit foundation that focuses on advancing
entrepreneurship and innovation has been following nearly 5,000
businesses nationwide since they were founded in 2004.

Researchers
are looking at debt and equity financing, employee benefits, and
business innovations and outcomes such as sales and profits, along with
characteristics of the owners.

"One of the real things that
we lack is understanding how new businesses develop," said E.J. Reedy,
manager of research and policy at the foundation. "Very few studies
follow the same set of businesses over time. For example, financing
issues. We’re creating a lot of new data to try to understand how
businesses finance themselves in the early years and how that might
contribute to success."

Nearly 70 percent of the businesses
under study are owned by men. Whites own more than 81 percent of the
business. Many are in the high-tech field.

Some highlights:

• A
little more than 2 percent said they owned patents during their first
year of operation, while nearly 9 percent had copyrights. High-tech
businesses had more patents and copyrights, while about the same
percentage (13.5 percent) had trademarks regardless of their tech
status.

• Nearly 60 percent of
the businesses had no employees their first year. About 25 percent had
two or more employees, and less than 4 percent had more than 10
employees.

• Thirty-seven
percent had no revenue in their first year of operation. But about 45
percent had a profit and about 17 percent had profit in excess of
$100,000.

• Nearly 44 percent
of new businesses had no debt financing during their first year, and
many were started with very little debt financing. About 17 percent of
the businesses started with $5,000 or less, and nearly 11 percent
started with $100,000 or more.

• The
vast majority of equity invested came from the business owners. Just 10
percent of the businesses used external equity, while spouses provided
equity to 1.6 percent of the businesses. Nonfamily informal investors
and venture capitalists were used very infrequently.

• A
little less than 9 percent of the firms closed in 2005. Women-owned
businesses had a survival rate of 89 percent, while men-owned
businesses had a survival rate of about 92 percent. About 88 percent of
black-owned businesses survived, compared with 91 percent of
Asian-owned businesses and 92 percent of white-owned businesses.

In
the coming months, researchers hope to investigate ongoing financial
infusions, changes in strategy and innovation, and survival and growth.

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