New Kauffman Foundation Study Offers Insights Into the Earliest Years of a New Business

Kauffman Firm Survey findings provide insights for policymakers interested in encouraging new business development and growth(KANSAS CITY, Mo.) March 12, 2008 — Understanding the characteristics of new business formation and sustainability can help lead to policies that encourage entrepreneurial businesses, which are a major driver of economic growth.

A new report released today by the Ewing Marion Kauffman Foundation fills a gap in the study of entrepreneurship. As the largest longitudinal study of new businesses ever conducted, the Kauffman Firm Survey (KFS) follows nearly 5,000 businesses founded in 2004 and tracks them over their early years of operation.

“New businesses play an important but not-well-understood role in our dynamic economy,” said Robert Litan, vice president of Research and Policy at the Kauffman Foundation. “These insights into the earliest years of a firm’s existence are essential for creating public and private programs that encourage new business development, innovation and sustainability.”

According to Kauffman researchers, the data provide a unique opportunity to study a panel of new businesses from start-up to sustainability or closure. Data are being collected annually from the same firms, centering on the topics of debt and equity financing, employee benefits, business innovations and outcomes such as sales and profits. In addition, detailed data are collected on the characteristics of business owners. Following are some of the highlights:

  • A little more than 2 percent of businesses reported owning patents during their first year of operation, while nearly 9 percent reported having copyrights. The percent of businesses with patents and copyrights was much higher for businesses that were considered to be high tech, at 4 percent and 11 percent, respectively. About the same percentage of businesses had trademarks (13.5 percent), regardless of their tech status.
  • Nearly 60 percent of the businesses had no employees in their first year. Just under three-quarters of businesses had one employee or less, while about one-quarter of businesses had two or more employees. Very few businesses (less than 4 percent) had more than 10 employees.
  • More than a third of businesses (37 percent) had no revenue in their first year of operation. About 45 percent of businesses in the KFS experienced a profit during their first year, compared with about 55 percent of businesses that experienced a loss in their first year. About 17 percent of businesses had profits in excess of $100,000.
  • Nearly 44 percent of new businesses had no debt financing during their first year of operation. Many businesses were started with very little debt financing: 17 percent of businesses started with $5,000 or less; nearly 11 percent started with $100,000 or more.
  • About 80 percent of businesses had some positive equity investment in their business in the first year. Nearly 10 percent invested $100,000 of equity into their business, while another 33 percent invested between $10,001 and $100,000. About one-quarter of businesses invested some amount less than $5,000.
  • The vast majority of equity invested came from the business owners themselves. Just 10 percent of the businesses in the KFS used external equity sources in their first year. Parents were the most common source of external equity (3.4 percent), while spouses provided equity to 1.6 percent of businesses. Non-family informal investors and venture capitalists were used very infrequently (2.7 percent and 0.6 percent, respectively).
  • Nearly 70 percent of businesses in the KFS data were owned by men and just over 30 percent were owned by women. Whites owned more than 81 percent of the businesses, while blacks owned 9 percent, Asians owned 4 percent, and the remaining 5 percent were owned by Native Americans, Pacific Islanders and individuals of other racial groups. About 6.6 percent of the businesses were owned by Hispanics.
  • Just under 9 percent of firms closed in calendar year 2005, and the survival rates vary by owner demographics. For example, 88 percent of black-owned businesses survived, compared with 92 percent of white-owned businesses and 91 percent of Asian-owned businesses. Women-owned businesses had a survival rate of 89 percent, about three percentage points lower than businesses owned by men.

According to Alicia Robb, principal investigator on the KFS, as additional years are added to the study, the data will allow researchers to investigate ongoing financial infusions, changes in strategy and innovation, and survival and growth. “Many important topics can be investigated, including the determinants of business growth and survival, as well as the roles that financial and human capital play in business outcomes,” said Robb. Learn more Visit the Kauffman Firm Survey site > Read the report:

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